By Lodewyk Meyer at Bowman Gilfillan
Africa is a vast, highly complex continent, living with the legacy of corruption, political instability and religious and social strife, among other problems. Differences in law, regulation and business culture can significantly increase the risk and complexity of doing business in Africa.
The financial crisis of 2008 brought increased attention and scrutiny to risks associated with banking and finance transactions and, together with the economic crisis that followed, made financing more difficult, with increased requirements for security.
There are ways of minimizing the risks inherent in doing banking and finance business: the use of structured finance techniques, insurance and other practical, commercial and legal techniques are available to help minimise the risk of loss. There are ways the law can help if risks are identified early and when decisions are made to manage it.
When dealing in a foreign jurisdiction, there are various risks to consider. Some, but not necessarily all, are related to the counterparty, the country, the business operations and protecting your reputation.
Once you have identified and assessed the risks you face and you have agreed to either accept them, transfer them (to a third party wishing to participate in a particular risk) or avoid them, you are required to manage the risks within the terms and conditions of the contract with your counterparty.
Given that the choice of law will affect the legal meaning and the enforceability of the terms and conditions of your agreement, it is important to consider it carefully, particularly when dealing in cross-border transactions. The legal regime applicable to your jurisdiction may not be recognised, rendering the terms and conditions of your agreement unenforceable.
The rights of contracting parties, the rule of law, international treaties and the independence of the judiciary are all principles which are required to be considered as being recognised and protected by the country concerned.
Always consider assets available as collateral. The most common forms of security granted over certain classes of assets may be incapable of being classified as collateral, or there may be local laws and regulations which one needs to comply with when taking security over them. There may also be types or classes of assets over which security cannot be granted or if granted, is difficult to enforce.
There are legal structures available to minimise risks, as opposed to taking physical security, when granting credit. These structures are often referred to as commercial or quasi-security structures.
In general, there are no specific requirements or formalities to be complied with in relation to these transactions, unless there are laws and regulations governing the extension of credit, and care should be taken to ensure that forms of security are not re-characterised on the basis of the principles of law of a specific jurisdiction.
There may also be company law rules or conventions which may affect taking security. A lender needs to assess the circumstances under which it can enforce its security and furthermore, when it is entitled to enforce its rights under the financing agreements.
There are various principles that may apply and affect the ability to enforce in relation to the security conferred by a specific security instrument.
Sometimes, the country of the lender and the country of the borrower are parties to a bilateral investment treaty. These treaties are often entered into between countries to attract investments by undertaking to protect investments and the repatriation of profits. Bilateral investment treaties provide for investors to have direct recourse to arbitration against the host state or other means of dispute settlement where it is alleged that the terms of the bilateral investment treaty have not been observed.
As stated earlier, a lender may agree to accept, transfer or avoid certain risks. One way of transferring risk is to insure against it. One should consider what types of insurance are appropriate for the transaction. Some of the forms of insurance available are insurance against goods in transit (marine cargo or goods in-transit insurance), insurance that indemnifies against losses from non-payment of a commercial debt (trade credit insurance), products offered by public sector export credit agencies (ECAs) and political risk insurance.
Your ability to retain legal advice early can help you minimise the risks in the transaction. Whilst reliable technical legal advice is always very important, the ability to deliver that advice in a coherent, relevant way combined with transaction management, structuring, negotiation and drafting skills, is essential to achieve your transaction objectives.
Your legal team should be able to alert you to potential pitfalls and gathering this information you require to assess the risks as they are associated with your transaction.