A recent article in The Secured Lender magazine titled
"Avoiding Lender Liability Claims: When Words and Actions
Matter" canvassed lender liability claims and the steps
lenders should take to avoid being held liable in certain
circumstances to a borrower, guarantor or third party. Many of the
suggestions are similarly relevant to borrowers (as purchasers in
an M&A transaction or otherwise) to ensure they are following
A liability claim often arises where a borrower believes a
lender failed to honour an agreement to lend under a commitment
letter or an oral commitment to extend credit. This can be
particularly problematic where a borrower relies on the purported
commitment from a lender to bind themselves to a further
transaction – such as the acquisition of a business or even
just the purchase of inventory or equipment. A failure by the
lender to extend credit could result in a default by the borrower
on its obligation to purchase.
The Statute of Frauds in force in many jurisdictions
requires that a commitment to lend be in writing in order to be
enforceable. While there may be circumstances in which a borrower
may be able to avoid the requirements of the Statute of
Frauds, best practice remains for a borrower to avoid
committing themselves to an acquisition funded by credit until they
have a written commitment from a lender to extend credit.
Even armed with a written and signed commitment letter or term
sheet from a lender, a borrower should be cautious if such
commitment is conditional on the execution of further or additional
"definitive loan documentation" or a more formal
agreement between the parties. Until such documentation is
finalized, the lender may still be able to avoid any obligation to
Finally, all documentation evidencing a commitment to lend
should reflect all terms or "side agreements" which may
have been agreed to orally. Most commitment letters will include
"entire agreement" clauses, so any oral representation or
agreement made by a lender in connection with the negotiation of
the extension of credit will not be enforceable unless included in
the written commitment.
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general guide to the subject matter. Specialist advice should be
sought about your specific circumstances.
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