Basic Explanation of Two Important Clauses in a Term Loan Agreement
The Basics of Conditions Precedent Clause
The conditions precedent (“CP”) are conditions to be fulfilled before the lender releases the loan to the borrower. Such conditions may be applicable at the time of first drawdown or any future drawdowns during the loan agreement. This clause provides a mechanism for the lender to ascertain the existence of certain documentary and non-documentary (factual) circumstances before giving out the loan. The lender, employing CP clause, tries to safeguard the fund it is going to put at risk. If there is no CP clause, the bank will be obliged to give out the loan. In this case, the bank will be defenseless unless the borrower commits a default.[1]
Provisions of CP clause must be satisfied (or deferred or waived) before making the payment. Once all of the provisions of CP clause have been satisfied (or deferred or waived), the lender will be required to confirm, in writing, that this is the case.[2] There are instances where a lender decides to make the loan even though all of the conditions have not been satisfied. In this case, the lender should either write down a deferral in a conditions subsequent letter or a waiver letter.[3]
Conditions in a CP clause may be applicable to all loans, collaterals, or a specific loan. In general, the CP clause provides that the bank has no obligation to give out any loans unless the bank receives constitutional documents of the borrower, official consents, appointment of process agency under the forum selection clause, and legal opinion confirming the validity of the mentioned documents. This is applicable to all loans. But secured loans, depending on the type of collateral, may contain relative provisions in favor of the bank in the CP clause. Such provisions could be regarding valuation, evidence of title, registration of title to the asset (if applicable), or a registration in a public bureau.[4] In addition to that, there are conditions in the CP clause applicable to each loan separately. For example, the bank may prescribe in the CP clause that if the borrower is on the verge of committing a default and it is only a matter of time, the bank will not be responsible for making any other payments.[5]
The Basics of Multicurrency Clause
Multicurrency options in loans allow for the borrower to borrow or to request for the repayment to be in the form of a foreign currency loan in a currency other than the currency in which the loan was made. This allows flexibility for both the borrower and the lender in an ever-expanding global market where a large portion of the borrower’s cash flow is not executed in the loan currency. The object of the clause is to allow the borrower to borrow other currencies at a lower interest rate than the original loan currency.[6] King provides an outline of this clause, “The borrower may prior to each interest period select the currency of the loan. If the bank is satisfied that the new currency is readily available, the borrower repays the old currency, and the bank readvances the new currency.”[7] This type of multicurrency loan has brought new business opportunities to fruition; however, with that opportunity comes risk.
Submitted by Dr.Mohammad Tabaeenia & Ms.Elham Akhoondan
[1] “Conditions Precedent to Lending – overview” Lexis PSL (blog), online: <https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/55KB-65S1-F185-X1SP-00000-00/Conditions%20precedent%20to%20lending—overview>.
2] Ibid.
[3] “Pre-conditions to lending” (August 2011), out-law.com (blog), online: <https://www.out-law.com/topics/financial-services/banking/pre-conditions-to-lending/>.
[4] Philip R Wood, International loans, bonds, guarantees, legal opinions, London: Sweet & Maxwell; Toronto: Carswell 2007. 16.
[5] Ibid.
[6] Philip R Wood, Law and practice of international finance (1990) at 24-25.
[7] Ibid.