When a project company defaults midway through construction or operation, the lender’s single most valuable protection is often not its mortgage or share pledge — it is the step-in rights negotiated into the direct agreements with the EPC contractor, the O&M operator and the offtaker.
Step-in rights let a lender group, or its nominee, step directly into the project company’s shoes under a key contract before that contract is terminated, keeping cash flow, construction progress and offtake intact while a workout is arranged.
In Vietnam, where project finance documentation must sit alongside the Civil Code 2015, the Law on Investment and sector-specific licensing, poorly drafted step-in mechanics can leave a lender’s remedy theoretically strong but practically unenforceable at the moment it matters most.
Table of Contents
- Why Step-In Rights Matter in Vietnamese Project Finance
- What Is a Direct Agreement?
- Step-In Rights Mechanics Upon Default
- Notice-and-Cure Periods
- Novation of Project Contracts to a Lender Nominee
- Enforceability Under Vietnamese Contract and Civil Law
- Direct Agreement Provisions by Counterparty Type
- Negotiating Direct Agreements: Sponsor and Lender Perspectives
- Practical Drafting Checklist
- Frequently Asked Questions
Why Step-In Rights Matter in Vietnamese Project Finance
A limited-recourse lender’s security is only as valuable as the project’s ability to keep operating. Enforcing a mortgage over land-use rights or a pledge over project company shares takes time and, in Vietnam, often requires court or enforcement-agency involvement. None of that helps a lender on the day an EPC contractor threatens to walk off site or an offtaker signals it will terminate a power purchase agreement for non-performance.
Step-in rights exist precisely to bridge that gap: they give the lender a contractual, pre-agreed route to intervene in the underlying project contract itself, independent of — and usually faster than — enforcing security over the borrower’s assets.
The Lender’s Dilemma Without a Direct Agreement
Without a direct agreement, a lender has no privity with the EPC contractor, the O&M operator or the offtaker. If the project company defaults under the loan and simultaneously defaults under the EPC contract, the contractor’s only counterparty is the project company — a lender watching from outside the contractual relationship has no standing to cure the default, extend the programme or prevent termination.
By the time the lender can act through enforcement of security, the EPC contract may already be gone, the site demobilised and the project’s value destroyed.
Typical Project Finance Structures in Vietnam
Most Vietnamese project finance Vietnam transactions — independent power projects, toll roads, LNG terminals, industrial parks with build-operate arrangements — follow a broadly similar contract web: a project company holding the investment registration certificate and relevant licences, an EPC contractor under a fixed-price or cost-reimbursable contract, an O&M operator once the project reaches commercial operation, and an offtaker (EVN, an industrial buyer, or a toll authority) under a long-term offtake or concession arrangement.
Lenders finance against the cash flows generated by this contract web, which is exactly why they insist on direct agreements with each counterparty rather than relying solely on the project company’s covenants.
What Is a Direct Agreement?
A direct agreement is a standalone tripartite (sometimes bilateral, incorporated by reference into the facility) contract among the lenders (or security agent), the project company and a single key counterparty — the EPC contractor, the O&M operator or the offtaker. It does not replace the underlying commercial contract; it sits alongside it and modifies, for the lenders’ benefit, how that contract may be terminated, assigned or enforced.
The direct agreement is the instrument that actually creates enforceable step-in rights — a facility agreement clause alone, without the counterparty’s consent, cannot bind a third party that never signed it.
Tripartite Structure: Lender, Project Company, Counterparty
The typical direct agreement has three operative pillars. First, the counterparty agrees to notify the lenders of any project company default under the underlying contract before terminating it. Second, the counterparty agrees to accept the lenders’ exercise of step-in rights — effectively treating the lender or its nominee as if it were the project company for a defined cure period.
Third, the counterparty consents in advance to novation of the underlying contract to a lender nominee if the lenders decide to replace the project company permanently. Each pillar needs separate, carefully negotiated drafting because Vietnamese counterparties — particularly state-owned offtakers — resist open-ended obligations.
Direct Agreements vs Security Documents
Direct agreements and security documents (share pledges, mortgages over land-use rights and assets, account charges) serve different functions and should not be treated as substitutes. Security lets a lender realise value from the borrower’s assets after enforcement; a direct agreement lets a lender preserve the project’s going-concern value before and during enforcement, by keeping the key operating contracts alive.
The two work together: step-in rights buy time and preserve cash flow, while security provides the ultimate recovery mechanism if a sale or restructuring of the project company is required.
Negotiating or enforcing step-in rights in a Vietnamese project finance transaction raises jurisdiction-specific drafting and enforceability questions that generic LMA-style templates do not resolve on their own. IVLF Advisors offers a confidential preliminary consultation for project sponsors, lenders and general contractors seeking to assess their direct agreement position before a dispute, or before signing.
Step-In Rights Mechanics Upon Default
Step-in rights are triggered by defined events, operate for a defined period, and carry defined consequences for both the counterparty and the project company. Getting the mechanics right is the difference between a right the lender can actually use under time pressure and a clause that looks protective on paper but collapses once a real default occurs.
Triggering Events and Default Thresholds
A direct agreement typically triggers step-in rights on two alternative paths: a payment or performance default by the project company under the underlying contract that would otherwise entitle the counterparty to terminate, or an event of default under the facility agreement itself (even absent a default under the underlying contract) that the lenders choose to act on.
Sponsors negotiate for the second trigger to require actual or imminent termination risk, rather than any technical facility default, to avoid lenders stepping in prematurely over a minor covenant breach.
Exercising Step-In Rights: The Practical Sequence
Mechanically, the lender (through its security agent or an appointed nominee) serves a step-in notice on the counterparty and the project company, assumes performance of the project company’s obligations for the duration of the step-in period, and typically undertakes to cure any outstanding default and to pay ongoing amounts falling due during that period.
The counterparty’s corresponding obligation is to suspend its own termination right for as long as the lender is validly exercising step-in rights and complying with the step-in undertakings — it cannot terminate around the lender’s intervention.
Notice-and-Cure Periods
Notice-and-cure periods are the operational heart of any direct agreement. They determine how much real time a lender has to organise a step-in, arrange interim funding or identify a replacement contractor before the counterparty’s termination right crystallises.
Cure Periods for EPC Contractors
Construction-phase defaults move fast — unpaid interim certificates, missed milestones, or site demobilisation threats can escalate within days. Direct agreements with an EPC contractor typically grant the lenders a longer cure period than the project company would get under the EPC contract itself (commonly an additional 20–30 business days on top of any cure period already available to the project company), recognising that assembling lender consensus and funding takes longer than a single corporate decision.
Cure Periods for O&M Operators and Offtakers
Operational-phase defaults are usually payment-related, which makes cure more mechanical: the lender simply pays the arrears and ongoing invoices during the step-in period. Cure periods with an O&M operator are typically shorter than construction-phase periods, since curing a payment default needs funds rather than a full remobilisation plan.
Offtake-side direct agreements — particularly with a state-owned offtaker such as EVN — tend to be the most heavily negotiated, because the offtaker’s own internal approval processes for accepting a lender nominee as counterparty can themselves take longer than the cure period a lender would prefer.
Novation of Project Contracts to a Lender Nominee
Where step-in rights alone cannot resolve the underlying problem — for example because the project company itself must be permanently replaced — the direct agreement’s ultimate remedy is novation of the underlying contract to a lender nominee, which then takes over as EPC contractor’s counterparty, operator’s counterparty or offtaker’s counterparty in place of the project company.
Novation Under the Civil Code 2015
Under Vietnamese law, novation operates as a substitution of a party to a civil transaction, governed by the general principles on transfer of rights and obligations in the Civil Code 2015.
A valid novation of a contractual obligation generally requires the consent of all original parties, meaning a direct agreement’s advance consent to novation — given by the counterparty when it signs the direct agreement — is what allows the lenders to effect a later novation without having to negotiate fresh consent from a potentially uncooperative counterparty at the point of actual default.
Drafting this advance consent with sufficient specificity (identifying the permitted lender nominee, the mechanics of substitution and any conditions precedent) is essential to its later enforceability.
Practical Novation Mechanics in Direct Agreements
In practice, the direct agreement will specify: who may be nominated (often restricted to an entity meeting technical and financial criteria acceptable to the counterparty, not simply any lender), what conditions precedent must be satisfied (outstanding payments cured, necessary licences or registrations transferred), and what happens to accrued liabilities of the outgoing project company.
Because Vietnamese licensing — investment registration certificates, construction permits, land-use rights, sector licences such as an electricity activity licence — frequently attaches to a specific legal entity, novation of the commercial contract alone will rarely be sufficient without parallel regulatory novation or re-registration, which should be mapped out in the direct agreement’s conditions precedent rather than left to be discovered during an actual enforcement scenario.
Enforceability Under Vietnamese Contract and Civil Law
A direct agreement drafted on an LMA-style template and simply localised with Vietnamese-law governing clauses is not automatically enforceable as intended. Several features of Vietnamese contract and civil law affect how step-in rights, cure obligations and novation consents actually operate in practice.
Civil Code 2015 Principles Relevant to Step-In Rights
The Civil Code 2015 recognises freedom of contract, subject to not violating prohibitions of law or contravening social ethics, and gives effect to multi-party civil transactions such as a tripartite direct agreement.
It also governs suspension and unilateral termination of civil contracts, which is directly relevant to the counterparty’s standstill obligation during a step-in period — the direct agreement needs to tie its standstill mechanism expressly to the statutory grounds on which a party may otherwise suspend performance or terminate, so the counterparty’s forbearance is not characterised as an unlawful waiver of a statutory right it did not intend to give up permanently.
Common Enforceability Gaps in Vietnam-Governed Direct Agreements
Three gaps recur in practice. First, direct agreements that assume a lender nominee can simply exercise step-in rights over a licensed activity (power generation, toll concession operation) without addressing the licence-holder requirement under sector-specific law. Second, advance novation consents drafted too generically to satisfy the specificity Vietnamese counterparties and courts expect.
Third, direct agreements silent on dispute-resolution enforcement mechanics — for example, whether a foreign arbitral award on a step-in rights dispute needs recognition and enforcement proceedings in Vietnam — leaving lenders with a remedy that is contractually sound but procedurally slow to realise.
Direct Agreement Provisions by Counterparty Type
The following comparison illustrates how typical direct agreement provisions differ by counterparty, reflecting the different commercial and regulatory pressures each relationship carries.
| Feature | EPC Contractor | O&M Operator | Offtaker |
|---|---|---|---|
| Primary default risk | Milestone delay, payment default, demobilisation | Payment default, performance shortfall | Payment default, early termination for underperformance |
| Typical cure period | 20–30 business days beyond project company’s own cure period | 10–20 business days | Often the most negotiated; frequently tied to offtaker’s internal approval timeline |
| Step-in trigger focus | Imminent termination or demobilisation notice | Payment arrears or safety-critical non-performance | Termination notice under the offtake/PPA |
| Novation sensitivity | Moderate — contractor consent to substitute employer usually negotiable | Lower — operator substitution is commercially routine | Highest — especially with state-owned offtakers requiring internal approvals |
| Licensing overlay | Construction permits tied to project company | Operating permits/licences tied to project company | Sector licence (e.g., electricity activity licence) tied to project company |
For context on how direct agreement protections compare to a lender’s alternative remedy of direct enforcement of security, the IFC’s project finance guidance and the standard form commentary published by the Loan Market Association remain useful international reference points, though both require careful adaptation to Vietnamese statutory and licensing requirements before use in a Vietnam-governed facility.
Negotiating Direct Agreements: Sponsor and Lender Perspectives
Sponsors and lenders approach direct agreement negotiation from different starting positions, and the balance usually turns on bargaining power and whether the counterparty is state-owned or private. Sponsors push for shorter step-in rights windows, narrower novation triggers, and caps on liabilities a nominee must assume. Lenders push the opposite way: longer cure periods, broad advance novation consent, and continued counterparty performance during the step-in rights period regardless of unrelated project company defaults.
Counterparties typically resist open-ended obligations and insist on conditions precedent to novation that protect their own commercial interest.
Practical Drafting Checklist
Before signing, sponsors, lenders and counterparties on a Vietnamese project finance Vietnam transaction should confirm: the step-in rights trigger definitions align precisely with default definitions in the underlying contract and the facility agreement; cure periods are calibrated to the realistic time needed to mobilise lender consensus; advance novation consent identifies permissible nominee criteria with enough specificity to be enforceable under the Civil Code 2015; licensing and permit transfer steps are mapped alongside contractual novation; and dispute resolution provisions in the direct agreement are consistent with the underlying contract and the facility agreement.
For a broader view of how direct agreements fit within overall security and facility structuring, see IVLF Advisors’ project finance advisory services, and for how these protections interact with cross-border lending structures, see our related guidance on structuring secured lending in Vietnam.
Frequently Asked Questions
What are step-in rights in project finance?
Step-in rights let a lender or its nominee temporarily take over a project company’s role under a key contract — EPC, O&M or offtake — after a default, preserving the contract and project value instead of letting the counterparty terminate it.
Why do lenders need a direct agreement for step-in rights?
A lender has no privity with the EPC contractor, operator or offtaker. Only a direct agreement, signed by that counterparty, creates a binding, enforceable right for the lender to intervene in that specific contract.
How long is a typical cure period in a Vietnamese direct agreement?
It varies by counterparty: EPC contracts often allow 20–30 business days beyond the project company’s own cure period; operator and offtaker cure periods are usually shorter but heavily negotiated, especially with state-owned offtakers.
Can a project contract be novated to a lender nominee under Vietnamese law?
Yes, subject to the Civil Code 2015 principles on substitution of parties, which generally require clear advance consent and satisfaction of specified conditions precedent, plus parallel transfer of any licences tied to the original project company.
Are LMA-style direct agreements enforceable as-is in Vietnam?
Not automatically. Standard international templates need adaptation to Vietnamese Civil Code principles, licensing requirements and dispute-resolution enforcement mechanics to be reliably enforceable in a Vietnam-governed project.
The practical next step for a sponsor, lender or contractor reviewing an upcoming Vietnamese project finance transaction is to have the proposed direct agreement package — EPC, O&M and offtake — reviewed against both the facility agreement and current Vietnamese licensing requirements before signing, rather than after a dispute has already crystallised.
This article provides general information on Vietnamese project finance practice and does not constitute legal, tax or financial advice. Readers should seek advice tailored to their specific transaction before acting on any of the matters discussed above.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
