Developing a New E.B.R.D. Product:
A Case Study on
Interpreting the E.B.R.D. Agreement
Douglas Peel’
In 1990, The European Bank for Reconstruc-
tion and Development was established with the
principal aims of fostering the transition towards
open, market-oriented economies and promoting
private and entrepreneurial initiative in the countries
of Central and Eastern Europe. Following a brief
comparative study between the constitutive docu-
ments of the E.B.R.D. and of other international fi-
nancial institutions, the author notes that the major
difference lies in the relatively detailed language of
the E.B.R.D. Agreement.
The author identifies the specific provisions of
the E.B.R.D. Agreement which may represent con-
straints on the Bank’s operations and may impede its
ability to adapt to changing circumstances. Follow-
ing a review of the particular process, principles, and
documents which would be involved in the interpre-
tation of these provisions, the author conducts a case
study of the application of the E.B.R.D. Agreement
to a recently developed financial product. This
analysis leads him to conclude that the E.B.R.D.
should be able to adapt itself to its clients’ future
needs.
En 1990, la Banque europtenne pour Ia recons-
tnuction et le dveloppement a 6t6 mise sur pied,
avec, pour objectifs principaux, de faire avancer Ia
transition vers des 6conomies ouvertes et orientees
sur le march6 et de promouvoir les initiatives priv6e
et d’entreprise dans les pays de l’Europe centrale et
de l’Europe de l’Est. Apr.s une brave 6tude compa-
r6e entre les documents constitutifs de ]a B.E.R.D. et
d’autres
intemationales,
l’auteur note que la difference principale rside dans
le langage relativement d6taill6 de l’entente de la
B.E.R.D.
financi&es
institutions
Uauteur identifie les dispositions pr6cises de
1’entente de Ia B.E.R.D. qui peuvent contraindre les
opdrations de ]a Banque et diminuer sa capacit6 de
s’adapter aux circonstances changeantes. Apr~s une
revue du processus particulier, des principes, et
des documents
impliqu6s dans
l’interprdtation de ces dispositions, l’auteur analyse
le cas de l’application de l’entente de la B.E.R.D. t
un produit financier rcemment d6velopp6. Cette
analyse l’amne h conclure que la B.E.R.D. devrait
etre capable de s’adapter aux besoins futurs de ses
clients.
seraient
qui
. Counsel, European Bank for Reconstruction and Development Member of the New York Bar,
LL.B. (McGill) 1988. The opinions expressed in this note are those of the author and not necessarily
those of the European Bank for Reconstruction and Development or its Office of General Counsel.
McGill Law Journal 1995
Revue de droit de McGill
To be cited as: (1995) 41 McGill L.J. 295
Mode de rf~rence : (1995) 41 R.D. McGill 295
296
MCGILL LAW JOURNAL! REVUE DE DROIT DE MCGILL
[Vol. 41
Synopsis
Introduction
I.
Constraints Imposed by the E.B.R.D. Agreement
The Interpretation Process
H.
mI. A Hard Case?
Conclusion
19951
D. PEEL- INTERPRETING THE E.B.R.D. AGREEMENT
Introduction
The Agreement Establishing the European Bank for Reconstruction and Develop-
ment,’ a treaty among states and international organisations, was signed by representa-
fives of forty countries, the European Economic Community and the European In-
vestment Bank. Signature and subsequent ratification of the E.B.R.D. Agreement
added the European Bank for Reconstruction and Development (“E.B.R.D.” or
“Bank”) to a small group of comparable, treaty-based international financial institu-
tions (“I.F.I.s”).’ The Bank’s core business is to lend money, make equity investments,
underwrite equity issues and provide other financial products to its clients for projects
in the countries of Central and Eastern Europe? The majority of the Bank’s business is
non-sovereign risk, that is, loans and investments not guaranteed by a state.
In 1989, the idea was first mooted of establishing a development bank to foster the
transition of Central and Eastern European countries to open, market-oriented econo-
mies and to promote private and entrepreneurial initiative. At that time, it was not a
foregone conclusion that a new institution would be required. The idea of using an ex-
isting regional institution, such as the European Investment Bank, had many support-
ers.’ Others thought the task could be within the jurisdiction of the I.B.R.D. and I.EC
The proponents of creating a new and separate institution carried the day, however, and
their ascendancy was quickly reflected in the text of the E.B.R.D. Agreement, which is
the constitutive document of the Bank.
Not surprisingly, this Agreement bears many similarities to the constitutive docu-
ments of other I.EI.s. In general terms, the purposes and functions of I..I.s are similar
to those of the E.B.R.D. as reflected in their constitutive documents. The core share-
’29 May 1990,29 I.L.M. 1077 [hereinafter E.B.R.D. Agreement].
2 The I.F.I.s, which are comparable to the E.B.R.D. in terms of their purpose and shareholders, in-
clude the International Bank for Reconstruction and Development (“I.B.R.D.”), its private-sector ori-
ented affiliate the International Finance Corporation (“I.EC.”), the African Development Bank, the
Asian Development Bank and the Inter-American Development Bank.
The E.B.R.D. Agreement authorises the Bank to conduct its operations only in “countries from
Central and Eastern Europe” (E.B.R.D. Agreement, supra note 1 at art. 8(2)). When the Bank was
formed, one of these countries was the Soviet Union. Following the dissolution of the U.S.S.R., the
Bank has continued to operate in all of the countries formerly comprising the Soviet Union.
‘ One proposal suggested the creation of a special section of the European Investment Bank to
make loans in Central and Eastern European countries (see D.R.R. Dunnett, “The European Bank for
Reconstruction and Development: A Legal Survey” (1991) 28 C.M.L. Rev. 571).
See P.A. Menkveld, Origin and Role of the European Bank for Reconstruction and Development
(London: Graham & Trotman, 1991) at 32-47, 96-97.
6 The debate continued after formation of the Bank, however, and the Bank suffered considerable
criticism in its first two years under then-President Jacques Attali (see generally: R. Waters, “Europe
expects more from EBRD” The [London] Financial 7imes (2 March 1993) 2; A. Robinson, “EBRD
puts emphasis on business” The [London] Financial Times (16 April 1994) 3; R. Peston & J. Bums,
“Aid bank overheads hit of 200 m but E Europe waits for loans” The [London] Financial Times
(13 April 1993) 1).
MCGILL LAW JOURNAL/REVUE DE DROIT DE MCGILL
[Vol. 41
holder base of the I.EI.s is also, more or less, the same; therefore, by referring to exist-
ing treaties, to which those shareholders were already party, the negotiation of the new
treaty was facilitated. There was also no reason to re-invent the wheel, since the consti-
tutive documents of the existing I.FI.s had, in large measure, proved adequate to their
purposes and functions; and there was a significant history of interpretation on which
to draw. Finally, the speed of the process of establishing the Bank also provided a
powerful incentive to work relatively closely with existing precedents.!
More interesting, however, are the important differences between the E.B.R.D.
Agreement and the constitutive documents of the other I.FI.s. One major difference is
that no more than forty percent of the amount of the Bank’s total committed loans,
guarantees and equity investments can be provided to the state sector.’ This restriction
ensures a permanent focus on the fundamental goal of developing a strong private
sector in the Bank’s countries of operations. Another significant difference is the in-
clusion of explicitly political provisions in the E.B.R.D. Agreement. These provisions
are designed to ensure that the Bank’s resources are used only in countries making
clear progress toward open, market-oriented economies and pluralist and democratic
political systems.” These differences are among those identified by observers as defin-
ing characteristics of the E.B.R.D., setting it apart from the other I.F.I.s.”
A further distinction, with immediate consequences, is the high degree of detail
included in the E.B.R.D. Agreement regarding the methods of operation permitted to
7 Formal meetings commenced in mid-January 1990 and the E.B.R.D. Agreement was signed four
and one-half months later.
‘ Although the similarity is relatively easy to account for, it has not gone without criticism. For ex-
ample, Ibrahim Shihata, Senior Vice President and the General Counsel of the World Bank and Secre-
tary-General of I.C.S.I.D., states:
The use of the familiar concepts and language of these instruments no doubt has advan-
tages. However, the new text could have avoided pitfalls caused by the language of
existing texts and could have benefitted more extensively from the elaborate interpre-
tations, formal and informal, necessitated by the occasional vagueness of their lan-
guage and the changing requirements of the work programs of their respective institu-
tions. It could have avoided, as it partially did, the repetition of clauses which fell into
disuse or proved to be unduly cumbersome in similar institutions and could have
drawn on improvements introduced by more recent agreements … (I.F.I. Shihata, The
European Bank for Reconstruction and Development: A Comparative Analysis of the
ConstituentAgreement (London: Graham & Trotman, 1990) at 5-6.
9 E.B.R.D. Agreement, supra note 1 at art. 11(3).
‘” The Bank’s purpose is “to foster the transition towards open market oriented economies and to
promote private and entrepreneurial initiative in the Central and Eastern European countries commit-
ted to and applying the principles of multiparty democracy, pluralism and market economics”
(E.B.R.D. Agreement, ibid at art. 1 [emphasis added]). Furthermore, “[tihe Bank may conduct its op-
erations in countries from Central and Eastern Europe which are proceeding steadily in the transition
towards market oriented economies and the promotion ofprivate and entrepreneurial initiative” (ibid.
at art. 8(2) [emphasis added]).
” See: Shihata, supra note 8 at2; Menkveld, supra note 5 at 91; Dunnett, supra note 4 at 574-75.
1995]
D. PEEL – INTERPRETING THE E.B.R.D. AGREEMENT
the Bank, the limitations on the scope of its operations and its operating principles.’2 In
1990, Shihata expressed concern that the very specific language of the E.B.R.D.
Agreement would prove detrimental by impeding the Bank’s future operations, should
unforeseen circumstances demand a level of flexibility apparently not afforded under
the E.B.R.D. Agreement.’3 The Bank’s operating priorities have evolved in the past
four years, and this has required the development of new products. The purpose of this
Note is to assess, in light of this evolution, whether Shihata’s concern has been borne
out in practice. The approach adopted is to examine some of the specific constraints
imposed by the provisions of the E.B.R.D. Agreement as they have been interpreted in
practice. The conclusion is that –
the E.B.R.D.
Agreement demonstrates a level of flexibility adequate to the Bank’s operational needs.
at least in the case examined –
I. Constraints Imposed by the E.B.R.D. Agreement
Most of the detailed constraints on the Bank’s operations are contained in articles
11, 12 and 13 of Chapter I1-, “Operations”, of the E.B.R.D. Agreement. Article 11,
“Methods of Operation”, provides that the Bank shall carry out its operations in fur-
therance of its purpose and functions as set out in articles 1 and 2 of the E.B.R.D.
Agreement: (i) by making or participating in loans to private-sector enterprises and
loans to state-owned enterprises that operate competitively and are moving to partici-
pation in the market-oriented economy, or if the loans facilitate transition to private
ownership and control;
(ii) by investing in the equity capital of private-sector enter-
prises and S.O.E.s in transition or by underwriting equity issues by such enterprises;
(iii) by facilitating access to domestic and international capital markets through the
provision of guarantees – where other means of financing are inappropriate –
and
other forms of assistance to private-sector enterprises and S.O.E.s in transition; (iv) by
deploying “special funds resources”;’5 and (v) by making loans for the reconstruction
,2 See E.B.R.D. Agreement, supra note 1 at arts. 11-13.
,3 Shihata wrote:
Incorporating such details in the constituent instrument of the EBRD may have been
caused by the concern that the Bank’s operational policies may otherwise develop dif-
ferently in practice. It may have also been based on the fact that certain policies and
practices have evolved in other MDBs [multilateral development banks] over the years
which the drafters of the Agreement may have wanted to emphasize or deny for the
new institution. It seems they were also concerned with specifying a role for the EBRD
which would distinguish it from other MDBs and ensure that it would complement,
rather than compete with them. While all these are valid concerns, experience shows
that a detailed text, inevitably influenced by the exigencies of the time of its drafting,
may cause difficulties in its implementation over time which could not be readily cured
through the cumbersome amendment process (Shihata, supra note 8 at 4-5 [footnotes
omitted]).
I’I will hereafter refer to these enterprises as “S.O.E.s in transition”.
These funds accepted for administration by the Bank which are “designed to serve the purpose
and come within the functions of the Bank”, and which do not form part of the ordinary resources of
the Bank (E.B.R.D. Agreement, supra note 1 at arts. 18, 19). Special funds resources have been pro-
MCGILL LAW JOURNAL/REVUE DE DROITDE MCGiLL
[Vol. 41
or development of infrastructure necessary for private-sector development and the
transition to a market-oriented economy.” Thus, for example, the Bank cannot finance
a state-owned enterprise that is not an S.O.E. in transition, other than by way of a loan
for the purposes outlined in item (v), above. Article 11 also contains the portfolio-ratio
restriction,” which requires that not more than forty percent of the amount of the
Bank’s total committed loans, guarantees and equity investments be provided to the
state sector.
Article 12, “Limitations on Ordinary Operations”, contains provisions limiting the
total amount of the Bank’s outstanding loans, equity investments and guarantees as
well as the disbursed amount of its equity investments to stated maximums that are
based on the Bank’s capital and reserves.’ Article 12 prevents the Bank from obtaining
a controlling interest in an enterprise through an equity investment and from exercising
control or assuming direct responsibility for management, other than in a jeopardy
situation.’9 Finally, article 12(4) provides that the Bank may not issue guarantees for
export credits nor undertake insurance activities.
Article 13, “Operating Principles”, specifies a number of operating principles with
which the Bank must comply. Dunnett has divided this article into prudential principles
and policy principles;’ although there is clearly some overlap between the two catego-
ries, this is a useful division. Prudential principles include the requirements that the
Bank must apply sound banking principles to all its operations; its investments must be
made on appropriate terms and conditions taking into account the enterprise’s require-
ments, the risks assumed by the Bank and comparable private sector terms and condi-
tions; the E.B.R.D. must have due regard to the ability of its debtors to meet their obli-
gations; and it must diversify its investments’ Policy principles include the require-
ments that: the Bank’s operations provide for the financing of specific projects, on the
basis of adequate proposals and with appropriate controls over proceeds;
it must not
provide financing to an applicant able to obtain sufficient financing elsewhere and on
terms and conditions that the Bank considers reasonable;” it must revolve its funds
vided, for instance, by the Nordic countries for investment in the Baltic countries and by the G-7
countries for specific Bank investments in Russia.
6 E.B.R.D. Agreement, ibid at art. Il(1)(i).
‘7 See supra note 9 and accompanying text.
” See E.B.R.D. Agreement, supra note 1 at art. 12.
9 See ibid at art. 12(2).
20 See Dunnett, supra note 4 at 589.
21 See ibid Dunnett is referring to the E.B.R.D. Agreement, supra note 1 at arts. 13(i), (xi), (viii),
(v), respectively.
See E.B.R.D. Agreement, ibid at arts. 13(i), (vi), (ix), (xiii).
See ibid at art. 13(vii). As Dunnett anticipated, this principle is frequently in apparent conflict
with the requirement that the Bank must apply sound banking principles (see Dunnett, supra note 4 at
589). The argument is that the “additionality” test is only truly satisfied where the Bank is taking risks
that are inconsistent with the application of sound banking principles. This assumes that commercial
finance is available for all projects for which it would be considered sound banking to provide fi-
nance; this cannot be the case.
1995]
D. PEEL – INTERPRETING THE E.B.R.D. AGREEMENT
its resources must not be used disproportionately for the
whenever appropriate;.’
benefit of any one member state;’ no financing may be undertaken in the territory of a
member state if it objects to the financing;2 and the Bank’s financing should be contin-
gent, in all appropriate cases, on procurement by international tender
II. The Interpretation Process
Notwithstanding the considerable detail in which the constraints described above
are stated in the E.B.R.D. Agreement, their application frequently requires an exercise
of interpretation to elaborate their meaning in any particular context. Under article
57(1) of the E.B.R.D. Agreement, the Bank’s Board of Directors28 has the power to
decide questions of interpretation or application of the provisions of the E.B.R.D.
Agreement. Where the Board of Directors has made such a decision, any member’
may require that the matter be referred to the Bank’s Board of Governors,.’ the decision
of which is final. The E.B.R.D. Agreement also provides that the approval of the Board
of Directors is required for each operation undertaken by the Bank, and it is expressly
made responsible for the establishment of Bank policies.’
Ad hoc submissions regarding specific questions of interpretation of the E.B.R.D.
Agreement rarely reach the Board of Directors. In practice, it decides questions of in-
terpretation through: the adoption of general policy papers based on drafts prepared by
Bank staff (often at the request of the Board of Directors) and the approval of particular
operations proposed by Bank staff. This may require the Board of Directors, expressly
or implicitly, to adopt or to endorse a specific interpretation of a provision of the
E.B.R.D. Agreement. The process of approving operations on a case-by-case basis is,
in this sense, closely analogous to the development of case law on the interpretation of
the E.B.R.D. Agreement.
The Bank’s multi-stage management review, which involves formal input from the
Bank’s Office of General Counsel, ensures that only proposed transactions that man-
agement has determined to be consistent with the E.B.R.D. Agreement are presented to
the Board of Directors for approval. This preliminary determination requires detailed
interpretation of the relevant provisions of the E.B.R.D. Agreement. This interpretation
2 4See E.B.R.D. Agreement, ibid at art. 13.
29See ibid at art. 13(iv).
26 See ibid at art. 13(iii).
27 See ibid at art. 13(xii).
” The Board of Directors was initially composed of 23 members, including 11 from member coun-
tries of the European Community and institutions of the European Community, four from recipient
countries, four from other European countries and four from non-European countries (see ibid at art.
26(1)).
29 “Any member” refers to a member state or organisation that is a party to, and ratifies, accepts or
approves the E.B.R.D. Agreement (see ibid at arts. 3, 61).
” The E.B.R.D. Board of Governors is composed of one representative of each member of the
Bank (see ibid at art. 23).
3′ See ibid at art. 27(ii).
MCGILL LAW JOURNAL/REVUE DE DROITDE MCGILL
[Vol. 41
is guided by the principles of treaty interpretation stated in the Vienna Convention on
the Law of Treaties and the Vienna Convention on the Law of Treaties between States
and International Organizations or between International Organizations.2 The general
rule of interpretation under these Conventions is that “[a] treaty shall be interpreted in
good faith in accordance with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and purpose.” The “context” of a
treaty comprises its text, its preambles and annexes together with certain types of in-
struments constituted in connection with a particular treaty.’ The Conventions also
provide for the interpreting authority to take into account subsequent agreements relat-
ing to a treaty or its application, practices in application of a treaty and relevant rules of
international law.’ Terms may, also, be given special meanings if it is established that
the parties so intended.’ Finally, recourse may be had to supplementary means of in-
terpretation (including preparatory work and the circumstances of its conclusion) to
confirm interpretations reached by applying the principles described above or to clarify
any such interpretation that leaves the meaning of the relevant provision ambiguous,
obscure or produces a manifestly absurd or unreasonable result.” Among the supple-
mentary means of interpretation is the Chairman ‘ Report on the Agreement Establish-
ing the European Bank for Reconstruction and Development.” The Chairman s Report
recorded the views of the representatives who negotiated the E.B.R.D. Agreement; ac-
cording to the Chairman’s Report “certain formulations in the text represented general
understandings which needed to be recorded, but which were not suitable” for inclu-
sion in the E.B.R.D. Agreement itself.” This Report was explicitly intended for “future
reference in interpreting the Articles”.’
m. A Hard Case?
Four years into the Bank’s operations, a narrow focus on hard-core industrial and
infrastructure project finance has not materialised, contrary to expectations for a bank
established to finance “specific projects”, primarily, by making loans and equity in-
2 Vienna Convention on the Law of Treaties, 23 May 1969, 8 I.L.M. 679 [hereinafter Law of Trea-
ties]; Vienna Convention on the Law of Treaties between States and International Organizations or
between International Organizations, 21 March 1986, 25 I.L.M. 543 [hereinafter Law of Treaties
between States]. Section 3 of both Conventions state identical principles of interpretation.
31 Ibid at art. 31(1). The “ordinary meaning” rule requires literal interpretation, presumably in-
formed by general legal reasoning and experience. Reference to the object and purpose of the
E.B.R.D. requires that interpretations furthering the evident object and purpose of a treaty (i.e. teleo-
logical interpretations) be preferred to those that do not (see Encyclopedia of Public International
Law, vol. 7 (Amsterdam: Elsevier Science, 1984), s.v. “Interpretation in International Law” at 322).
‘ Law of Treaties, ibid at art. 31(2); Law of Treaties between States, ibid. at art. 31(2).
3′ See ibid at art. 31(3). Practices in application of a treaty should include, for instance, tacit inter-
pretations adopted by the Bank’s Board of Directors approving specific operations.
31 See ibk at art. 31(4).
3″ See ibid at art. 32.
” Reproduced in Shihata, supra note 8 at 166 [hereinafter Chairman’s Report in Shihata].
39Ibid at 167.
40Ibid
19951
D. PEEL – INTERPRETING THE E.B.R.D. AGREEMENT
vestments. Although this type of project finance remains a very significant part of the
Bank’s business, financial institutions and trade facilitation have also been identified as
operational priorities.” Investment in financial institutions in the Bank’s countries of
operation strengthens the local financial sector, which is a crucial condition for the suc-
cessful transition to a market-oriented economy. Trade facilitation efforts similarly
strengthen the local commercial and financial infrastructure and unlock trade flows
limited by shortcomings in that infrastructure. While project finance tends to raise
relatively few issues under the E.B.R.D. Agreement, developing products for the Bank
to offer its clients in the areas of financial institutions and trade has tested the flexibility
of the Agreement.
One Bank product in these areas, first approved in early 1994, is already in use by
a client in one of the former-Yugoslav republics. It is currently being developed for use
in Russia, Belarus, Ukraine, Uzbekistan and elsewhere. The product allows local banks
to increase the volume of trade transactions they finance for local clients. For example,
importers in the Bank’s countries of operation require resources from foreign suppliers,
which frequently must be paid in a foreign convertible currency. Typically, the foreign
supplier is unwilling to rely on the local importer’s promise to pay for goods and re-
quires that a bank letter of credit (“LC”) be opened. This LIC guarantees that the
supplier will be paid when it presents specified documents showing that the goods
have been shipped. While the importer will request a local bank to open the I/C, the
supplier (or its bank) will likely be unwilling to rely directly on the credit of the local
bank;”2 therefore, the TIC has to be confirmed by another bank deemed creditworthy by
the supplier, or its bank. Confirmation of an L/C obliges the confirming bank to make
the payment when the specified documents are presented to it. The confirming bank
then claims payment from the local bank that issued the I/C. The problem is that, like
the supplier, the confirming bank is rarely willing to rely directly on the local bank’s
credit and may, thus, require that the local bank post cash collateral of up to one-
hundred percent of the amount of the TiC. This requirement drastically restricts the
volume of such business carried on by local banks, because posting hard-currency
collateral is expensive for the local bank, and the importer, and unproductively con-
strains limited supplies of hard currency. The same problems may apply to other com-
mon trade financing transactions made through a local bank, such as pre-shipment fi-
nancings and advance payment bonds.
One solution to this problem is the substitution of an E.B.R.D. guarantee, which
may take the form of an E.B.R.D. TIC, for the cash collateral required by the confirm-
ing bank. For a fee paid by the local bank, the E.B.R.D. guarantees the confirming
bank 3 that it will reimburse a specified percentage of the amount of the LIC not paid by
the local bank, when properly claimed by the confirming bank.” Payment to the con-
” See European Bank for Reconstruction and Development, Annual Report 1993 (London:
E.B.R.D., 1994) at 7-8.
,2 This may be the case, for instance, for country-risk reasons or because the local bank is unknown.
41 In the case discussed here, there are four confirming banks from different countries.
“The documentation involves a facility agreement between the E.B.R.D. and the local bank, and a
MCGILL LAW JOURNAL/REVUE DE DROITDE MCGILL
[Vol. 41
firming bank creates a debt of the local bank to the E.B.R.D. The amount of the facility
and the fee charged to the local bank depend on the Bank’s evaluation of the risk to
which it is exposed. The evaluation is based on a combination of the general credit risk
of the local bank and the country risk. Availability of the facility is linked to an institu-
tional development program in the local bank.
Developing an LUC-support product of this nature raises three issues under the
E.B.R.D. Agreement. First, the product may take the form of a guarantee, but the
E.B.R.D. Agreement at article 11(iii) appears to place qualifiers on the Bank’s power to
issue guarantees. A second issue is whether an LC-support guarantee finances a spe-
cific project, as required by article 13(ii) of the E.B.R.D. Agreement. Finally, the IC-
support product might be inconsistent with article 12(4) of the E.B.R.D. Agreement,
which prohibits the Bank from issuing guarantees for export credits.
Article 1 1(iii) of the E.B.R.D. Agreement states that the Bank may facilitate access
to domestic and international capital markets by private-sector enterprises or S.O.E.s in
transition through the provision of guarantees where: other means of financing are in-
appropriate and through financial advice or other forms of assistance. This might mean
that the Bank may issue guarantees only in these circumstances. In that case, it would
be necessary to demonstrate that the IC-support product fell within the stated criteria.
However, the main subject matter of article 1 1(iii) is clearly the Bank’s role in assisting
enterprises in accessing domestic and international capital markets. On an ordinary
reading of the article, the reference to guarantees is, like the reference to the provision
of financial advice and other assistance, merely incidental to the purpose of the clause.
It is evident, from numerous references to guarantees throughout the E.B.R.D. Agree-
ment,’
that the guarantee is intended to be one of the Bank’s principal financial prod-
ucts; there is no other evidence (apart from the prohibition of guarantees for export
credits discussed below) that this product was intended to be subject to more severe
limitations than the Bank’s loan-making power.’ This observation leads to the conclu-
sion that the Bank’s power to provide guarantees is coextensive with its power to make
loans, and that article 1l(iii) does not limit the guarantee power. Accordingly, structur-
ing the LJC-support product as a guarantee rather than as a stand-by loan facility, for
instance, does not put the product outside the Bank’s permitted methods of operation.”
separate payment agreement between the E.B.R.D. and the confirming bank. These specify, among
other matters, the form and substance of L/Cs eligible under the facility agreement, the fees charged
by the Bank and the Bank’s rights in the event it is called upon to make a payment to the confirming
bank. The local bank’s obligations to the E.B.R.D. may be partially secured to ensure that the local
bank has the proper incentives to honour these obligations.
“See e.g. EBRD Agreement, supra note 1 at arts. 11-15, 27.
,This view is reinforced because in some cases precisely the same effects as a guarantee can be
achieved with a stand-by loan facility, rendering the distinction formal rather than substantive.
“, Even if the contrary argument were accepted, any limitation imposed by article l(iii) should not
prevent the Bank from offering the L/C-support product. The use of the term “capital markets” might
lead to the interpretation that Bank guarantees could be used only to facilitate access to the domestic
and international markets for long-term investment funds, principally, the bond markets. The ordinary
meaning of the term “capital markets”, however, is arguably the market for capital generally, that is,
for financing generally. There is nothing in the context of the E.B.R.D. Agreement to suggest that this
1995]
D. PEEL – INTERPRETING THE E.B.R.D. AGREEMENT
Next, article 13(ii) requires that the operations of the Bank must finance specific
projects, whether individual or in the context of specific investment programmes. Nar-
rowly construed, the phrase “specific project” might presumptively be limited to indus-
trial projects that form the core of classic project finance; that interpretation would
clearly rule out the [IC-support product. The ordinary meaning of the word “project”,
however, is very much wider than this: it can include virtually any plan or scheme.’
“Specific” means clearly defined or definite.’ 9 There is no evidence from the context of
the E.B.R.D. Agreement (except as noted below in relation to the Chairman’s Report)
or from supplementary means of interpretation that either word was intended to be
given any special meaning. This suggests the Bank may finance any clearly-defined
plan or scheme, so long as it does not compromise any of its other operating principles
in so doing. This interpretation is generally supported by the Chairman’s Report, which
states that the purpose of including this requirement was to “make clear that fast-
disbursing policy based lending is not included” in the Bank’s scope of operations.’
The intention was not, evidently, to rule out any other kind of operation. In practice,
this requirement has been addressed by presenting the [!C-support product as a trade
facilitation programme designed to improve the local financial infra-structure, in par-
ticular, local payment systems for interational trade transactions.
The final hurdle to the development of an LIC-support product is the ban on
“guarantees for export credits” contained in article 12(4) of the E.B.R.D. Agreement.
The precise definition of an export credit is open to debate. There is nothing in the
context of the E.B.R.D. Agreement that provides guidance on the meaning of this
phrase. One possible starting point, then, is the traditional export-credit transaction in-
volving the provision of credit directly to an importer or exporter to finance a trade
transaction. Generally, this financing is supported by a public or private export-credit
agency (“E.C.A.”) in the country of the exporter, which has the specific objective of
promoting exports from that country (hence the term “export credit” as opposed to
“trade credit” or “import credit”).’ In the simplest structures, the E.C.A. guarantees a
interpretation would be incorrect; on the contrary, it would be preferred because it would further the
purposes of the Bank, such as to promote private and entrepreneurial initiative. The requirement that
guarantees be used only when other means of financing are inappropriate would demand a case-by-
case analysis of whether a client’s financing needs and the Bank’s objectives could best be met with a
Bank loan or equity investment. If the determination were made that a loan would be inappropriate
because of the relatively high cost involved for the borrower; and that an equity investment would be
inappropriate because it would not match the financing provided by the Bank (long-term, essentially
untied funds) to the financing needs of the borrower (availability of shorter-term funds for limited,
specific purposes), then a guarantee might be appropriate and would be pennitted under the E.B.R.D.
Agreement.
” The Concise Oxford Dictionary of Current English, 9th ed., s.v. “project”.
‘9 Ibid., s.v. “specific”.
“‘ Chainnan ‘s Report in Shihata, supra note 8 at 173. This statement is notwithstanding that fast-
disbursing policy based lending might, on the ordinary meaning of the terms, constitute a “specific
project”. It is possible that the apparent narrowing of the meaning of “specific project” advocated by
the Chairman’s Report will be the subject of future debate.
, One example of an E.C.A. is the Export Development Corporation.
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commercial bank that provides credit to the exporter or importer by directly assuming
the credit risk of the exporter or importer. The E.C.A., thus, provides a guarantee for
the export credit extended by the commercial bank. However, E.C.A.s increasingly en-
gage in a wide range of financing activities other than these simple export credits.
These activities include general facilities made available to financial institutions in the
country of the importer. The facilities can be used for any export from the E.C.A.’s
country, in which the E.C.A. assumes the credit risk of the local financial institution,
rather than the exporter or importer. E.C.A.s also make direct project loans and equity
investments. Arguably, the ordinary meaning of “guarantees for export credits” should
be taken to be the narrower meaning cited, namely, transactions in which the guarantor
guarantees that an exporter or importer will meet its financial obligations in relation to
a particular transaction and, so, directly assumes the credit risk of the exporter or im-
porter. This definition is to be preferred on teleological grounds to a broader definition
that would encompass all financing instruments used by E.C.A.s in the definition of
“export credit”, since the broader definition would, by foreclosing many activities to
the Bank, seriously impinge on the E.B.R.D.’s ability to achieve its object and purpose.
This approach is consistent with the principle of general application in legal interpreta-
tion which states that exceptions to a general power and authority must be read nar-
rowly. On this interpretation, the UC-support product would not breach article 12(4) of
the E.B.R.D. Agreement because the Bank does not, in conjunction with the issuance
of its guarantee, assume the credit risk of the importer or exporter. Rather, it assumes
the general credit risk of the local bank.
Adoption of the JC-support guarantee as one of the Bank’s mainstream products
confirms that the detailed language on methods of operation contained in the E.B.R.D.
Agreement does not rule out the development of new products. The key is whether a
new product can be shown to be consistent with the E.B.R.D. Agreement’s provisions.
The LJC-support guarantee is an example of one such product. The process of product
development will be continuous, however, as the needs of the Bank’s clients change
and as financial markets in the Bank’s countries of operation become increasingly so-
phisticated.
Conclusion
This Note has summarised some of the apparent constraints stated in the E.B.R.D.
Agreement, the process by which those provisions are interpreted and the application
of that process to a new Bank product developed to respond to evolving operational
priorities.
The Note suggests that the E.B.R.D. Agreement has afforded adequate flexibility
to respond to changes in the Bank’s operational needs over the first four years of its
operation. Despite the potentially restrictive level of detail noted by Shihata, the Bank
has been able to develop new products for new operational priorities without amend-
ing, or unduly stretching, the provisions of the E.B.R.D. Agreement. It may be that the
E.B.R.D. Agreement strikes approximately the right balance between the need for de-
1995]
D. PEEL – INTERPRETING THE E.B.R.D. AGREEMENT
307
tail, to ensure that the Bank’s unique mission is preserved, and for flexibility, to allow
changes as the needs of the Bank’s clients change.
