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Legal agreements are populated with terms one would rather not know. These terms have little to no literary quality to them and lawyers are paid to endure them on behalf of their clients. Some of these terms which frequently make an appearance in loan agreements are surveyed below for the reader’s pleasure.
A facility (or a commitment in such facility) is not a loan and a loan (or a participation in such loan) is not a facility. The first is an option and the second is the result of exercising that option. The lender holds on to funds for a period of time (availability period) until the borrower requests such funds in the form of a loan. The borrower pays to the lender a commitment fee for the length of time the lender is asked to hold on to its funds that are earmarked to be lent to the borrower.
A representation and an undertaking are neither tested on the same dates nor breached in the same manner. A representation is a factual statement (about the borrower’s capacity, authority, financial condition, compliance with laws or about the validity and enforceability of loan documents (among others)) made by the borrower as of specific pre-determined dates – these dates are described in detail in the loan agreement. An undertaking is an obligation on the borrower which applies for the entire period of time during which debts under the loan agreement (and any related finance documents) remain. Making of a representation whose content is untrue as a matter of fact is a misrepresentation. An undertaking is breached by the borrower not performing what it undertook to perform (or performing what it undertook not to perform). Some people like to call undertakings by the name of covenants but this does not change their nature or substance.
A certain funds period and a clean up period pre-date and post-date the same event. Their effect is to excuse the borrower from complying with a particular set of representations, undertakings and loan acceleration/security enforcement events for a limited period of time only before and after the date on which the borrower acquires the target company respectively.
Conditions precedent and conditions subsequent pre-date and post-date the same event – namely, the movement of funds from the lender to the borrower in the form of a loan or a borrowing. Some people like to call the act of borrowing (or the principal amount borrowed) by the name of utilisation or drawdown (one feels there is a need for uniformity of reference). A condition precedent can be a requirement that a particular circumstance obtains on a date prior to the date of borrowing, or a requirement that certain documentation (such as executed loan documents, due diligence reports and financial models), whose forms have been approved by the lenders in advance, are delivered to the lenders on a date prior to the date of borrowing. A condition subsequent is the same except that the time period for compliance with such obligation post-dates the date of borrowing and they are usually limited to security perfection matters or delivery of documentation whose delivery has been deferred due to special circumstances affecting the borrower.
A grace period and a cure period are different. The effect of both is to grant the borrower additional time during which the borrower can comply with the relevant obligation and, for that reason, the original due date of the relevant sum is not the date on which the lenders can accelerate the due date of the outstanding loan obligations or enforce their security interests against the relevant security grantors. However, a cure period will be accompanied by a positive obligation on the borrower to engage in a particular conduct such as raising of additional funds (by issuing shares in itself or borrowing a loan from its immediate parent) and applying such funds towards satisfaction of outstanding loan obligations.
A mandatory prepayment event and an event of default are not the same. The occurrence of a mandatory prepayment event means the due date of the relevant sum is deemed to occur immediately even though the originally scheduled due date has yet to arrive. The occurrence of an event of default means that the lenders are now entitled to take a vote on bringing forward the due date of the relevant sum. Absent such vote and (depending on the relevant terms of the subject agreement) absent a payment demand on the borrower following an affirmative vote, the due date of the relevant sum remains unaltered. An event of default may give rise to an acceleration event or a termination event under another agreement to which the borrower is a party which defines such circumstance as a cross-default event.
Damages and liquidated damages have different consequences. Damages are payable to the extent the claimant actually suffers a loss as a result of the defendant’s breach of contract and it may be reduced by the court to the extent the claimant has failed to mitigate its loss. Liquidated damages are payable in the amount stated in the agreement no matter what (although it may be struck down as a whole if, on its proper construction, it is a penalty disproportionate to the breach of contract committed by the obligor).
Pro rata settlement with respect to a particular sum means apportionment of that sum between multiple payees based on an agreed ratio. If two lenders hold the loan in a ratio of 60:40 then any repayments on such loan should be remitted to them according to that ratio.
Privity and third parties' rights concern voluntarily entered contractual relations. A person who is not a party to a contract has no entitlement to enforce that contract against someone who is a party to that contract. For the second person has not agreed to undertake any obligations towards the first person. This stands in contrast to legal obligations arising by operation of law which are imposed on individuals irrespective of their consent.
If you have before you a vacuous piece of contractual language from a source uncertain, please ask for relief here.