FINANCIAL ASSURANCES AND PROTECTIONS IN BUSINESS TRANSACTIONS Presented by: Kenneth B. Flowers, Partner M. Timothy Syer, Associate

LETTERS OF CREDIT

What are they? An undertaking by an issuer (bank) to honour drafts or demands for payment drawn against the credit by the beneficiary (payee) upon compliance with specified conditions.

Who uses them? • Buyers • Sellers • Banks and other financial institutions • Governments • Other businesses

Why? • Standardized – UCP • Used world wide - ICC • Safe – substitute credit of issuing bank for that of the counterparty • Principle of autonomy, fraud exception • Bankruptcy remote

Sale Contract Letter of Credit Credit Application Seller/Beneficiary Buyer/Applicant ISSUING BANK

Types or Characteristics • Documentary • Standby Revocable or irrevocable • Revolving • Confirmed • Back to back • Transferable

Confirmed Letter of Credit Sale Contract Credit Application Confirmation Buyer/Applicant Seller/Beneficiary Confirming Bank Issuing Bank

Back to Back Letter of Credit Credit Letter of Credit Letter of Application Credit Application Credit Sale Contract Sale Contract Issuing Bank (Buyer) Issuing Bank (Seller) Buyer/Applicant Seller/Beneficiary Supplier

SURETY BONDS

What are they? Three party arrangement where the surety (insurance co) promises in favour of a third party (the obligee) that the principal will perform its obligations to the obligee.

Who uses them? • Contractors • Suppliers of services, labour & materials • Other businesses

Why? • Enhance credit by replacing credit of company with that of the surety • No principle of autonomy • Liability of surety is collateral (i.e. indirect) and is dependant upon liability of principal • Surety only liable for actual damages sustained by the principal obligee

Types or Characteristics • Non standard, they are a contract • Three parts Obligation Recitals Conditions of the bond • Bid or Tender Bonds • Performance Bonds • Labour and Material Payment Bonds • Repayment Bonds

GUARANTEES

What are they? A contract to be answerable for the debt, default or miscarriage of the principal debtor.

Who uses them? • Banks and other financial institutions as issuer and recipient • Other creditors

Why? • Secondary source of security • Credit enhancement for principal debtor • Enhances markets for certain products

Types or Characteristics • Limited or unlimited • Not standard – ICC tried to standardize but largely failed • No principle of autonomy, subject to defences available to guarantors, unless defences are expressly waived • Performance guarantees • Deficiency guarantees • Contingent guarantees or “comfort letters”, “keep well” agreements • Guarantees Acknowledgment Act (Alberta)

INDEMNITIES

What are they? An agreement where the indemnitor undertakes to indemnify the indemnitee against a liability, cost, expense, damage or loss independent of whether there is a default by some other person

Who uses them? • Buyers • Sellers • Banks and other financial institutions • Other businesses who are party to contracts

Why? Independent primary obligation Many defences used by suretys cannot be raised Credit enhancement Often used to address specific concerns

Types or Characteristics Can be written or oral Distinctions between indemnities and guarantees often blurred Three parts Notice provisions Right to participate in settlement discussions Thresholds or caps

ESCROW ARRANGEMENTS & HOLDBACKS

What are they? Escrow arrangements are agreements where certain property is held by a third party to be dealt with in accordance with the conditions specified in the escrow agreement Holdbacks occur when a portion of an amount due to a party is withheld until that party has fulfilled all or part of its services or obligations under a contract

Who uses them? All types of businesses Banks Lawyers

Why? Escrow agreements used widely for transaction closings and for holdback arrangements as they create a perception of trust Independence from parties Holdbacks are a form of security until representations can be verified or for obligations

Types or Characteristics Escrow agents can be banks, specialized escrow companies, law firms etc. Escrow agreements must clearly specify what is going into escrow, how it is to come out, the responsibilities of the escrow agent and the remedies on dispute Holdbacks are usually provided for in the sale or other contract itself and holdback monies (often a percentage of purchase price) are often the subject of escrow arrangements

ADJUSTMENT CLAUSES

When Are They Used? Adjustment clauses are often used in supply agreements to permit an adjustment to an agreed price of goods or services with the aim of ensuring that agreed prices reflect true market value at the time of closing Adjustment clauses also used in share purchase transactions to adjust the purchase price for shares in the event of an adverse tax ruling (e.g. lifetime capital gains deduction) Used in union and employment contracts for increases in cost of living

When are they used (contd) Adjustment clauses often used to permit pricing adjustments to the price of goods to reflect the supplier’s increase or decrease in costs, provided such a valuation is limited to a variation in clearly identified costs and circumstances (e.g. the price of fuel over a period of time) Used by governments to unilaterally adjust the price or quantum of goods and may be considered “equitable adjustments” because they provide for an allowance for loss of anticipated profits. Often called “changes clauses” Used to compensate for changes to “fixed price” contracts

FORCE MAJEURE CLAUSES

What are they? Force Majeure is French for “superior force” Address the extent to which non-performance is excused or delayed if prevented by causes that are beyond the reasonable control of the party having the obligation Direct clause between the parties to a contract and does not extend to others (e.g. suppliers) who may have a direct impact on a party’s ability to perform

Terms or Characteristics Usually defined to include events such as war, riots, strikes and other civil unrest, crime or “acts of God” such as flooding, earthquakes, hurricanes, tornados or volcanic eruption Must be external, unpreventable and unpredictable Generally exclude breaches as a result of financial difficulty or economic inability to perform Have a lead in period before they take effect and are limited in life before a contract is terminated May wish to include required steps to mitigate

SPECIAL INSURANCE

What is it? Defined in most insurance acts as an undertaking by one person (the insurer) to indemnify another person (to a specified limit) against loss or liability in respect of a specified loss or peril to which the insured person may be exposed or to pay a sum of money upon the happening of a certain event Undertaking is in return for payment of premium and obligation of insurer is primary

Who uses it? Buyers Sellers Businesses with international connections or transactions EDC

Why? Covers risk of loss Protects overseas assets

Types or Characteristics Representation and warranty insurance Performance security insurance Accounts receivable insurance Political risk insurance Contractor and subcontractor default insurance Directors and officers liability insurance

Presented by: Kenneth B. Flowers, Partner M. Timothy Syer, Associate © 2010, Lawson Lundell LLP. All rights reserved. Lawson Lundell LLP is a British Columbia Limited Liability Partnership