Common Terms Agreement

What is a Common Term Agreement?

A common terms agreement is a legal settlement that includes two parties. One party seeks financial aid or loan for a particular project, and the other party provides that financial assistance. The CTA makes sure to bring about the arrangement between the borrower and the lender. The second party can be a financial institution. This agreement includes the provision for reimbursement and the cost of procuring debt. Both the parties agree with the clauses mentioned in CTA regarding project account, conditions, power of voting-related to amendments, etc.

Common Terms Agreement – What Are Its Prerequisites?

Common terms agreement is key to project financing scenarios. CTA safeguards both the parties from future legal issues. The agreement between financer (s) and borrower explains the mutual and common terms. The detailed explanation about the financial instruments and the relationship between each of the instruments is necessary for both parties to prevent future disagreements or disputes.

Purpose of the Common Terms Agreement

The purpose of a common terms agreement is to create a common understanding between the lending financial institution or financer and the fund receiving company. CTA in any project finance transaction mentions almost every minute details about the dos and don’ts and responsibilities of both parties in the agreement. CTA also explains the role of the parties in critical and complicated situations.

Benefits of Common Terms Agreement

Common terms agreement simplifies the clause and sheds light on the essential terms related to receiving and paying of the financial aids. It helps both parties to understand the points and consider those points before entering into an agreement. CTA highlights the key terms and factors, and when both the parties agree to the mentioned terms, they sign the contract accordingly.

Key Terms of Common Terms Agreement

The key terms of a common terms agreement comprise:

Provisions regarding general precedent conditions
Circumstances precedent to each drawdown
The availability period for the loan including a commitment fee
Details about clauses related to interest and repayment
Vital project metrics calculations
Dividends and warranties related restrictions

CTA can also mention lenders, contractors, off-takers, equity investors, equipment suppliers, legal, financial and technical advisors, multilateral/regulatory/export credit card agencies involved, and the insurance providers.

Does CTA bind you legally?

Both the lenders and fund receivers need to sign the common terms agreement to become legally binding. The sign is proof of their consent and mutual understanding about the terms and clauses that they have agreed upon to enter in this agreement.

Is CTA a contract?

Yes, CTA is a contract!

Any law-enforcing agreement can be considered as a contract. Common terms agreement is indeed an agreement enforceable by law. A common terms agreement and facility agreement, both fall under this.

How to Draft the Common Terms Agreement?

You should follow a generic form first and modify it later to fit the situation.
It is necessary to mention the document as a CONTRACT to avoid confusion.
Proper identification of both parties is essential. For that, their particular names and other details are mandatory.
You should mention the validity of the contract in the first paragraph of the agreement.
Use numbers to highlight the different and essential paragraphs. Clarify the technical terms. In the future, this will make it easier for you to understand the details about the CTA.
Correct use of punctuation marks is necessary. Else, it can change the entire meaning of a sentence. The incorrect use of conjunction can also create confusion. Use punctuation correctly.
Signing on every page is essential. It is proof that the parties have gone through every detail, and there is no chance of eventuality. You can go for notarization if you deem it necessary.
Try to avoid legalese/out-dated phrases (e.g., the party of the first part, heretofore, etc.) to maintain transparency and clarity.
Try to avoid long sentences. It can complicate the whole agreement and disrupt the clarity.
Both parties can differ in terms of perception and capability to understand. So explaining the confusing terms is necessary.
Once both parties sign the agreement, then act according to the terms in the agreement.
Any future amendment should be in writing and with the consent of both the parties.

Getting the lawyer’s review is the most crucial part. Standard agreements might require customization, avoiding certain phrases, and clauses that can change the entire equation in the agreement.