Lenders rejoice! Contingent liabilities protected

Published on
2 min read

The partnership was established to acquire and develop land. The lender financed the endeavour by way of a £61.25m loan, pursuant to a Facility Agreement which was secured by a Security Agreement of the same date. The Facility Agreement contained clauses binding the borrower to pay to each secured party any sums (including legal fees) incurred in connection with the enforcement of any rights under the finance documents.

The Security Agreement further defined liabilities as “all present and future obligations and liabilities whether actual or contingent”. A further condition in the Facility Agreement required the borrower to obtain additional finance by a specified date, as the borrower could not prove to the lender they had done so, the lender served notice of default, cancelled the facility, and appointed administrators.

The administrators sold 3 of 5 plots of land and repaid the principal sum in full. However, the First Respondent (R1) threatened legal proceedings over termination of the facility. It fell to the court to decide whether the borrower had a contingent liability for the lender’s costs in connection with the threatened litigation and whether the Agreements continued to provide the lender with security for that liability.

R1 argued that the contingent liability couldn’t be engaged because the principal sum was repaid and that continuation of the security after it had been enforced and repaid should not be permitted in equity. The Judge, in rejecting this argument, found that the Agreements were not oppressive in their construction or application in this instance and the various conditions imposed on the borrowers should be adhered to wholesale.

Apparently, the Agreements were typical and ordinary in their construction, therefore, the approach of the Judge in this case should give some comfort for commercial lenders.

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