For many years, we have witnessed how the laws of England and Wales were introduced in the Montenegrin financial legal system by the application of Loan and Market Association (LMA) templates in financing transactions. It was usually the lenders insisting on having the LMA standards in the loan agreement and for the laws of England and Wales to govern the loan agreement.
Although such practice has existed for quite some time, it has accelerated since mid-2000 in club deals or syndicated transactions. It is indisputable that the courts in Montenegro would accept the English law as governing law if it would come to enforcement in Montenegro, however, we never tested that in practice, given that collaterals are always governed under local law. The enforcement of collaterals is then governed under local law, and we did not have a chance to see what the courts’ view on certain legal terms would be, as derived from English law.
However, in the last few years, we have been witnessing another trend. Local lenders in Montenegro request for the loan agreements to be governed under Montenegrin law, but based on term sheets designed and structured under the LMA standards and based on English law norms. Needless to say, that creates nightmarish work for lawyers, and it also opens a vast area of issues for which we do not have any precedent in practice.
To give a few examples: the enforcement of the hybrid jurisdiction clause – we are unaware of how the Montenegrin courts would treat such a clause in Montenegrin law-governed loan agreements. The concept of a hybrid jurisdiction clause which provides the lender with the right to deviate from the agreed forum and resort to another court or jurisdiction is clearly benefiting only one side. Such a clause is very frequent in English law-governed loan agreements, but we now see it in Montenegrin law-governed agreements as well. The Montenegrin law recognizes the autonomy of will in contractual relations, but one of the key concepts is also the equality of contractual parties. No clause should be upheld by the court if it is clearly benefiting only one party to the agreement. But we do not know what the actual position of Montenegrin courts would be.
Another example would be the introduction of detailed procedures which are relevant to the contractual relationship. That is very useful and facilitates the contractual relationship if the agreement is governed under English law and the judge presiding is a sophisticated judge or arbiter. However, in the situation where the judge in the Montenegrin court has a 200-page long agreement where all procedures are described in detail, and frequently are related to specific technical matters unknown to most judges, it is unclear what the outcome would be in such a proceeding. It might be a very long process whereby various court experts would have to aid the judge in understanding the relationship between the parties.
Having standard language in certain types of agreements is undoubtedly good, from a market participant perspective. It facilitates the negotiation process, provides predictability, and certainly saves time and money for all parties to the contract. However, using standardized contracts created and structured under the laws of one jurisdiction in another jurisdiction where such legal concepts are not genuine should be done with great caution. A good lawyer not only negotiates the contract and thinks of all options at the time of negotiation and signing, but also thinks about the life of such a contract in the jurisdiction where it will be enforced. Civil law jurisdictions such as Montenegro are not accustomed to liberal, market economy concepts that are genuine and natural to English or some other common law system.
Although law cannot be separated from life, and civil law systems clearly must adapt to market trends, such adaptation shouldn’t be by force. Perhaps industries that favor common law concepts such as banking and finance, IT, IP, fintech, and others should invest some efforts in the education of the judiciary, to make them familiar with those concepts that are taken over from other jurisdictions such as England and Wales – in order to enable them to effectively run court proceedings in case such common law concepts have to be implemented within the Montenegrin legal system.
By Milica Popovic, Partner, CMS Serbia and Montenegro
This article was originally published in Issue 10.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
