A financial crisis looms, or has already arrived. Increasingly, financiers face payment defaults and requests for moratoriums on payment, interest waivers, and similar.
Tightly drafted financing documentation will probably allow the calling of an Event of Default, whether for straightforward payment defaults, (less straightforward) material adverse changes, or inability to provide further collateral following drops in the valuation of secured assets. In turn, an Event of Default generally allows remedies including acceleration, termination, and enforcement over securities and, in lease financings, repossession of ships.
A financier may choose to temporarily refrain from exercising such remedies, and discuss restructuring the debt. This could be for any number of reasons, reflecting the commercial relationship with a particular debtor or broader considerations such as the existing proportion of bad debt on a financier’s books at the time or even wider ramifications as to cross-default implications on the debtor’s group of companies.
It is important to ensure the financier’s rights are preserved in the meantime.
What if the financier does nothing following an Event of Default?
The initial position is, silence alone is unlikely to amount to a waiver of the financier’s rights, or estop the financier from relying on its remedies. You may have in mind the “no waiver” or “no variation except in writing” clauses common in financing documentation (more on such clauses below).
However, that can easily change. Perhaps there is continued silence in the face of repeated breaches. Perhaps there is an act or representation reasonably relied upon by the debtor who therefore believes the financier will not insist upon strict legal rights. Examples might include, after an Event of Default has occurred: (1) a financier allowing continued drawdowns from a facility, (2) a financier maintaining the debtor’s operating account which receives charter income, and allowing continued payments of operating expenses from that account, or (3) a financier entering into preliminary discussions to compromise the debt on the understanding of a standstill in the interim.
It may be the Event of Default continues for a longer time than initially anticipated, and the financier later decides to enforce. At a minimum, it would be prudent for the financier to provide a final warning to the debtor, stating a reasonable time for the debtor to rectify its Event of Default, before proceeding further, and also to formally state that it is not the financier’s intention to forego its rights to subsequently rely on that Event of Default.
“No waiver” clauses
These clauses exist in almost every suite of financing documentation, in favour of the financier, to try to ensure that the financiers do not by inference accidentally or informally waive their rights to any remedies in the event of a breach of the contract by the debtor.
However, English judicial opinion on them has varied over time.
In the 2000s and up to the mid-late 2010s, there appeared acknowledgment that a “no waiver” clause could itself be waived. For example: “When one looks at a clause of this kind, however, the position is this. This clause, along with any other clause, can be the subject of waiver, and the requirement for a waiver to be in any particular form is one which can itself be waived. These clauses, inevitably, give rise to little more than an evidential requirement to establish that there truly has been a waiver in the case in question.”1
However, more recently, there appears to have been a re-focusing on party autonomy and the literal words of the contract. For example, in SMBC v Euler Hermes2 , SMBC was the assignee (as security trustee) of rights under a performance bond. The bond required its beneficiary to later repay sums paid if a Court decided that less was payable under the underlying contract. The bond could be assigned, if the assignee confirmed acceptance of this repayment obligation. A notice of assignment was issued and accepted by the obligor.
SMBC never confirmed acceptance of the repayment obligation. Instead, the notice of assignment indicated that the assignor retained responsibility for any obligations and that the assignee had no liability under the assigned document (only rights). Among other things, SMBC argued that this notice of assignment amounted to a waiver of the need for it to confirm acceptance before it could take the benefit of the assignment.
The English High Court did not agree. In so deciding, it read the “non-waiver” clause closely – and found that the notice of assignment did not meet those requirements because it had not made specific reference to the repayment obligation: “No waiver under clause 12.1 shall be a waiver of a past or future default or breach, nor shall it amend, delete or add to the terms, conditions or provisions of this Bond unless (and then only to the extent) expressly stated in that waiver.”
Although the non-waiver clauses were different in each case, the Court also discussed the earlier cases (including that cited above) and emphasized: “…if it is said that waiver prevents reliance on a no waiver clause there would have to be something which indicated that the waiver was effective notwithstanding its noncompliance with the non-waiver clause and something more would be required for this purpose than what might otherwise simply constitute a waiver of the original right itself.” 3
In any event, the prudent counsel for financiers would be to avoid arguments about the operation of these clauses altogether (or arguments about how a particular clause is more similar to a clause discussed in case A than that in case B) – and expressly make clear that no waiver or estoppel at all can arise.
Reservation of rights letters
Such letters are not uncommon, and are usually exhaustively worded. They are intended to exclude arguments by the debtor, again, that the financier has waived its rights or is estopped from relying on them. They are indeed evidence that the financier did not intend to do so. However, they are not conclusive. A Court or Tribunal would consider matters overall, including in particular acts or omissions later in time than such letters so from a financier’s perspective it may be prudent to consider refreshing such letters from time to time in the absence of settlement arrangements.
It is also usual to see wording in such letters that you would expect to see in a contract. For example, a lengthy recital of contract clauses relied upon and reference to governing law and jurisdiction. However, if and to the extent that such letters simply reserve the financier’s rights, they are not a contract and such wording is probably unnecessary. (The position would be different if, for example, the letter also indicated the financier’s agreement to make certain concessions or restructure some financing terms. In that event, the letter might either reflect an offer or an acceptance, or record a variation – assuming the other elements of a contract are present.)
Whether you are a (1) financier facing defaults, requests for a moratorium or similar, or suspect impending defaults, or (2) a debtor seeking relief, protection, or restructuring, please don’t hesitate to reach out to the Stephenson Harwood team today. Early and accurate advice can help clarify the options realistically available and help ensure proper protection of your rights, to the greatest extent possible.
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