In these difficult economic times, there are bound to be occasions when borrowers breach the terms of facility letters or loan agreements causing the occurrence of events of default. Under their terms, amongst other things, the banks may then be able to demand immediate repayment of the loans.

Depending on the circumstances, a bank may conclude that the best course of action is to allow a particular borrower more time to resolve the relevant problem, rather than to demand immediate repayment. The bank may think that it can rely on a clause in the letter or agreement preserving its rights, so that it can demand repayment in the future, on the basis of the same breach.

However, a recent case, Tele2 International Card Co SA and others v Post Office Limited (2009), shows that such a clause will not necessarily protect a bank in such a situation.

In that case the Tele2 companies had entered into a commercial contract with the Post Office Limited. Under its terms the Tele2 companies had to provide parent company guarantees for each calendar year 7 days before the beginning of that year.

Failure to do this gave the Post Office a right to terminate under the terms of the contract. By 24 December 2003 the parent company guarantees for 2004 had not been produced and were never produced for that year. However the Post Office did not give notice to terminate until 1 December 2004, nearly a year later.

The Post Office tried to rely on a waiver clause in the contract which said that: “In no event shall any delay, neglect or forbearance on the part of any party in enforcing….. any provision of this Agreement be or be deemed to be a waiver thereof or….. shall in any way prejudice any right of that party under this Agreement”. It is common to find similar “waiver” clauses in facility letters and loan agreements.

The Court held that the fact that the Post Office continued to perform the contract without any protest or reserve of any kind in relation to the failure to provide the parent company guarantees meant that it elected to affirm the Agreement and to abandon its right to terminate it because of that breach.  

As a result it is now more important than ever to ensure that appropriately drafted letters or notices of waiver are used in situations where events of default arise, but are not to be acted upon immediately.