Q: Is it appropriate to include events of default in a demand facility letter? My borrower wants the bank to include them in the document as examples of when the bank might make demand.
A: Events of default are really inconsistent with a true demand facility, so including reference to them in the facility letter should be avoided if at all possible.
Generally speaking, the bank will want to maintain as much flexibility as possible in exercising its right to make demand upon a borrower for repayment for any reason. Ideally, the bank will want the decision to make demand to be completely in its full discretion. Including examples of events of default for illustrative purposes might be construed by a court as limiting the bank to making demand for only those types of events that are similar in character or severity to the ones listed or described in the facility letter.
Sometimes a new borrower will insist upon the inclusion of events of default in the facility letter in order to be comfortable with the banker-customer relationship. In that case, the bank will need to ensure its facility letter includes a clear statement that:
- the demand nature of the credit facility is the paramount feature of that credit;
- the inclusion of events of default is for illustrative purposes only and they have been inserted as the express request of the borrower; and
- the reference to events of default shall not detract from the demand nature of the credit facility or limit in any way the bank’s rights to make demand for the repayment of the indebtedness, to cancel or terminate the facilities, or to enforce its security at any time for any reason.
In this way, the bank can hopefully avoid having its accommodation of the borrower’s request unfairly prejudice the bank’s right to make demand or restrict the exercise of the bank’s remedies.