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

2. LETTERS OF CREDIT

3. 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.

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

5. 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

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

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

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

9. 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

10. SURETY BONDS

11. 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.

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

13. 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

14. 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

15. GUARANTEES

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

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

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

19. 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)

20. INDEMNITIES

21. 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

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

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

24. 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

25. ESCROW ARRANGEMENTS & HOLDBACKS

26. 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

27. Who uses them?
All types of businesses
Banks
Lawyers

28. 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

29. 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

30. ADJUSTMENT CLAUSES

31. 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

32. 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

33. FORCE MAJEURE CLAUSES

34. 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

35. 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

36. SPECIAL INSURANCE

37. 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

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

39. Why?
Covers risk of loss
Protects overseas assets

40. 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

41. 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