Understanding the legal fundamentals of project finance contracts

Abstract

Project finance is an alternative finance mechanism for structural development whereby the funding of a project is dependent on the project itself and not on the sponsors or credit providers. It is an international transaction involving long-term, nonrecourse loans for the financing of heavy, cost intensive projects. Because of this peculiar nature, the risk involvement is higher than what is obtainable in other international transactions. Even more risk-laden is project finance in developing countries. Therefore, it takes a proactive legal draftsman who is well grounded on issues of project finance contracts to pre-emptively circumvent some of these issues which may frustrate the contract by making provisions for foreseeable and other reasonable risks even before they arise. This paper seeks to arm the legal draftsman with the fundamental knowledge of project financing contracts and by extension arm him with the basic tools for a productive career in the drafting and implementation of project finance contracts. To achieve this objective, this article engages in a comprehensive appraisal of the concept of project finance contracts; exploring its nature, merits, demerits and structures. Conclusively, it guides the legal draftsman on the effective requirements for the drafting of a practical, proactive project finance contract.

Key words: Project Finance, Legal Fundamentals, Contracts