What Is Project Finance Agreement?
The project finance agreement is the legal document specifying the financed project distribution and the total cost needed to accomplish the project. The agreement should feature the project elements such as capital needed to be invested in the project, promotion cost, contingency plans, etc.
It must also include the amount of capital gained for starting the project and how exactly the funding needs to be managed. Moreover, the agreement tells the number of financiers funding a particular project, the return on investment rate.
When Do You Need a Project Finance Agreement?
The finance agreement is signed between a producer (the party responsible for executing the project) and financier (the person who invests in the project). Basically, the answer to ‘what is project financing?’ is when the financier and producer decide to collaborate for a specific project. The contract clarifies the payment disbursement and accounting methods.
Inclusions in the Project Finance Agreement
The contents of the agreement are
- Legal names of financier and producer
- Term of the contract
- Credit facilities, repayments, use of proceeds
- Conditions of lending
- Details of the facility and its utilisation
- Repayment and market disruption
- Voluntary prepayments
- Closeout settlement agreement
- Proceeds
- Representations and Warranties
- Governing laws
- Increased costs and taxation
- Financial Calculation
- Information requirements and inspection rights
- Hedging rights
- Covenants
- Fees, costs, and other expenses
- Indemnification and breakage costs
- Assignees, transferees, and sub-participants
- Remedies and waivers, cumulative rights, and partial invalidity
- Jurisdiction and counterparts
- Security
- General Provisions
- Payments, indemnities, and computations
- Events of Default
How to Draft a Project Finance Agreement?
A well-drafted agreement features all the necessary clauses and terms that both parties must accept and follow until the contract termination. The parties can add additional clauses with mutual consent. Here is how to draft a precise agreement:
- Start by mentioning the names of each party involved in the contract
- Specify the duration of the agreement
- List all the terms and conditions
- Mention the details of the project
- Mention the return on investment the financier expects after the project completion
- Specify the total cost incurred to complete the project
- Add indemnification, confidentiality, repayment, security, and Default clauses
- Read the contract thoroughly
- Sign the form
- Details of the use of facility
- Responsibility of taxes, fees, costs, and other expenses.
- Information requirements and inspection rights
- Drawdown requirements
Benefits of Project Finance Agreement
- Once the agreement comes into effect, you can stay rest assured that you are getting into a legal deal.
- The agreement ensures that both parties follow their duties during the contract term. Should you face any trouble, this agreement serves as evidence of your deal.
Key Clauses in the Project Finance Agreement
The terms include
- Term
- Warranties
- Obligations
- Project specifications
- Lending conditions
- Default
- Security
- Indemnification
- General provisions
- Payments
- Return on Investments
- Drawdown clause
- Purpose of the agreement
What Happens in Case of Violation?
Violation of any term mentioned in the agreement can lead to the termination of the contract. Both parties should take the time to read the contract and understand each Term before signing the deal. Failure to fund the project and the inability to stick to the terms and conditions can result in contract termination. The treatment for a breach of contract is usually mentioned in the agreement. Parties may approach courts of law for restitution to return the injured party to its original state or seek monetary damages for lack of profits
Project finance agreements have always been on the rise. Basic terms and methodologies, when applied to well-structured deals, can help define the best business financing rule.
Sample Project Finance Agreement
A sample of the agreement can be downloaded from below.
