Lenders beware: are you waiving your rights away?
12 May 2022
In Lombard North Central v European Skyjets, the court gives all secured lenders a lesson in how to declare an event of default, terminate a credit agreement and enforce security. What makes this case interesting is that the court found the lender had validly terminated the loan even though it also found that the lender had waived the event of default specified in the termination notice.
Three points to highlight are:
- The court found that the lender had waived its right to declare an event of default for the borrower’s repeated failures to pay interest and repay the loan as a result of the lender’s positive acts (such as accepting late payment) and its positive statements to accommodate the borrower. These acts cut through any protection provided by both the standard “No waiver” provision in the credit agreement and the reservation of rights terms in its communications with the borrower. As the judge put it, “I do not accept, however, that the ritual incantation of this language can prevent anything said or done in the preceding letter from having its objective effect”.
- A contractual right to terminate is an absolute right of the lender, not a contractual discretion to which so-called Braganza duties apply (essentially to act in good faith for a proper purpose and not in a way that is arbitrary, capricious or irrational). There is no room for arguments on good faith.
- The exercise of the contractual right to terminate must strictly comply with any conditions of the contract – a question of construction of the contract. In this case, the notice of an event of default was not required to specify an event of default. The fact that it specified an event of default that was wrong and which the court considered to have been waived did not impugn the notice. On the facts, there were other defaults which had occurred on which the lender could rely.
Judgment: Lombard North Central v European Skyjets