Loan Agreement Indemnity Clause

The High Court`s decision in K/S Preston Street v Santander [2012] EWHC 1633 and the recent decision in Barnett Waddington/RBS [2015] EWHC 2435 underscore the importance of careful preparation of advance clauses and the need for legal advice in the event of client problems. Both cases involve the introduction of pre-compensation clauses in fixed-rate loan contracts. In any event, borrowers wanted to pay the loan in advance. The banks sought compensation for the costs/losses they incurred as a result of the early down payment. Borrowers disputed the fact that banks were allowed to recover these costs/losses. “In addition to the down payment fee… the partnership frees the bank at the request of fees, losses, expenses or responsibilities… following the repayment of the loan during the fixed rate period… The question remained, therefore, what costs/losses the bank would recover. Could it recover both its past and foreseeable loss of interest at the contractual rate, net of what it could earn to borrow money on the interbank market? The judge found that, as the claim was not based on a breach of contract (since the loan contract authorizes prepayment), the Sanctions Act (and the assessment of future losses) was not applicable. He therefore found that the bank had to see its actual loss on the basis of the borrower`s contractual right to an early down payment.

First, the court had to decide whether this clause applies to advances. The borrower argued that the indemnity clause applied only to the “repayment” of the loan and not to the “down payment.” The loan agreement clearly distinguished between the two and had a separate down payment clause that defined the fees to be paid at the time of the down payment. It argued that any ambiguity against the bank should be interpreted as the editorial party (contra proferentum). The bank argued that this analysis was patently flawed and made no commercial sense under the agreement. The judge found that the use of the word “infaller” and not the phrase “incurred or incurred” was important. He also indicated that compensation should be triggered “on demand.” He therefore found that compensation was limited to the bank`s crystallized actual costs or losses. The compensation clause indicates when the borrower must compensate the lender (for example. B at the lender`s request or within the business days requested by the lender). It must also clearly state what the borrower must compensate the lender against. For example, in cases, there is an emphasis on the need to carefully develop compensation clauses.

Note the following key elements: the court found that borrowers are not responsible for these fees, since the internal swap is not considered a “financing transaction.” This is not a “transaction” because the definition of loss in the loan agreement and the compensation at issue do not prejudge a transaction between two different legal entities and different divisions of the same bank. Nor could it be considered a “financing transaction” since it was not a transaction carried out by the Bank to finance the facility to borrowers. In Barnett Waddington, when the bank entered into the credit agreement with the borrowers, it also entered into an internal hedging agreement with another department of the bank. The loan agreement provided that borrowers would compensate the Bank for costs “incurred in the liquidation of financing transactions related to the facility.” When the borrowers wanted to pay the loan in advance, the bank tried to charge them about $2 million in termination fees, which it said was due to the internal swap.