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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.
Background
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.
Key issue
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.
Test
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".
Decision
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.
Conclusion
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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