EGYPT Trends and Developments Contributed by: Muhammad Ussama and Adam El Shalakany, Shalakany Law Office
Between Bonds and Assignments: Structural Risk in Complex Commercial Transactions Introduction – framing the risk In mega projects with various parties, it is not always feasible to have all involved in the underlying project, whether directly by providing works, materials or ser- vices or indirectly by financing the implementation of the works, as contracting parties to the very same contract. Even if it is feasible to achieve such a thing, the corresponding legal relationships, and the rights and obligations stemming from such relationships, are not always easy to map out and to structure in a man- ner that provides absolute legal clarity. This is especially so when legal instruments are used that, pursuant to the applicable legal system, in a man- datory manner, provide for and emphasise separate legal relationships between some or all of the relevant parties. The immediate example that comes to mind is that of on-demand bonds. These are instruments that are frequently used in medium-sized to mega projects. They are used to provide the employer with sufficient guarantee that it will be able to immediately enforce its rights by calling on the on-demand bond(s). Banks are required by law to honour their obligation, stem- ming from the on-demand bond(s) that the relevant bank had issued at the request of the bank’s client in favour of the beneficiary, vis-a-vis the beneficiary. In this respect, the bank is not entitled, in order to resist the beneficiary’s call on the on-demand bond(s), to invoke any arguments that stem either from the bank’s client relationship with the beneficiary or from the bank’s relationship with its client. This entails that, to recover its dues, the bank, after releasing the bond’s value to the beneficiary, must make recourse against its client (ie, the orderer). In practice, especially in big and mega projects, a call on an on-demand bond translates into a considerably high quantum of debt becoming owed by the bank’s client to the bank. The bank’s client, in some cases, is not a party enjoying sufficient liquidity in order for the bank to strategically decide to target in legal and thereafter enforcement actions. Banks are certainly aware of these practical considerations and, accord- ingly, seek to secure corporate structuring of a bundle of agreements that aim, in their totality, to justify the bank’s decision to take on the business risks associ-
ated with issuing the on-demand bond(s) in favour of the beneficiary. One method involving corporate structuring of the bundle of agreements entered into between the bank and the bank’s client is as follows: as part of the bun- dle of agreements that aim at securing adequate, suf- ficient securities that the bank could enforce against if a call is made by the beneficiary on the bond(s), the bank signs an assignment of rights agreement with its client concerning the latter’s right vis-à-vis the ben- eficiary as stemming from the underlying agreement between the latter two parties. By doing so, the bank aims at going around the legal maxim that provides for the separate legal relationships arising from the issuance of on-demand bonds and securing a direct claim against the beneficiary pursuant to the assign- ment of rights agreement. Whether or not such a method would legally hold and achieve its purpose is not an immediately answerable question. The answer depends on the particulars of the matter and hinges upon many factors. This piece aims at addressing some of the various legal issues that the authors have seen arise in prac- tice in dispute resolution in high-quantum disputes in both Egypt and the UAE concerning the above issue. Nature of on-demand bonds versus the intended goal of an assignment of rights On-demand bonds create separate legal relationships between the issuing bank, the orderer (being the cli- ent’s bank who requests the bank to issue the bond for the benefit of the beneficiary), and the beneficiary of the bonds. Such independence in these different legal relationships is often provided for in the laws of civil law countries (such as those of Egypt and the United Arab Emirates (UAE)) by virtue of mandato- ry statutory provisions. This renders attempts to go around the legal effects intended by such mandatory statutory provision a legal risk worth adequate con- templation and careful analysis from both legal and business ends. Furthermore, the usual arguments raised by the orderer with the aim of blocking the liquidation of an on-demand bond by the bank pursuant to a call on the bond by the beneficiary are quite limited. In most
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