The recent case of Lombard North Central Plc v European Skyjets Ltd [2022] EWHC 728 has re-affirmed the position that “no waiver” clauses and reservation of rights wording does not always operate to preserve a lender’s original rights and remedies: positive action taken by a lender may override these. More helpfully for lenders, the case confirms that a loan acceleration notice can still be valid even if it contains no details of the events of default on which the lender is relying.
We examine the key issues below.
What is a “no waiver” clause and what does “reserving your rights” mean?
A "no waiver" clause seeks to ensure that a lender’s failure to enforce (or a delay in enforcing) its contractual rights or remedies under a loan agreement (whether deliberately or by oversight) does not result in that lender losing those rights or remedies. A lender may also attempt to “reserve its rights” in respect of a particular breach of a loan agreement after the breach has occurred while it decides what it wants to do. The English courts have held that both “no waiver” clauses and "reserving rights" are not effective in all circumstances.
Events of default and acceleration clauses
Where a loan is not repayable on demand, the loan agreement should specify “events of default” (or occasionally “termination events”) that, if they were to occur, would entitle the lender to demand early repayment of the loan.
The “acceleration” clause deals with the lender's rights following the occurrence of an event of default. It is usually drafted so that the lender can serve notice on the borrower declaring that the loan, accrued interest and all other amounts must be immediately repaid but without specifying the required contents of the notice. An acceleration notice can still be relied on even if the lender does not:
- Identify (or correctly identify) the event of default in question (e.g. Byblos Bank SAL v Al-Khudhairy [1986] 2 BCC 99549) and/or
- Specify the precise amount due if that is not required by the loan agreement (e.g. Tridos Bank v Dobbs [2004] EWHC 845).
What happened in the Lombard case?
Lombard North Central plc as lender (Lombard) and European Skyjets Ltd as borrower (Skyjets) entered into a secured loan agreement (Loan Agreement) relating to a Bombardier Learjet aircraft (the Aircraft). The Loan Agreement contained a customary no waiver clause and an acceleration clause that entitled Lombard to demand early repayment after the occurrence of an event of default. The mortgage over the Aircraft could be enforced on notice to Skyjet “on the occurrence of an Event of Default and at any time thereafter”.
The loan was repayable in instalments. Skyjet paid a number of repayment instalments late and Lombard started to charge Skyjet a “late payment fee” to discourage further late payments, as well as levying default interest on other unpaid amounts. Lombard wrote to Skyjets about the missed repayment instalments (and related non-payment event of default) reserving its rights in the following terms: "…without prejudice and [Lombard] fully reserves its rights in respect of the identified breaches being arrears on the Loan Agreement… ". Lombard eventually accelerated the loan and enforced its security by selling the Aircraft. Its acceleration notice (the Notice) cited a non-payment event of default as the basis for demanding early repayment, and the amount of arrears was specified in the Notice. The arrears included the aggregate late payment fees.
Skyjets argued that Lombard had no entitlement to accelerate the Loan Agreement or enforce the mortgage and sell the Aircraft.
The decision
The decision reached in the Lombard case is an interesting and informative one for lenders and borrowers.
- Lombard had no contractual right under the Loan Agreement and related finance documents to levy the “late payment fee” and no other amount was due when the Notice was served. However, other events of default were continuing at that time (including a misrepresentation in relation to maintenance agreements and material adverse change)
- The Loan Agreement did not, as a matter of pure contractual construction, require an event of default to be continuing when the Notice was served (i.e. if a missed payment under the Loan Agreement was subsequently paid late, that would still constitute an event of default which could be invoked later, even though the event of default was not continuing). This kind of acceleration right is modified by the doctrine of waiver, under which the lender's conduct after receipt of a late payment may be held to have waived any acceleration right arising from the late payment. Applying this principle to Lombard facts, the judge concluded that:
- Lombard had accepted late payments and offered more time for outstanding payments to be made and, as a result, had waived its right to rely on missed payments as events of default
- The “no waiver” clause did not help Lombard to preserve its acceleration rights. Its waiver resulted from its positive conduct towards Skyjets regarding accepting late payments and offering more time for outstanding payments, not from it failing to exercise, or its delay in exercising, a right and
- Lombard’s earlier positive conduct trumped its subsequent reservation of rights language
- Despite the Notice only referring to a payment event of default that had not, in fact, arisen because of the waiver, it was still valid because other events of default were continuing (even though they were not identified in the Notice).
- The Notice was valid even though it inaccurately stated the sums due by virtue of including late payment fees which Lombard accepted were not due. It was effective because the acceleration clause permitted Lombard to require Skyjets to repay all sums immediately but that clause did not require the actual amount due to be specified.
- A contractual duty of good faith was not relevant to Lombard’s "absolute contractual right" to accelerate the loan as it saw fit. It was not in the nature of a contractual discretion to which the Braganza duties apply.
Comment
Andrew Dodds, a partner in the banking and finance team at Stevens & Bolton, comments that the Lombard case is a handy reminder of two things:
- That a lender’s conduct (e.g. accepting late payments) may be held to waive an event of default, despite a loan agreement including a market standard “no waiver” clause and a lender using reservation of rights wording in communications with a borrower. Accordingly, a lender should be mindful about how it interacts with a borrower (especially one in financial distress) so as to ensure that its rights (especially acceleration rights) are not inadvertently compromised by its actions or words and
- An acceleration notice served pursuant to a customarily worded acceleration clause can still be valid and effective even if it contains errors or incomplete (or no) information relating to the events of default on which a lender is relying to accelerate a loan, so long as it complies with the requirements of the acceleration clause.
Andrew Dodds