What is a direct agreement between lenders and a project contractor?

A lender direct agreement is a contract between project lenders or their security agent and a key project counterparty—such as an EPC contractor, operator, offtaker or concession authority—designed to protect project continuity if the borrowing project company defaults. The agreement does not automatically make the lender a party to every obligation in the underlying construction contract. It usually establishes notice, cure, step-in, replacement and consent arrangements that coordinate the lender's financing remedies with the counterparty's contractual rights.

Why a direct agreement is required

Project loans are often repaid from future operating revenue. If the EPC contract or concession is terminated during construction, the bank may lose much of its collateral value. Lenders therefore seek notice before termination and an opportunity to cure defaults, arrange substitute performance or negotiate a transfer. The counterparty needs assurance that its own rights and liabilities are preserved. The agreement allocates those competing concerns.

Parties and underlying contract

Identify the project company, lender agent or security trustee and the relevant counterparty. A bank may not need a direct agreement with every minor supplier. Priority is usually given to material construction, operation, revenue and concession contracts. The direct agreement should identify the exact underlying contract, amendments and assignable rights. A document referring only to an unsigned project contract can create uncertainty.

Acknowledgement of security

The contractor may acknowledge the lender's charge or assignment over the project company's contractual rights. This acknowledgement should clarify that it does not itself transfer all obligations or absolve the project company. The security package must still comply with Pakistani company and property law. The parties should examine whether the underlying contract restricts assignment and whether the acknowledgement constitutes the required consent.

Notice before termination

A key provision requires the contractor to notify the lenders before terminating the underlying contract for a project-company default. The notice should identify breach, cure amount and relevant deadline. Without proper notice the lender may discover termination after the project has lost construction support. The counterparty should insist that notices reach the correctly designated lender agent and not impose an indefinite obligation to postpone every termination.

Cure rights

The agreement may permit lenders to pay overdue certified sums or remedy another project-company default. Not all defaults can be cured by money; failure to provide designs, site access or technical personnel may require management action. The cure period must be realistic. An EPC contractor should not be required to continue dangerous or impossible performance merely because a lender promises future financing. Rights should align with the actual nature of potential breaches.

Step-in and substitution

Lenders may seek to appoint a nominee or substitute project company to preserve the contract. The direct agreement should specify how this occurs, required consents and responsibility for ongoing performance. The lender does not automatically become a licensed contractor or public concessionaire. Technical qualifications, permits and government approval may be necessary. The process should support continuity without bypassing mandatory sector regulation.

Standstill periods

A termination standstill can provide time for lenders to assess and remedy defaults. It should state when the period starts, how long it continues and whether extensions require specific action. A contractor may seek ongoing payment during the standstill. A lender may instead propose a limited obligation to meet post-step-in expenses. The agreement should not create an indefinite unpaid obligation through vague wording.

Limits on lender liability

A lender commonly seeks rights to cure or step in without assuming all historic project-company liabilities. The contractor may insist on payment of specified arrears as a condition. The agreement should define whether the lender assumes any direct liability, its maximum amount and when responsibility ends. A clause giving lenders unlimited practical control without clear payment obligations may be commercially unacceptable.

Construction contractor rights

The EPC contractor may have rights to suspend for nonpayment, claim variations and seek extensions. The direct agreement should coordinate rather than silently eliminate those rights. Lenders should understand the underlying contract's claim and termination machinery. An instruction that the contractor continue works despite unresolved serious safety or access issues must be assessed under law and the actual bargain.

Relationship to FIDIC terms

A FIDIC contract may contain specified notices, claim determinations, suspension and termination rights. The direct agreement must identify whether and how those mechanisms are modified or supplemented. It should not assume that a bank notice automatically satisfies a contractor's separate FIDIC notice. Contractual priority clauses can resolve conflicts. Any amendment affecting the project company's obligations should be executed by the necessary parties.

Financial close

Lenders often require executed direct agreements as conditions precedent before first drawdown. The parties should verify signatory authority, underlying contract effectiveness and consent rights. A draft agreed in principle may not satisfy the facility's condition. Government counterparties may require ministerial or authority approval. The lender should confirm the agreement will remain effective throughout the secured finance term.

Default notices and information

The counterparty may agree to provide copies of major notices, progress reports or impending termination notices. Confidentiality and commercial sensitivity should be addressed. A lender needs adequate information to intervene but should not automatically receive every trade secret unrelated to financing risk. Reporting should be practical and not impose excessive operational costs on the contractor.

Change of control

A replacement project company or investor may trigger contractual change-of-control restrictions. The direct agreement should identify permitted transferees and qualification standards. An EPC contractor may reasonably require that the substitute can provide access, decisions and funding. Public authorities can have non-waivable procurement or concession consent requirements. The lender should not promise security enforcement will bypass those legal conditions.

An EPC delay example

A contractor plans to terminate because the SPV has failed to pay several certified invoices. Under a direct agreement, the contractor notifies the lenders, who have a defined period to cure. The bank may fund arrears to preserve construction, subject to finance approvals. The original contractor's right to dispute variations remains governed by the actual EPC contract. The direct agreement is a continuity tool, not necessarily a final dispute settlement.

An operations example

A power plant operator threatens termination after a long fee default. Lenders rely on direct agreement notices to appoint a temporary replacement operator. The replacement must satisfy technical, safety and permit requirements. Existing employees, maintenance records and spare parts access need to be coordinated. A contractual step-in right is of limited value without the practical capacity to operate the plant.

Enforcement and disputes

The direct agreement should provide governing law, dispute resolution and remedies for breach. A lender may seek specific relief where unlawful termination threatens project value, subject to law and contract. An injunction is not automatic simply because lending is substantial. If the counterparties dispute whether the standstill began, authenticated notices and effective-date provisions can be decisive.

Opinion and recommended course

A lender direct agreement protects project continuity by aligning counterparty termination rights with lender notice, cure and step-in options. It should precisely define parties, defaults, standstill, liability and replacement conditions, and remain consistent with the signed EPC or concession contract and Pakistani law. It does not make lenders automatic operators or obligors for every underlying debt.

Principal authorities: Contract Act, 1872; Companies Act, 2017 and relevant security law; executed facility, EPC or operating contract and direct agreement; applicable concession, procurement and sector licensing legislation.