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Banking Update - Waiver of Conditions Precedent
A recent High Court decision will bring increased discipline to the commercial reality and market practice of dealing with the waiver of any condition precedent required under the terms of a transaction.
In Irish Bank Resolution Corporation Limited (IBRC) v Cambourne Investments Inc & Ors, IBRC was seeking to recover debts of over 10 million euro it had lent pursuant to two facility letters to a company called Cambourne Investments Inc. (Cambourne) in respect of the proposed purchase by Cambourne of several units in the Parnell Centre in Dublin. Century City and Peter Curistan were guarantors of the Cambourne debts.
In essence, the facilities were not to be drawndown unless two conditions precedent, (firstly, an updated written valuation in respect of the units had to be provided by a valuer to IBRC and secondly, the loan to value ratio had to remain at a certain level) were provided and complied with. IBRC waived both conditions precedent and allowed Cambourne to drawdown under the facilities arguing before the court that as both conditions precedent were for its exclusive benefit, it was entitled to waive them, unilaterally and without notice to Cambourne as borrower or to the guarantors.
Charleton J held a lender was only entitled to waive a condition precedent which was (i) exclusively for its sole benefit and (ii) severable, and as the waiver in this case did not fulfil these requirements, the contract of loan (which included the guarantees in the facility letters) "did not come into operation" and IBRC could not therefore rely on the facility letters.
The court did however find that
(1) as a matter of law the monies were still held to be repayable by Cambourne on a "monies had and received" basis; and
(2) although the guarantees which were set out within the facility letters must also fail, IBRC could rely on the two separate “all monies” deeds of guarantee which had also been executed in respect of the facility letters by Peter Curistan and Century City as guarantors respectively, for enforcement against Cambourne.
In considering the key issue of “whether a term is for the exclusive benefit of one party alone or may also benefit the other”, Charleton J outlined a two fold test:
(1) the condition must of its nature be exclusively for the benefit on one party; and in addition
(2) it must be severable from the contract.
He then expanded this issue and stated that “if the condition is so bound up with the proper performance of the contract that the unilateral waiver of it by the party in whose favour it is said to be alters the entitlements of the other party to the contract so that a different bargain may then be said to be present, then exclusive benefit cannot characterise the clause”.
Looking at the conditions precedent in more detail, Charleton J did concede that although IBRC had argued that the valuation provided comfort to it as to the level of security being provided by Cambourne, the fact that Cambourne also offered to procure a guarantee as further security meant it could be difficult to see how Cambourne took any benefit from the valuation condition precedent except as “satisfaction of the same was a precursor to the release of funds”; however he concluded that “from the point of view of the ordinary borrower seeking funds on the basis of a valuation conducted by a bank, such a condition offers comfort as to the security of the bargain and it is not unreasonable for the borrower to also rely on such a valuation”.
With respect to the issue of severability, we note that Charleton J stated that the standard severability clause was not included in the facilities and therefore neither condition could be severed.
This decision has potentially serious consequences as it establishes a stricter more formal approach to the market practice in dealing with a waiver of a conditions precedent and parties to any transaction will now have to review their documentation to ensure all of the key issues raised in this judgment are covered clearly. Key steps should include (i) documenting any waiver of a condition precedent in writing and requiring all obligors (including any guarantor) to sign the same, (ii) inserting a provision which states that all conditions precedent are for the benefit of the lender and (iii) inserting a severability clause in the relevant documentation.