In the engine room
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In the engine room

The legalistic stuff at the back of loan agreements is too dull for most bankers to bother about. But you need to know why it is there. By Christopher Stoakes.

The standard terms in a financial agreement contract are known as the "boilerplate". They are the clauses - such as grossing up if there is a tax charge, or reasons for treating the contract as terminated - which protect one or other party and are so widely accepted that they are generally only lightly negotiated, if at all.

However, there are clauses in the boilerplate which can be confusing because they interlock. These cover choice of law, submission to the courts of a particular jurisdiction, and enforcement of judgements. Wrapped within, although not necessarily mentioned, is the issue of conflicts of laws. Provided these clauses don't come up for negotiation, a banker shouldn't need to understand them. But if they do become the subject of discussion - for instance, if a powerful borrower in an emerging market starts to haggle over their inclusion and meaning - you should be able to stand your ground.

Every agreement has to be governed by a system of law of a specific country. The choice of law clause says which. If the parties don't choose, the court will decide. But that is unpredictable since it depends on knowing which court any dispute will be brought before, so it is better for the parties to decide.

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