Direct Agreement

Summary

This template is a direct agreement that may be used in project finance transactions to give the lenders to the project direct rights in respect of certain key project documents. This template includes practical guidance, drafting notes, and alternate and optional clauses. Direct agreements are entered into among the project company, a secured party (often a collateral agent acting on behalf of financing sources), and the parties to the project company's key contracts (such as the engineering, procurement and construction contract; the operations and maintenance contract; a government concession agreement, if any; and any long-term supply contract or sales contract). This agreement allows the lenders to take certain actions in respect of the key project documents in an enforcement scenario. The direct agreement establishes contractual privity between a secured party and a project counterparty, granting the secured party (or its agent or other designee) enforcement rights vis a vis the project counterparty if the project company defaults on its obligations to the secured parties. Under a direct agreement, the party to the key contract consents to the collateral assignment, by the project company, to the lenders of the project company's rights under the key contract. Direct agreements will also include an undertaking from the party to the key contract to provide the lenders with written notice prior to exercising certain rights and remedies under the key contract. In addition, direct agreements will often provide that if the project company defaults under the related key contract, then, following notice from the party to the contract, the lenders will have certain additional cure rights prior to the party exercising its rights and remedies with respect to the default. Although at face value, direct agreements appear to mostly benefit the secured party, project counterparties may also gain from these arrangements. If the project company has defaulted under the relevant project document, it is likely the lenders will exercise their step-in rights to keep the project performing (the lenders do not have to do so but, as a matter of commercial sense, they are likely to). Further, the lenders will usually have to pay amounts owed by the project company to the project counterparty (or at least some of them) as a trade-off for the lenders' right to step in (lenders cannot usually expect the project counterparty to keep up its side of the contract without being paid to do so). Nevertheless, borrowers and lenders may face hurdles negotiating the terms of direct agreements once the underlying project documents have been finalized and executed. Borrowers may wish to work through the terms of a form of direct agreement with the counterparty to a key project document at the time of entering into the project arrangements even in the absence of identified financing sources with whom to negotiate these documents, provided that the borrower can anticipate and explain its lenders', or potential lenders', needs and concerns. This template may be read in conjunction with the following practice notes and clauses: • Project Financing Key Documents • Project Finance Transactions Guide • Project Finance Resource Kit • Key Issues for Project Finance Lenders in Construction Contracts • Operation and Maintenance Contracts: Key Issues for Project Finance Investors, Developers and Lenders