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C ps, css, rep & warranties

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  • 1. Conditions precedent, representations and warrantiesConditions precedent, representations & warranties together with covenants and events ofdefault are standard restrictive clauses contained in syndicated loans. The reasons for theirimposition are that banks want to be sure that everything is in order before the borrowercan draw down the money and that the banks can compel the earlier repayment of the loanif everything is not as it should be. The loan contracts will contain various conditionsprecedent as well as representations and warranties the number of which depends, amongstother, on the financial position of the borrower, its bargaining power.I. Conditions precedent (CPs) The loan agreement will contain various CPs which must be fulfilled before theborrower can draw down the money by delivering a utilisation request. The idea of the CPsis to highlight any problems before the money advanced. The CPs in syndicated loansare fall into the category of the conditions precedent where there is a binding contractbetween the parties, however, some or all of the obligations of one or both parties aresuspended pending fulfilment of the CPs. Thus, in syndicated loans there is a contract bywhich the lender is bound to make available to the borrower the loan facility, but thatobligation is contingent upon the fulfilment of conditions precedent by the borrower. Theborrower is given a stipulated period within which to satisfy the CPs and the lender iscommitted until the end of that period so that he cannot, before then, to withdraw on theground that the CPs have not been satisfied. The loan agreement will also normally provide (but LMA contract states) that theCPs are to be fulfilled in „form and substance satisfactory‟ to the lender or the agent bank.The requirement that the CPs must be in form and substance satisfactory‟ to the lender issubjective in that only the lender – not a reasonable lender or the court – is empowered tomake the determination as to the acceptability of the documentation provided. Yet, thecourts will imply some constraints on its exercise and certain actions maybe so egregious asnot to constitute an exercise of the discretion granted by the contract. However, asRawlings points out that the case law on commercial contracts does not provide aconsistent indication of how a court will interpret such a term. In some cases, such asParagon Finance plc v Nach & Staunton, which concerned the power of a lender to varyinterest rates, the court implied a term obliging the lender not to use its discretiondishonestly, for an improper purpose, capriciously or unreasonably. This meant the lendermust not act in a way that no reasonable lender would act. In Socimer International BankLtd (in liquidation) v Standard Bank London Ltd [2008] Rix LJ suggested that adecision-maker‟s decision will be limited by concept of honesty, good faith, and the needfor the absence of arbitrariness, capriciousness, perversity and irrationality and as such issubject to principles analogous to Wednesbury test (this involves taking into accountirrelevant considerations, or failing to take into account relevant considerations, or acting ina way that no reasonable person would have acted). But in other cases, such as LymingtonMarina Ltd v Macnamara the court made it clear that the courts should not refer to theWednesbury test. This uncertainty is likely to be a matter of concern to the borrower, whomight wish for a clear set of criteria. However, the lender will usually be unwilling to doso. In addition, the lender can waive the need for the borrower to fulfil the CPs beforethe delivering of the utilisation request or agree that the fulfilment of a condition mightbecome a condition subsequent, so that the borrower would be permitted to draw the moneybut be required to repay if the condition is not fulfilled by some later date. It is implied thatthe lender will not do anything to obstruct a condition precedent from being fulfilled. Thecase of Mackay v Dick (1881) makes it quite clear that one party to the contract cannotclaim he is excused if he takes action which prevents the other party from fulfilling a
  • 2. condition which needs to be fulfilled before the contract can be enforced (the defendantrefused to provide a digging machine the testing of which by the plaintiff was envisaged bythe contract). The conditions precedent can only be used before the lender is obliged to lend, butmany of the issues in the conditions precedent also appear in the representations andwarranties and in other undertakings and covenants and as such may continue through thecurrency of the contract and, if breached, may allow the lender to accelerate repayment. The CPs drafted into the loan agreement will vary accordingly to the particularcircumstances of all parties who contract under the agreement. There are no standard CPs,however, it is likely the agreement states that the borrower shall provide: (1) a copy of theconstitutional documents of the borrower; a copy of resolutions of the board of directors ofthe borrower: approving the finance document, resolving to execute the contract, andauthorising a specified person(s) to execute the finance document and to sign utilisationrequests and to issue any notices required; (2) a certificate signed by a director of theborrower confirming that the borrowing does not exceed any limits on the borrower‟sborrowing powers; (3) a certificate of an authorised signatory of the borrower certifyingthat each copy document required is correct, complete and in force at the date of thecontract; (4) evidence that any process agent referred to in the finance document hasaccepted its appointment (a process agent accepts notices in relevant jurisdictions on behalfof the borrower); (5) the financial statements of the borrower; (6) evidence that fees, costsand expenses due from the borrower under the contract will be paid before the firstutilisation date; (7) the legal opinions specified in the agreement; (8) other conditionsprecedent will require that any guarantee is enforceable and any security has been properlycharged so as to give priority to the claims of the lender. In respect of some of these the lender can have little or no room for rejection: forinstance, there should be clear answers to the question of whether or not copies of theconstitutional documents, or resolutions of the board, or certificates, or evidence of theappointment of a process agent have been delivered. Less clear may be those documentsrelating to the last three items. Legal opinions are couched in cautious language (“may”rather than “is”), and full of declared assumptions and qualifications. Indeed, there isusually a good deal of negotiation between the parties and the lawyers over the content ofthe opinions. The evidence that the fees, costs and expenses will be met at a point in thefuture is a matter of opinion that may be open to challenge. The guarantee will be assessedin financial as well as legal terms. The lender will assess its enforceability, which mayinvolve uncertainty about the jurisdiction where any claim against the guarantor could bebrought and the legal enforceability of the guarantee in that jurisdiction. Moreover, thelender will need to consider the financial ability of the guarantor to meet any obligation.The priority of the lender in respect of any security granted by the borrower depends, notonly on legal issues, but also on factual ones: a lawyer can give an opinion on theenforceability of the security, but may not be able to determine if it has priority because thismay depend on the existence of competing charges, although this may be easier to resolveif the relevant country has a system of registration. If these conditions precedent are met, the borrower may deliver the utilisationrequest, but this gives rise to further conditions precedent (sometimes it is called conditionssubsequent), namely, that no event of default is continuing or would result from the loanand the repeating representations are true “in all material respects”. The repeatingrepresentations (“evergreen representations”) are those representations made both onexecuting the contract and on the delivery of every utilisation request. Theserepresentations can also give the lender room to manoeuvre.
  • 3. As noted above some of the conditions precedent may cover the same area as therepresentations and warranties. For example, typically the banks would require productionof the borrower‟s constitution documents and a board resolution approving the executionand performance of the loan agreement. This compliments the representation that theborrower has power to own its assets and carry on its business and has power to enter intoand perform the loan agreement (cl.19.1 and 19.4) and that all authorisation required inconnection with the transactions contemplated by the agreement have been obtained(al.19.5). It would also be a condition precedent that all consents and authorisationsnecessary to ensure the legality, validity and enforceability of the loan have been obtained.Again, there will be a parallel warranty (cl.19.5). The banks will normally require formallegal opinion from the borrower‟s lawyer and from any overseas lawyers instructed onbehave of the banks (as a condition precedent). The lawyers to the agent may also be askedto give an opinion on the loan agreement which they have drafted. Again, these will serveto confirm the representations and warranties made by the borrower. These are not asubstitute for the representations and warranties because they serve a separate purpose.First, they speak only as at the date upon which the opinions are given and are not repeated.Secondly, to highlight in advance of drawdown any legal problems that may exist. Apart from the documentary conditions precedent, there will also be a conditionsprecedent that the representations and warranties remain true at the date of drawdown andthat no Event of Default (or event which with the giving of notice or the passing of time orboth may become an Event of Default) shall have occurred. Usually, the notice ofdrawdown served on the agent by the borrower will contain a statement to this effect. The borrower will not normally be liable to the banks if the CPs are not met. It isnot usual for the borrower to covenant that they will be met or that it will use its bestendeavours that they be met. However, if any bank in syndication fails to make available itsparticipation in an advance and the borrower has satisfied all the conditions precedent, thebank will be liable to the borrower in damages for the actual loss caused by the bank‟sbreach if contract under the general principles stated in Hadley v Baxendale. The borrowercannot order for specific performance (South African Territories v Wallington, Sichel vMosenthal). Neither the agent nor any of the other banks will be liable to the borrower forthe defaulting bank‟s breach. III. Representations and Warranties According to Clark and Taylor the functions fulfilled by the representations andwarranties (R&W) are threefold: to provide for certain contractual remedies within theframework of the loan agreement; to give the banks the benefit of certain remediesavailable under the general law; and, importantly, to ensure that the banks are providedwith full information before and after advancing funds to the borrower. Representations and warranties are broadly fall into two categories: those whichrelate to the legal position and those which are commercial or factual. As far as the legal ones concerned, they usually start with the statement concerningthe valid existence and authorisation of the borrower, and include that the borrower isvalidly existing under the relevant law and has power to borrow or enter into otherobligations, such as the giving of guarantee, required under the agreement. Whenconsidering capacity of the borrower it is usual to incorporate a statement that the borrowerwill not be in contravention of any relevant laws or regulation, such as exchange controls.There may also be a statement that any necessary authorisations and approvals have beenobtained, a statement that a loan is valid and constitutes a binding obligation upon theborrower, enforceable in accordance with its terms; a statement that the borrower‟s
  • 4. payment obligations under the loan agreement rank at least pari passu with the claims of allits other unsecured and unsubordinated creditors and others. As to the commercial and factual R&W, they contain a statement that no default iscontinuing or might reasonably be expected to result from the making of any utilisation; astatement that the recent accounts of the borrower reflect true and fair view of theborrower‟s financial condition; a statement that any factual information provided for thepurpose of an information memorandum was true and accurate in all material respects; astatement that no litigation, arbitration or other proceedings are, to the best of theborrower‟s knowledge, threatened against the borrower which might adversely affect theability of the borrower to perform its obligations under the loan agreement. Also certain R&W are to be made not only as at the date that the loan agreemententered into, but are also deemed to be repeated at various time, for example, on the date ofeach utilisation request (if the facility is provided by a number of drawdown) and on thefirst day of each interest period by reference to the facts and circumstances then existing.Very often, the warranties are repeated on each rollover date and sometimes even on eachfate during which the facility continues. Yet, the warranty relating to the informationmemorandum is usually excluded from the repeating representations because theinformation contained in it may not be true as at the date of repetition. In many term loan agreements, particularly non-revolving structures (so there willnot be a multiplicity of drawdowns during the term of the agreement), the documentationwill provide for the R&W to be repeated at the commencement of each interest period. It isnot appropriate, however, for all representations and warranties to be subject to repetition inthis way. For example, the borrower will frequently give a representation on drawdownthat all amounts payable by it under the loan agreement are payable without any deductionor withholding on account of taxes. This representation may be true as at the date ofdrawdown, but may become untrue as a result of a change in law. Rather than calling anEvent of Default on the basis of a breach of warranty, the appropriate remedy is to requirethe borrower to gross up on its interest payments, so the bank does not feel the effect of thewithholding. To take another example, it is not appropriate to repeat only on interestpayment dates (i.e. at the end of an interest period) a representation to the effect that allrelevant consents, licences and authorisations required to effect the borrowing have beenobtained and are in full force and effect. If for any reason a required consent is revoked orlapses in the middle of an interest period, the bank will not want to wait for the end of theinterest period, and an untrue repetition of the warranty at that point in time, beforeexercising its rights: in this circumstance, it is appropriate to call an Event of Defaultimmediately, and the Events of Default should be drafted accordingly. Under English law there is a distinction between a representation and a warranty. Arepresentation is a statement of fact which is made before the loan agreement has beenexecuted, and in reliance upon the truth of which the lenders enter into the loan agreement.It is not, however, an integral part of the contract. A warranty, on the other hand, is a termof the contract itself. This distinction is an important one because remedies formisrepresentation may are different from those for breach of warranty. Remedies available under common law for misrepresentation: (1) A fraudulent misrepresentation may give rise to an action for damages in deceit. (2) A negligent misrepresentation may give rise to an action for damages in for negligent misstatement (a tort) under Hedley Byrne v Heller principles. (3) The innocent party may also have a right to rescind the contract entered into as a result of misrepresentation (whether fraudulent, negligent or innocent). Although in the case in negligent and innocent misrepresentation, the court has now discretion to award damages in lieu of rescission (s. 2(2) of the
  • 5. Misrepresentation Act 1967). Where the representation is not „substantial‟, the court would probably uphold the contract and exercise its discretion to award damages. The higher the ratio of the failure to the level of performance undertaken, the more likely it is the court would regard the failure as substantial and allow the contract to rescind (Hong Kong Fir Shipping Co Limited v Kawasaki Kisen Kaisha Limited, where charterers were held not be entitled to rescind the contract because the ship was still available for 17 out of the original 24 months of the charter party). (4) In the case of negligent misrepresentation, the injured party may also be entitled to damages under s. 2(1) of the Misrepresentation Act 1967, although s. 2(3) of the same Act provides that any damages awarded under s. 2(2) shall be taken into account in assessing the liability under s 2(1). As mentioned above, a warranty is a term of the contract. Whether a statement is oris not a term of the contract will depend upon the intention of the parties and such intentionis ascertained by applying an objective test. Appropriate drafting techniques can, however, avoid problems which arise out ofthe distinction between representation and warranties by expressly making all statementswarranties and, therefore, terms of the contract. Such an approach is also represent in LMAcontract where the borrower „represent and warrants‟ in respect of every clause in theappropriate section of the documentation. However, not all terms of the contract are strictly specking “warranties”. Adistinction is drawn between a “warranty” which is a contractual term which affects somerelatively minor aspect of the contract and a “condition” which affects a more fundamentalaspect. In the former case, the innocent party can only sue for damages, whereas in thelatter case ha can not only sue for damages but also have a right to terminate the contractfor the future. Even this is not as simple as it sounds because recent cases recognise a separategroup of intermediate terms which are neither warranties nor conditions, breach of whichjustifies the termination of the contract by the innocent party if the breach amounts to aserious failure in performance of the contract by the defaulting party (Bunge Corporate vTradex SA, Tradex International SA v Goldschmidt SA) The court will look to the intention of the parties to determine whether a particularterm is a “condition” or a “warranty” as expressed in the contract, but the crucial questionis whether the term is so important that it would be unreasonable to expect the innocentparty to fulfil its obligations under the contract if that term is breached by the other party –if this is the case then the term is likely to be construed as a condition (Bunge Corporationv Tradex SA). Although the loan agreement will leave intact any remedies under the general lawfor misrepresentation and breach of warranty and condition, it will attempt to circumventthe technicalities by providing certain contractual remedies within the framework of theloan agreement itself. These contractual “internal remedies” are threefold: (1) the condition precedent that all representations and warranties are correct when the loan agreement is signed and as at the proposed date for any utilisation of the facility will allow the banks to decline to make advance available if it is discovered that any of the R&W are untrue; (2) the breach of R&W will be an event of default which entitle the agent (normally on the instruction of the banks) to cancel the undrawn portion of the facility; and (3) the event of default should also allow the agent (normally on the instruction of the banks) to declare the loan to be immediately due and payable.
  • 6. However, it worth noting that if the banks know at the time a R&W is made that itis incorrect, they may be treated as having waived their right to enforce any right they mayhave as a result of R&W being incorrect. Summary of the cases by Westlaw As to CPs Paragon Finance plc v Nach & Staunton: N appealed against the striking out of adefence and counterclaim to a possession action brought by the mortgagee, PF, after N hadfallen into mortgage interest arrears. N contended that the mortgage agreement, whichcontained a variable interest clause, became an extortionate credit bargain under theConsumer Credit Act 1974 s.138 following the failure by PF to bring its interest rates inline with the Bank of England or prevailing market rates. N sought to have the loanagreements reopened under s.139 of the 1974 Act, and to plead an implied term that PF wasbound to exercise its discretion in varying interest rates fairly, honestly, in good faith, andnot arbitrarily, capriciously or unreasonably, having regard to all relevant matters andignoring the irrelevant. Held, dismissing the appeal, that the discretion to vary interest rates was notcompletely unfettered and was subject to the implied term contended for by N, LombardTricity Finance v Paton [1989] 1 All E.R. 918 not followed. However, the fact that PF hadset interest rates without reference to those of other market lenders did not place PF inbreach of the implied term. PF had been attempting to alleviate serious financial difficultiesby passing its increasing costs onto its borrowers. Therefore it could not be said that itsdiscretion to set interest rates was being exercised capriciously, arbitrarily, unreasonably orfor an improper purpose. The argument that the rates of interest were exorbitant so as tobring the agreement within s.138 of the 1974 Act had no real prospect of success, giventhat only charges existing at the time of the agreement could be taken into account indetermining whether a credit bargain was extortionate. Furthermore, it was not open to N toestablish a breach of the Unfair Contract Terms Act 1977 s.3(2)(b) by arguing that PF haddefeated their reasonable expectations, given that the setting of interest rates was not"contractual performance". The court could only intervene if a credit bargain had beengrossly unfair to a borrower by requiring grossly exorbitant payments or if it had grosslycontravened principles of fair dealing. Lymington Marina Ltd v Macnamara: The relevant clause in a marina licenceauthorised the licensee to grant successive sub-licences, and the marina companys refusalto approve the sub-licences had been based on an erroneous view of the power conferred onthe licensee by the clause and was invalid. Mackay v Dick: If, in the case of a contract of sale and delivery, which makesacceptance of the thing sold and payment of the price conditional on a certain thing beingdone by the seller, the buyer prevents the possibility of the seller fulfilling the condition,the contract is to be taken as satisfied. Hadley v Baxendale principles: that the remoteness test comprises two limbs: thelender is liable for the types of loss which arise naturally from the breach or which mightreasonably have been foreseen as likely to arise from particular circumstances of which thelender was aware at the time of the contract. South African Territories v Wallington The rule that specific performance cannotbe granted in respect of a contract to lend money applies to a contract to lend to a companymoney, payable by instalments, upon the security of debentures to be issued by thecompany.
  • 7. Where the lender makes default in payment, the moneys due for unpaid instalmentsdo not constitute a debt to the company, and the company are only entitled to damages forthe actual loss caused by the breach of contract. As to R&W Bunge Corporation v Tradex SA: In general, time is of the essence in a mercantilecontract, and a term as to time of performance of an obligation by one party as a conditionprecedent to the performance of an obligation by the other party will generally be treated asa condition. By a contract dated January 30, 1974, buyers agreed to purchase 15,000 tons ofsoya bean meal, shipment to take place in consignments of 5,000 tons in May, June andJuly 1975. By cl.7 of the Grain and Feed Trade Association Ltd.s standard form contract119, which was incorporated, it was provided that "Period of delivery during May 1975 atbuyers call. Buyers shall give at least 15 days notice of probable readiness of vessel." Thebuyers gave notice under cl.8 extending the period for delivery to one calendar month. Thelast day upon which the sellers could ship the goods therefore became June 30, 1975, andthe last day for the buyers to give notice was June 12. The buyers did not give notice untilJune 17. The judge held that the term as to the time for giving notice was not a conditionand that in any event there had been no breach. The Court of Appeal allowed the sellersappeal. On appeal to the House of Lords, held, that, in general, time was of the essence in amercantile contract; in such a contract, where a term had to be performed by one party as acondition precedent to the ability of the other party to perform another term, especially anessential term such as the nomination of a single loading port, the term as to time forperformance of the former obligation would in general fall to be treated as a condition. cl.7was a condition since until notice was given the sellers could not know which loading portto nominate