What is a Master Agreement BOP?
What is a Master Agreement BOP? Master Agreement BOP is a form of master agreement. A Master Agreement is an agreement that contains core terms and additional terms for a future agreement. In a Master Agreement, core terms are agreed to and additional terms may be agreed to only in the future. A Master Agreement is used when additional terms are expected to be agreed to in the future and at times do not need to be agreed to for the initial agreement.
A Master Agreement BOP is a Master Agreement for a BOP agreement , or a Balance of Payment agreement. A BOP agreement is a type of agreement where counter parties trade certain things to conserve foreign reserves. A Master Agreement BOP is likely used when the number of future trades is not known.
Key Components of a Master Agreement BOP
The Master Agreement BOP will typically be in two parts, each containing the following elements:
- Basic Terms. The basic terms detail the rudimentary aspects of the Master Agreement BOP, such as: the identity and contact information for the parties; a description of the products covered by the agreement; and the effective date of the agreement.
- Conditions. The conditions segment of the Master Agreement BOP contains the elements necessary to determine the legitimacy of the products involved and the viability of the parties. These elements typically include: the legitimacy of the governmental entities involved; the legal ability of the buyer and seller to engage in buying and selling; the ownership of the products; and, in some cases, the quality of the products.
- The Financial Instruments. The Master Agreement BOP may, or may not, define the financial instruments involved. In the context of the agreement being discussed, the financial instruments are an array of documents, such as performance bonds, Preferred Shares, and loans.
Advantages of a Master Agreement BOP
One of the prime advantages of a master agreement BOP is that it provides access to the level of coverage and risk protection not typically possible under standalone insurance contracts. Taking this type of approach to insurance arrangements also allows for streamlined transactions, including the issuance of certificates of insurance on short notice and with minimal or no new underwriting. Instead, the underwriting of the BOP serves as the underwriting of the insurance provided under the supplemental contracts. Moreover, the BOP satisfies blanket indemnity and liquidated damage obligations, while simultaneously providing a framework for a centralized and expedited dispute resolution mechanism. A further benefit is that all of the agreements are signed at once in a single contract, which not only has the effect of eliminating the need for many tedious negotiations but also reduces the chance of conflicting terms between the various contracts. For example, if a supplier agrees to a waiver of subrogation in one contract but that obligation is absent from an amended contract, the waiver is only effective in the context of the contract in which it appears, which may lead to costly disputes at a later date. To be sure, common law doctrines such as governing laws or choice of forum clauses may still apply, but a master agreement BOP can help ensure consistency and uniformity.
Challenges of a Master Agreement BOP to Consider
There are a number of areas that pose challenges when it comes to entering into or providing a master BOP. Firstly, there’s the risk of non-compliance with local laws and regulations, whether it is your laws as the p & i operator or those of the jurisdiction in which the vessel operates, or of any applicable international conventions. As mentioned, the circumstances of the casualty may range from minor to major. Should you wish to enter into a credit form, the question is whether an original or copy form should be used and whether the credit limits are sufficient or should be increased. The challenges posed by cross-border insurance, where risks are involved in a number of jurisdictions, cannot be underestimated. So too can counsel not ignore the realities of amendments and termination of a master BOP.
Quite apart from the potential trouble posed by the re-negotiation of a master BOP, there is the inherent instability of master BOPs – i.e., the constant need to amend them in a changing legal and commercial environment. The greatest challenge lies, however, in ensuring compliance when circumstances change or a casualty occurs. There has been much discussion in recent years about the meaning and need for this important term and the related term, ‘without prejudice’, used commonly in insurance contracts . The purpose of the master BOP is to provide a means of paying compensation without first having to consult the P & I Club. However, it does not immediately follow that payment should be made without any subsequent right of recovery. Indeed the contrary is the case unless expressly agreed otherwise. One of the difficulties with the lack of judicial guidance in this area is that the authorities discussed above have largely dealt with the causative aspects of the indemnity and have not dealt with other points, for example when the reasons for payment fell short of the cause of the casualty, whether or not the payment was without prejudice or whether the proceeds fell into the property of the assured. Further, the implications of regulation 6(10) of the 2011 Rules of the Association (mentioned above) is not at all clear and there is no jurisprudence on this provision. With Amoco Cadiz and Torrey Canyon lying across the English Channel, any imaginative lawyer can dream up a new tort based on the refusal to pay without prejudice. Without doubt, the MBI will continue to provide fertile ground for litigation and a potentially profitable niche practice. It is to be hoped however, that P & I operators take up the challenge and proactively ensure that colourful and costly battle does not become an unavoidable norm.
Implementing a Master Agreement BOP
Implementing a master agreement BOP generally requires a reconsideration of data flows among all parties involved. The following considerations may help when implementing these agreements to ensure the transaction is a true risk sharing arrangement. In today’s complex, ever-evolving risk market, it is important to obtain a high level of comfort when negotiating and drafting a master agreement BOP. Careful consideration is required to ensure all parties have a clear understanding of the flow of funds from the insurer through to each insured, and the differing levels of confidence in, and exposure to, the credit of the insurers and reinsurers at each level. When establishing a master agreement BOP, consideration should be given to how often the agreement is to be reviewed, who will have the right to review it, and on what basis. A master agreement BOP can be tailored to suit the needs of a particular organisation. For example, the terms of the agreement can be used to allocate respective exposures among various insurers at varying insurer rating levels. This is done by virtue of the terms of the master BOP or by subjecting certain insurers (such as BBB rated) to additional reinsurer risk. This is particularly important to bargain for when the BOP program is large and loss exposures are shared across many insurers and reinsurers. For example, ABC Pty Ltd has a BOP program with a number of international rated A+ insurers. At the same time ABC Pty Ltd decides to place a very large, high deductible policy in Australia with a single lower rated BBB+ insurer which obliges that insurer to buy down that risk thereafter with a limited number of reinsurers. ABC Pty Ltd will now hold a number of insurance policy certificates covering the same loss exposure with varying reinstatement provisions and deductible requirements. After significant negotiation and legal drafting work, ABC Pty Ltd decides to use a master agreement BOP with the same concept to be entered into with each insurer. The draft basic terms of the Master BOP include:
Examples and Use Cases
To better understand the value of Master Agreement BOP in real world transactions, consider the following case studies:
Case Study 1 – Private lender, public borrower. In a recent deal, a private lender provided a public borrower with an installation/mortgage loan that contained a Master Agreement BOP. The P3 delivered its deliverable (in this case, a factory), to the borrower who, in turn, directed the lender to disburse construction funding. The borrower later sued the lender claiming the factory was defective. The lender refused to disburse additional funds to the borrower until the factory was repaired, believing it may have been released from the obligation to disburse funds by virtue of the public borrower’s alleged nonconforming deliverable. The borrower argued that the Master Agreement BOP was a single integrated contract that required further funding. The Court determined the parties’ intentions were to provide the lender with the right to use its discretion to refuse to release additional funds to account for the alleged nonconformity of the deliverable. As such, the lender was deemed to rightfully withhold the funding.
Case Study 2 – Value capture . In another recent deal, a public private partnership was seeking a source of funding for an asset created as part of a major real estate development. The public P3 would be the sole user of the asset and would not permit others to use it. The Master Agreement BOP was negotiated to provide an opportunity for the private developer to pay back upfront costs for the P3’s use of the asset through capacity payments (aka "user fees") from the P3 to the private developer, which would then be reimbursed from P3’s farebox. In this way, the P3 recaptured value from the service it created.
Case Study 3 – Bondholder protection. The parties to a recent rail infrastructure transaction also recognized the value of a Master Agreement BOP. In this transaction, the Managers of the project (the P3) issued bonds to finance the construction of rail infrastructure. As security for the repayment of the Bonds, the P3 entered into a Master Agreement BOP with the Bondholder which allowed the City of Sacramento to issue a separate stability agreement directly to the Bondholder. In exchange, the Managers gave the Bondholder the right to draw on the Master Agreement BOP and a loan from the bondholders would be paid back from the cash flows received under the stability agreement.
