PRINCIPLES OF LOAN

DOCUMENTATION
by

SIMON DEANE
Partner, Deacon
MY INTENTION In this talk is to give you a brief guided tour
around a typical eurocurrency term loan agreement, looking in
particular at the structure and provisions of a typical agreement
and some legal issues arising therefrom.
WHAT is EUROCURRENCY AND THE
EUROCURRENCY MARKET?
The Eurocurrency market can helpfully be described as the
market where a specific currency is held by a bank (including
a branch of a bank domiciled in the country of this currency)
or other person, outside of the country of that currency. As the
US Dollar has formed, up to now, the major currency of the
eurocurrency market I shall refer to Eurodollars during the
course of this talk. The Eurodollar market can probably be said
to consist of 2 parts:
(i) a market where short term funds are placed by original
owners with commercial banks which then re-lend to final
users and
(ii) a market involving interbank transactions in which
commercial banks borrow and lend Eurodollars amongst
themselves.
What happens in practice is that if a borrower wishes to borrow
for, say, a five year term the lender would enter into the
Eurodollar market and obtain short term funds to finance the
loan to the borrower. The funds may be made available to the
lender for, for example, a. one month, three month, six mouth

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or one year period (or for other periods). Loan agreements will
usually provide that the borrower can choose the particular term
for each short term funding by the lender so that it ensures that
it gets the best interest rates.
As the loan is for 5 years the lender will have to renew its
funding at the end of each short term from the Eurodollar
market.
Interest

The borrower will pay interest on the loan to it at the

same time as the lender has to pay interest on, repay and then
renew the short term funds it borrowed from the market to lead
to the borrower. The amount of interest payable is set at a
market rate and will depend upon the market from which a
lender is borrowing. The rate applicable is termed the Interbank
Offered Rate. There will be different rates applicable to
whichever market one is borrowing from. The three markets
which HK practitioners will deal with almost exclusively are
the London, Hong Kong and Singapore markets (the London
market being by far the largest). Interest rates applicable to
such markets are in short hand referred to as respectively
LIBOR, HIBOR and SIBOR. The ultimate borrower will pay
a margin above the interbank offered rate of interest for the
particular funds it is borrowing. This is obviously the 'turn' for
the banker for organizing the funding for the borrower.

STRUCTURE OF EURODOLLAR LOAN AGREEMENTS

Having attempted to explain the Eurodollar market let me now
turn to Loan Agreement itself.
Law of Agreement
Although the choice of law clause is usually the last provision
in loan documents, I shall here deal with it first.
(i) Legal Considerations relating to Choice of Law Clauses
English and Hong Kong law recognize, subject to limitations,
the freedom of contracting parties to choose whatever law they

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wish to govern their contract. This rule was recently confirmed

In James Miller and Partners Ltd v Whitworth Street Estates (Manchester) Limited [1970] AC 583. Lord Wright In Vita Pood Products
Inc v Unus Shipping Co Ltd [1939] AC 277 established the rule but
made It subject to the provisos that the choice of law be ( i ) a
bona fide and legal choice and (2) not in breach of public
policy. It is difficult to see how a loan agreement choice of law
clause could be chosen not in good faith or in breach of public
policy, although there Is an Australian decision (Golden Acres Ltd
v Queensland Estates Pty Ltd [1969] Qd R 378) where the judge
held that Hong Kong law had been chosen deliberately and in
bad faith to avoid the effect of Queensland law which would
have been the proper law of the contract had there been no
express choice (and even though one of the parties to the
contract was based in Hong Kong). It is a very difficult line to
draw but without going Into great detail I would argue that
specific laws chosen to govern Eurodollar loan agreements will
generally be upheld. In practice these agreements are usually
governed by English, New York or, locally, Hong Kong or
Singapore law and a court would be unlikely to overturn this
choice, In the Vita Food Products case Lord Wright said that in
international business contracts a choice of English law would
be upheld even if there was no other apparent connection with
England. Presumably this view would also be held by Hong
Kong judges.
(ii)

Implied Choice of Law

In the very unlikely event that there is no express choice of

law, the court itself will decide on the law to govern the
contract. Its decision will be based upon the intention to be
inferred from the terms and the nature of the contract and
the general circumstances of the case. Factors in deciding
the; law include the language of the contract and specific
terms used, currency of payment (although in Eurodollar loans
this may not be so strong an indication of parties' Intention that
the law of the agreement be NY/US law), commercial purpose,
business efficacy or reference to other contracts which contain
express law. A Libor or Hibor clause may also be invoked in

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determining that an agreement is governed by English or HK

law,
(iii) Closest and Most Meal Connection

If it is not possible to show the parties' intention from the

contract, the court will then look to see which law a contract
has its closest connection with. For example, it may consider
where the contract was made, place of performance and the
currency of the loan, place of business of the parties or the law
of the market (as I mentioned above). Note that there may be
overlap between the implied choice of law and connecting factors.
It will be seen therefore that the courts apply a three-tier
approach. First they look at the express terms of the contract,
If there is no choice of law, they look to the parties' conduct to
see if a proper law can be inferred from this. If no choice can
be inferred they look to see which law is most closely connected
with the contract. This approach was approved by the House
of Lords in the Miller case.
(iv) Submission to Jurisdiction and Process Agent

After all that, to avoid such uncertainty you will see how
important it is that loan agreements should contain an express
choice of law. The choice of law clause should be coupled with a
submission to the jurisdiction of the courts of the country whose
laws govern the contract if one or both of the parties are not
domiciled or do not have a place of business there. The submission should be non-exclusive so as not to limit a lender's freedom
of action. If a borrower is not domiciled in the country of the
law governing the agreement it is also advisable and usual for it
to appoint an agent in the relevant jurisdiction to accept service of
legal proceedings on its behalf. This saves the lender having to
apply to the courts where it wants to sue the borrower for leave to
serve its proceedings on the borrower out of the jurisdiction in
the country of domicile of the borrower. This procedure can be
a tedious and time consuming affair.
Commitment to lend

The loan agreement will contain a basic commitment to the

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borrower to lend, subject to the provisions of the agreement. It

would be very unusual for a bank to breach Its commitment to
lend in Eurodollar loan agreements but, In the unlikely event
that It did, the borrower's remedy would be in damages for
breach of contract. The English courts have recognized that
specific performance of a lender's obligations in equity would
not be allowed, damages being the preferable remedy since loss
should be readily calculable. (See South African Territories v
Wallington [1898] AC 309, HL where Lord Watson held at p 314
'it is settled In the law of England that such a promise cannot
sustain a suit for specific performance'but note also the Privy
Council decision in Loan Investment Corporation of Australia v Banner
[1970] NZLR 724, PC where it was held that the principle that
specific performance would not normally be granted 'may not
prevail in exceptional cases').
The amount recoverable by the borrower will depend upon
how easily it is able to get new funding, whether it gets such
funding and the cost of the new funding. If it manages to obtain
new funding but at a higher interest rate or for a higher fee then
the defaulting lender will pay the difference. I don't have time to
consider the case whereby (in, say, a project finance matter to
construct a hotel in China) a lender defaults and the borrower
cannot get alternative funding (so that the project can't proceed)
and suffers loss with respect to the construction contract and
loss of expected earnings from the project upon completion.
However, there is authority to say that a borrower can get
substantial damages for such a breach (see Manchester and Oldham
Bank Ltd v WA Cook & Co (1883) 49 LT 674). There is also
authority (see Anglia Television Ltd v Reed [1972] I QB 60) to say
that a party to a contract can claim for wasted expenditure in
preparing for the borrowing and related matters not only after
the loan agreement was concluded but also before, provided that
pre-agreement expenditure was within the parties' contemplation as likely to be wasted if the agreement were broken. This
alternative claim may be preferable where a borrower has
abandoned its project or cannot quantify its loss of future profits
(if it could claim for these at all).

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Commitment to Borrow
The borrowing commitment in Loan Agreements is usually
framed in the form of an option which must be exercised within
a specified period by service of notice on the lender. The
borrower will usually be expressly irrevocably bound upon
service of its drawdown notice. If a borrower fails to borrow
after service of the notice the remedy for the breach is damages.
Specific performance would very probably not be granted, as
in the case of lending.
Lenders usually require a commitment fee from borrowers
for the period that the loan is available but undrawn. Jf a
borrower does not borrow or cancels its option the lender will
still be paid this amount at least up until the time of cancellation.
Thus damages may only be nominal.
In a Eurocurrency loan, upon service of the drawdown notice
(usually 2 days prior to drawdown), the lender will normally
obtain deposits on the interbank market in order to fund the
loan for the relevant interest period. If the borrower fails to
borrow then the lender will incur a foreseeable loss with respect
to interest payable on the deposit or breaking the deposit.
A lender may make express provision in the loan agreement
for recovery of such amounts.
Conditions Precedent
Conditions precedent are the specific conditions that lenders
require to be complied with prior to lending. A standard
condition precedent clause will usually commence: 'The obligation of the lender to make the loan available is subject to the
condition.that it has first received . . .' & then incorporate the
list of conditions.
Conditions precedent are terms of an existing contract
between lender and borrower, not conditions of the loan agreement coming into existence. Thus a borrower may not have
fulfilled all the conditions precedent to the lending but the
lender's commitment to lend will still remain in spite of the
circumstances changing with the result that the lender's risk
becomes bad. It may be sensible to include a provision to allow

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155

the lender to withdraw in such circumstances eg a force majeure

clause or material adverse change in financial position or in
risk clause.
Conditions precedent will take two forms:
(1) the documents or evidence that a lender will want the
borrower to produce prior to the lending to show that it is
validly able to borrow and otherwise has the necessary corporate
capacity in connection with the specific transactions contemplated by the loan. The documents a lender will require will
obviously depend upon the circumstances of the transaction
itself but examples of standard requirements are
(i) corporate authorities (eg memorandum and articles of
association of the borrower and other security parties, directors resolutions approving the borrowing)
(ii) any other necessary approvals from government authorities, for example,
(iii) valid execution of required security documents
(iv) legal opinions if a foreign company is involved; and
(2) evidence that before money is lent no event of default has
occurred, the warranties made by the borrower in the agreement
or otherwise are still correct and no events of force majeure have
occurred. This would be the correct place in the agreement to
incorporate the additional conditions referred to earlier relating
to changes in risk to the lender etc.
Basic Financial Provisions

I now want to review what I shall call the basic financial

provisions contained in loan agreements. These are relatively
simple and straightforward but are the most fundamental
provisions and so the most important,
(i) Repayment Provision

This is the most basic covenant of all ie that the borrower

will repay the loan. It may provide for repayment by instal-

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Practitioners

ments due on fixed dates, a repayment of the whole amount

on the final maturity date or a combination of the two, instalments on fixed dates followed by a bullet payment on maturity.
(II) Prepayment

This allows a borrower to repay (or prepay) the loan in

advance of the due date for repayment if, for example, it
has obtained a windfall of cash and wishes to cut its debt
financing costs (Interest). The loan agreement will usually
provide that all or part of the loan can be prepaid but prepayments must be in minimum amounts and sometimes integral
multiples of large round sums to avoid prepayment in dribs and
drabs of inconvenient amounts. The leader may also wish to
charge the borrower a premium for prepayment to compensate
it for lost earnings, especially if the borrower has obtained
prepayment funds from another lender, for example, at a better
rate of interest. If a lender does not specifically require a
prepayment fee the borrower should request that the prepayment provision provide expressly that there will be no premium,
fee or penalty payable.
Prepayments of principal will usually be required to be
accompanied by interest accrued at the time of prepayment on
the amount prepaid and. also usually any other sums outstanding
under the agreement at the relevant time. The agreement
should expressly provide that they are only to be made on the
last day of Interest periods under the agreement or that if not
then the borrower will indemnify the lender for Its costs etc for
having to break its deposits from lenders to it. The agreement
will usually provide for the borrower to give comparatively long
notice of its intention to prepay and that such notice will be
irrevocable and binding once given. Similar provisions may
apply with respect to cancellation by a borrower of unborrowed
loans. There are other occasions when a borrower may prepay
which I shall come to shortly.
(iii)

Interest

I have already touched on interest payable under Eurodollar

loans in my introduction. The rate will be based on a

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commercially agreed margin above the Interbank offered rate

on the relevant market. It has become quite common (at least
in Hong Kong) for lenders (particularly Chinese banks) to use
the interbank offered rate shown on the Reuters screen at the
relevant time as the basis for interest. Whilst there is nothing
at all wrong with this (indeed it may be helpful to the borrower
in that it will be able to monitor interest rate trends more
closely with a view to choosing the most advantageous interest
period for itself) you should always provide for an alternative
means of determining the rate in case for some reason Reuters
stops showing such rates or Reuters goes bust. It is often provided
that the borrower can choose the length of interest periods ie the
length of the respective periods that the lender has to borrow
funds from the interbank market. If there are multiple advances
under a loan agreement it Is common to try to consolidate the
interest periods for them so that they run concurrently and end
on the same day. This makes administration of the loan and
payment of interest simpler. There should of course also be a
provision feat interest is actually paid on the last day of the
relevant interest period.
(iv) Taxes
Another important and usually standard provision is that
payments by the borrower under the loan agreement will be
made free of taxes without any withholding or deduction on
account of any tax and that if tax payments/ withholdings are
required to be made then the borrower will increase the amount
payable to the lender so that the latter receives the same amount
as if there had been no withholding.
If a bank Is subjected to new taxes which may mean that it
will no longer obtain the full benefit or return which it expected
to receive at the time the agreement was entered into, it may
seek the protection of a provision whereby the borrower will
indemnify it for its loss of expected benefit. A borrower may
wish to have an option to prepay the loan in these circumstances.
(v) Force Majeure / Change in Circumstances
This Is a standard provision which deals with the case where it

Law Lectures for Practitioners

becomes unlawful for a lender to continue its lending under the

agreement, otherwise to fulfill its obligations thereunder or to
charge interest. The provision will also usually cover the case
where a change in law increases the cost to the lender of continuing its lending or reducing sums receivable (other than for tax
reasons). It may also require the borrower to give an indemnity
for the lender's loss. In both cases it is usually also provided that
the parties will negotiate in good faith to try to work out a
suitable way of avoiding the consequences of the changes in the
law, (This provision may not be enforceable in that it amounts
to an agreement to agree). If no agreement can be reached,
rather than give indemnities, the borrower may have an option
to prepay.
Finally, there should be a provision dealing with inability to
determine interest rates or obtain funds on the relevant interbank market. In this case there will be consultations with a
view to determining art alternative way of obtaining funds or
fixing the interest rate. If no satisfactory arrangement is reached
the borrower may wish to prepay,
(vi) Payment Provision

This is a mechanical provision which deals with formalities

for when and where payments should be made. Obviously
payments should always be made on business days or if
repayment instalment's would fall on non-business days then
it should provide that payment will actually be made on the
next following business day. In Eurodollar loans all payments
of US Dollars must be made through New York or another
financial centre in the United Statesso both the lender
and the borrower must have accounts in New York in and out
of which payments can be made. Likewise, with respect to
payments of other eurocurrenciesthey should be made through
a financial centre in the country of the relevant currency.
Representations, Warranties, Undertakings and Events of Default

I now turn to the provisions of a loan agreement that may

require the most attention from lawyers and the borrower both

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in the drafting/negotiation stage of an agreement, in the actual

performance of the agreement and in its enforcement. These are
the warranties, undertakings (or covenants) and default provisions. The terms actually included will depend upon the
circumstances of the particular loan.
There would appear to be two practical remedies for breaches
of warranties and undertakings:
(I) damages for the specific breach (which may be difficult
to quantify or may actually be the same as the loan outstanding) or
(ii) acceleration of the loan on the basis of a default (there
will usually be a provision whereby there is a default if there
is a breach of warranty or undertaking).
These remedies should always be borne in mind when drafting
these provisions,
I think a distinction should be drawn between representations
and warranties and undertakings/covenants (one which is sometimes missed). Representations deal with the condition of the
borrower up to the time of signing the agreement whilst
undertakings deal with the situation after the signing when the
loan is outstandingwhat the borrower will ensure happens.
Representations form the basis upon which the lender lends
whilst undertakings are the basis upon which it will continue
to make funds available.
In view of the legal difficulties arising from the distinction
between warranties, conditions and innominate terms and the
consequences of breach thereof and also the doctrine of fundamental breach which were first considered in the Hong Kong Fir
Shipping Ltd v Kawasaki Kisen Kaisha Ltd [1961] 2 QB 26 there
should always be included in the default clause a provision that
a breach of a warranty and an undertaking will entitle the
lender to determine the loan and accelerate payment ie treat
the representations, warranties and undertakings as conditions,
as well as having the right to sue for damages. It is possible also
that warranties may be deemed to be conditions in Eurocurrency
loan agreements purely from trade usage because all persons

Law Lectures for Practitioners

Involved In the Eurocurrency market treat warranties as

conditions.
(I)

Representations and Warranties

I shall now briefly review certain specific representations and

warranties.
Material Adverse Change

This will relate to changes to the financial condition of the

borrower (and its subsidiaries or the group of which it is a
member). The question here is who decides whether the
material change has taken place or not. An objective test would
seem to be the fairest, most satisfactory way of deciding
although a lender may wish to have the discretion to decide.
The representation should be consistent in any event with the
equivalent default clause which usually provides that there will
be a default if the lender decides there has been a material
adverse change in the borrower's financial condition. A borrower
may try to negotiate qualifications to the warranty such as:
'to the best of its knowledge' or 'so far as it is aware'. It is
arguable whether these can be acceptable to a lender because
a borrower should actually know its financial condition. In any
event an objective test will probably apply to whether the
borrower should be aware of a change to its financial condition,
Existence of Borrower and Validity of Borrowing

These warranties have little value in practice except that

breach may entitle the lender to call a default. However, if the
transaction is void then the warranties by the borrower will not
cure the delect. If a foreign company is borrowing the
formalities necessary for it to enter into the agreement will be
governed by the law of the country of its incorporation not the
law of the agreement.
The following arc typical warranties:
(a) Status of the company borrowingie it is in existence and
established under the laws of the country of incorporation and
has power to conduct and continue its business.

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(b) Power -it has power to borrow and comply with obligations under the agreement.
(c) Consentsgovernmental and other consents to enter into
loan agreement and other pertinent documents including
corporate or other internal approvals, eg resolutions from
directors and shareholders, have been obtained.
(d) Non-violation of lawentering into the loan agreement
will not violate any law to which it is subject or its own
constitutional documents,
(e) Enforceable Obligation the agreement constitutes the
valid, binding obligations of the borrower enforceable in
accordance with its terms. This warranty should be qualified
by borrowers if possible. The warranty may not be entirely
correct in the case of all provisions in the loan agreement since
a court may wish to exercise its equitable jurisdiction with
respect to some terms. Indeed it is questionable that the
warranty should be included at allit relates to matters of
law whereas the other representations are as to questions of
act. A lender should rely upon legal opinions with respect to
this point. However that said, it Is standard to include it.
(f) Accountsaccounts delivered for the past year (or years)
are accurate. This is usually read in conjunction with the
material adverse change clause (which I have dealt with
above).
(g) JVb litigationthere is no litigation either in existence,
threatened or contemplated which may materially affect the
borrower's financial position or ability to perform obligations
under the loan agreement. Again this can be read in conjunction with the material adverse change clause.
(h) Negative Warrant such as no other indebtedness or no
security interests created.
No event

of default has occurred.

There will usually be a 'repeater' clause as well such that each

representation will be repeated on each drawdown date and on
each interest payment date or even continuously throughout the

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term of the agreement. Such a provision may have the effect of

turning representations into undertakings/covenants,
(ii)

Undertakings

As suggested earlier undertakings seek to maintain the position

of the borrower as set out in the representations for the period
of the loan. They are intended to protect the lender against the
risk of the borrower running into financial difficulties. In
addition, undertakings will deal specifically with the transaction
for which the borrower requires funds since the success of this
transaction will often bear very heavily, If not totally, upon the
borrower's ability to repay the loan. So again, the circumstances
of each loan will dictate what undertakings are needed.
Now let us run through the standard undertakings found in
most loan agreements,
No Change of Business The borrower will not change its
business or carry on any other business other than current
business, without the consent of the lender. This ensures that
the borrower docs not jeopardize the lender's position by undertaking a substantial new business which proves a drain on
resources which could have been used to repay/service the loan.
The borrower may then wish to ensure that the lender does not
unreasonably withhold consent to the changebut this is a
commercial matter.
Official Consents The borrower will maintain corporate
existence and ensure that It maintains and obtains all consents
and approvals to enable it to conduct and continue its business.
You may come across a reference to 'good standing' in some
provisions. This is an American concept which does not really
have a place in English/HK law documents.
Negative Pledges The basic negative pledge relates to
creation of other security over its assets in favour of a third
party, (either with or without the lender's consent).
The negative pledge is a contractual right between the lender
and borrower with two limbs If the automatic security clause is

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included. First, the lender can prevent the borrower from

creating circumstances subordinating the lender's loan to the
loans of other creditors, and, secondly, if the automatic
security clause is included, require that the security given to the
third party also becomes security to the lender for its loan. It
would seem that the second right Is a mere 'equity' to the lender
prior to breach of the undertaking which becomes an equitable
interest in property once the undertaking is broken. It would
seem therefore that such an interest would be registrable under
the Companies Ordinance in order to ensure Its validity against
a liquidator and the third party. If the borrower is an Individual
borrowing in the ordinary course of his/her business and the
security is potentially over book debts, the Interest would be
registrable under Section 48 of the Bankruptcy Ordinance,
Questions of priority also arise with respect to registration which
I do not have time to deal with here.
The negative pledge undertaking referred to above may be
supplemented by further negative undertakings, such as: no
issue of further shares, no payment of dividends, no disposal of
material assets, no creation of other indebtedness, no repayment
of other indebtedness. They depend largely upon the commercial
transaction.
A borrower may wish to limit the effect of these negative
covenants because in practice they may stultify its business to
the detriment not only of the borrower but also eventually the
lender. Thus it may request that it be allowed to carry on in
'its ordinary course of business' without these provisions applying ; or that they only apply to material assets; or that the lender
will permit relaxations of the rule upon request,
Purpose The lender will usually want to ensure that the
loan will be used for the particular purpose agreed that the loan
would be used for.
Financial Status Covenants It is standard for the borrower to
agree to provide the lender with its accounts and other information requested by the lender with respect to its financial position.
In addition to this, a lender may require a borrower to maintain
minimum standards for say, its net worth, working capital, debt

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to equity ratio, current assets less current liabilities. These again

depend on the commercial transaction.
(iii)

Events of Default

These are the specific events which lenders include in loan

agreements which will permit them to terminate their obligations with respect to the loan and accelerate its repayment.
They should be very carefully drafted and attempt to cover
every eventuality which from the lender's point of view would
justify discharge of the agreement, They should also be as
specific as possible so that the parties are entirely clear as to
when a default has occurred or will occur. This is important for
both a lender and a borrower. The lender requires clarity so
that its decision to call a default will not be subject to a challenge
that it was not entitled to do so (the courts are strict in their
interpretation, of commercial contracts) and the borrower so
that it knows exactly what it must do or not do to avoid default
inadvertently.
Events of default may be said to fall into two categories:
(a) automatic default provisions under which the occurrence
of an event will result in a default and
(b) where a grace period is allowed for a default to be
remedied.
From a lender's point of view grace periods (if agreed to at
all) should be kept as short as possible since they may restrict a
lender's ability to move quickly where a potential default has
occurred and the borrower is clearly in financial difficulties and
unlikely to be able to remedy the situation.
In law there would seem to be two forms of default by a
borrower(i) anticipatory breach ie the act/pronouncement of
refusal to perform a condition of" a contract which is due for
performance at a future time and (ii) actual breach during
performance.
In the case of anticipatory breach, if the lender accepts it the
contract is terminated before the time for performance (see
Hochster v De la Tour (1835) 2 E & B 678; 118 ER 922). The rule

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will also only apply to a fundamental breach (see Afovos Shipping

Co SA v Pagnan [1983] i WLR 195). If the breach is not accepted
then the contract will remain in full force and effect and the
non-accepting party will still be liable to perform all its
obligations.
The obvious relevance of anticipatory breach to loan agreements is that a refusal by a borrower to perform the contract
will entitle the lender to terminate the loan and demand
immediate repaymentthis ability will be especially useful
where the specific events of default do not cover the breach.
In the case of actual breach, the lender will have the right
under the standard default clause to declare an event of default,
terminate the loan and its obligations under the agreement and
demand repayment of all outstanding sums. In practice, lenders
sometimes do not immediately accelerate but will enter into
negotiations with the borrower with a view to reaching a
compromise, for example, a rescheduling of the debt.
Let me now turn to specific events of default which may
appear in a typical loan agreement.
(a) Failure to payThe obligation to repay is the most important
obligation in the loan agreement so failure to pay on a due date
is also the most basic event of default. A grace period to remedy
a failure to pay when due may be agreed to by a lender although
from a lender's point of view this is not recommended. If a grace
period is allowed it should be very short,
The courts in analogous shipping (charterparty) cases have
interpreted payment clauses very strictlyfailure to pay on the
due date or within the grace period will amount to a breach and
therefore a default. In cases where a grace period is given,
provisions may require a lender to give notice of non-payment
before the period begins to run. Case law has established that,
unless there is some trade practice to the contrary, where a
thing has to be done on a particular day it may be done at any
time up to 12.00 noon on that day. Further the notice from the
lender should only be given after expiry of the time for payment
(see the Afovos case referred to earlier).

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(b) Breach of representation, warranty or undertakingI have dealt

with this above In the section on representations, warranties and
undertakings. It is common for a borrower to request a grace
period to remedy these breachesparticularly of representations
and warranties.
(e) Cross defaultThis provision will usually provide that breach
of any other agreement to which the borrower is a party will
also constitute a breach of the loan agreement. It is often limited
to simple failure to pay other indebtedness. Such a provision is
prima facie unfair from the borrower's point of view since it
means that an event entirely unconnected with the loan agreement could result in a default. However its purpose is to put all
creditors on an equal footing, such that if a third party creditor
can call a default the lender will also be able to do so. In spite
of this such a provision does have serious implications for a
borrower so borrowers will usually try to qualify it such that it
will only apply to material indebtedness or breaches or that a
grace period will be allowed to remedy the non-payment or the
breach. In practice, it may not be necessary for the lender to
rely upon cross-default because the other events of default will
be so comprehensively drafted as to entitle the lender to accelerate at the time that the cross default occurs anyway.
(d) Insolvencyof the borrower and often also of its subsidiaries
and other members of its group.
(e) Enforcement proceedings-are commenced against the borrower's property or any other security given by the borrower is
enforced.
( f ) DissolutionA winding up resolution is passed or petition
presented.
(g) AuthorisationsAny necessary approvals are revoked, not
given or materially changed to the detriment of the lender's
position.
(h) Illegality or unenforceabilityIt becomes illegal for any party
to perform its obligations under the loan agreement (or support-

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167

ing security documents) or the loan agreement (or security

documents) become unenforceable.
(i) Material adverse changein the financial position of the
borrower (as mentioned earlier),
These particular events of default are only meant to be
examples and are by no means exhaustive. In particular, in a
project finance case a lender will want to include events of
default which relate to the project itself since the success or
failure of the project may determine whether or not the borrower
is able to repay the loan.
Other Default Provisions

The events of default clause will usually include provisions

providing for
(i) the payment of default interest on overdue amounts
usually accruing from, the date when due up to the date of
actual payment (whether before or after a judgment); and
(ii) general indemnities by the borrower to the lender with
respect to payments not being made when due or not on the
last day of an interest period, an event of default occurring or
loans not being drawn down after notice of drawdown has
been served as.a result of conditions precedent not being
complied with. The last two cover the lender's financing costs
with respect to having obtained deposits on the interbank
market.
There will also usually be an indemnity against currency
losses a lender may suffer if it obtains a judgement against the
borrower in a currency other than the currency of the loan,
Miscellaneous Standard Provisions

Finally I shall deal very quickly with the standard provisions

which will usually be included at the end of a loan agreement.
These provisions are sometimes referred to as 'boilerplate' but
nevertheless they do have some importance.

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(i)

Law

Lectures for

Practitioners

Set-Off

Contractual set-off rights can be a useful addition to a lender's

statutory or general rights against a borrower particularly
if the borrower does have substantial deposit accounts with a
lender. The question as to when the set-off rights arise should
be addressed in particular. Lenders may request that the
rights be exercised at any time that an amount is due and
unpaid whilst a borrower may wish to limit the exercise
of the right to the time of enforcement. This is a matter for
negotiation between the parties. One other important point
to note is that the set-off rights should not go so far as to create
security interests in the accounts in the lender's favour since
these would make the loan agreement registrable as a charge
under the Companies Ordinance. Lenders obviously do not
want the validity of their contractual rights challenged for lack
of registration. They also usually wish their loan agreements to
be private commercial documents and not part of the public
domain.
(ii)

Expenses

There should always be a provision whereby the borrower

agrees to pay the leader's costs (with specific reference to legal
costs) in respect of entering into the transaction and
negotiation and execution of loan documentation. The loan
agreement will usually also provide that the borrower pays all
stamp and other taxes and registration fees connected with the
loan documents and also the lender's costs of enforcing its
rights. These provisions will obviously be subject to the Court's
jurisdiction to award costs in any action.
(iii) Evidence

Determinations made by the lender under a loan agreement

may be expressed to be conclusive in the absence of error,
(iv) Assignment

Generally a borrower is not permitted to assign its rights or

obligations whereas a leader can, A borrower may wish to

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169

make a lender's assignment subject to its consent or at least

limited to recognized international financial institutions with a
branch in Hong Kong, A lender will usually include a right to
disclose information about the borrower to potential assignees.

Provisions making time of the essence are often included

although this may not be strictly necessary since time being of
the essence may be an implied term of the agreement anyway.
It does not hurt to make this an express condition however since
it makes for certainty particularly with respect to payment
provisions and events of default.
A provision to the effect that delay by the lender will not
operate as waiver or consent is also helpful.
There should also be a severability clause permitting the
lender to sever illegal, invalid or unenforceable provisions from
the agreement without tainting other provisions with such
illegality, invalidity or unenforceability.
(vi) Communications

Finally there will usually be a clause dealing with how the

parties should communicate, whether by telex, fax or letter
and also dealing with the time that such communications shall
be deemed to have been received by either party. In the case of
Hong Kong law documents where Chinese parties are involved,
communications should expressly be required to be made in
English or at least accompanied by a certified translation
into English.