International Banking Law: Condition Precedent

Pages: 17 (5780 words) Published: January 6, 2011
International Banking Law

Bluebird Ltd, owners of a football team, the Bluebirds, is in need of loan finance to provide the seating and other fittings in a shortly to be completed new football stadium. It negotiates a revolving credit facility with Popular Bank. The term sheet that forms part of a commitment letter prior to signing the agreement states that, because there will be a very short time in which to install the seating, work can begin on this prior to completion of the stadium.

Bluebird and Popular Bank sign the loan agreement. However, in July, when Bluebird seeks to draw the loan funds down to begin the job of installing seating, Popular Bank point to a clause in the loan agreement headed ‘Condition Precedent’. This states that no funding can be drawn down until a ‘Certificate of Health and Safety’ from the appropriate regulatory agency is granted to Bluebird.

After some delay, in August, Bluebird produce a certificate from the engineers building the stadium and the Bank allows a portion of the funds to be drawn down. In fact under the Safety of Sports Grounds Act 1975, as a designated sports ground, the stadium requires a safety certificate issued by the local authority. The delay in drawing down the money and beginning work on the seating causes the first two football games of the season to be cancelled with a loss of £50,000. Moreover, for failing to play these games, the Bluebirds has ten points deducted, making it likely that they will be relegated from the league causing even greater losses. Struggling with writing your law essay?

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The problems with the local authority’s certificate are widely reported in the national press. The local authority initially refused to issue a certificate until some seating was in place so that it could judge how easy the stadium would be to evacuate. Popular Bank is likely to have known of these reports and that the certificate issued by the engineers was not sufficient to meet the condition precedent but they allowed the funding to be drawn down given the impasse with the local authority.

One of the warranties in the loan agreement is that the furnishing funded by the loan is in good working order and well maintained. In fact in only the second game held in the stadium in September, after a particularly heavy defeat to a local rival team, the Swans, many Bluebird supporters riot, tearing up seats and wrecking the Directors’ boxes that had been installed. Bluebird Ltd does not report this to Popular Bank but seek to draw down more funding to pay for the repairs to the damaged seating and boxes. The loan agreement states that warranties are taken to be repeated on draw down of further funding and that compliance with warranties is itself a condition precedent of further funding being made available.

For the next sixth months, the stadium functions well but Bluebird have a poor season and are unable to make up the gap of ten points deducted at the beginning of the season. Relegation from the league will prove very costly and may threaten the financial viability of the Bluebirds. Popular Bank is worried that it will not recover its money. In March it points to the inadequate safety certificate and states that the original funding paid in the previous August must be repaid, together with all interest. Popular Bank seek neither to cancel the agreement as a whole nor to recover any other funding.

The only way that Bluebird could repay the loan is to borrow from another source. Another bank, Bob Bank, is willing to lend in principle but would require security. Bluebird has ample...

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* Chitty on Contracts, including 4th Cumulative Supplement, London: Sweet & Maxwell, 2004
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* Ellinger, E.P, Lomnicka & Hooley, Modern Banking Law, Oxford: Oxford University Press, 2002
* Youard, Richard, Default in International Loan Agreements, Parts 1 & 2, J.B.L. 1986, Jul, 276-281 & J.B.L. 1986, Sep, 378-392
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