Recent Case Note: IBRC v Cambourne Investments Inc & Ors

Recent Case Note: IBRC v Cambourne Investments Inc & Ors on waiver of Conditions Precedent

Irish Bank Resolution Corporation Limited (“IBRC”) v Cambourne Investments Inc & Ors (the “Borrower") [2012] IEHC 262

In this case IBRC sought to recover debts exceeding €10 million from the Borrower.  The facilities were secured on a cinema complex in Dublin and IBRC relied on a guarantee from an individual (“PC”) and a company (“CCL”) Century City Limited. The conditions precedent set out in the relevant facility letters are central to the case in relation to enforceability of the Bank’s security.  The facility letter required an updated written valuation to support the combined value of the units in question prior to drawdown and also required that the loan to value ration was to remain at a specified level.These conditions precedent were waived by IBRC and the loan facilities were drawn.

PC argued that as the conditions precedent were never met, the Bank cannot rely on the terms of the facility letters in order to recover the amounts due by the Borrower.  His argument was that the waiving of the conditions precedent prevented the facility letters "crystallising as a contract of loan" and that the Bank was also prevented from recovering under the relevant guarantees provided by CCL and PC as the contract of loan was invalid.

IBRC argued that the conditions precedent in both facility letters were for the exclusive benefit of the Bank, and that the Bank was entitled to waive them, "unilaterally and without notice to either the borrower or the guarantor".

The Court looked at the interpretation of contracts generally and the background against which these facility letters were entered into in order to decide whether the conditions precedent were for the exclusive benefit of IBRC.
Charleton J outlined a two stage test for deciding whether a contract term is for the benefit of one party only. The condition must:

1. of its nature be exclusively for the benefit of one party; and
2. be severable from the contract.

Despite acknowledging that "it is difficult to see how the borrower took any benefit from the precondition except insofar as satisfaction of same was a precursor to the release of the funds", Charleton J found that the conditions precedent here were for the benefit of both sides.  Charleton made reference to an ordinary borrower relying on the valuation conducted by a Bank as "comfort as to the security of the bargain".

In relation to severability, Charleton also noted that the standard severability clause was not included in the facility letter which prevented severance of either condition. The court relied on an English case wherein it is stated that "if it is not obvious on the face of the contract that the stipulation is for the exclusive benefit of the party seeking to eliminate it, ... it cannot be struck out unilaterally". On that basis if the condition is for the benefit of both parties the consent of all parties to the waiver should be obtained.

The facility letters, and as a consequence the guarantees contained within the facility letters, were found to be unenforceable and the debt could not be recovered under the facility letters. Notwithstanding this the court held that the Borrower was liable to repay the debt. The Borrower agreed to borrow and IBRC agreed to lend the money and as a matter of law the Borrower was obliged to repay funds borrowed. While the guarantors were not liable to pay on foot of the guarantees contained within the facility letter both guarantors had provided separate “all sums due” guarantees to IBRC which were held to be enforceable as these were independent of the facility letter.

In light of this decision lenders must take particular care in drafting of facility letters to ensure that relevant conditions precedent are clearly stated to be for the sole benefit of lender, where applicable. A lender should review each facility letter carefully and consider the possible implications of waiving a condition precedent prior to advancing funds.  It would be prudent for a lender to obtain written confirmation from each borrower and guarantor of their knowledge and approval of the waiver of any such condition. A lender should consider amending standard drawdown notices to refer to any waiver of conditions precedent.

For advice on any of the above mentioned issues or if you have a Banking or Security query please contact your usual contact at Byrne Wallace Shields LLP.