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High Court clarifies definition of written committed statement of financing in contracts

Out-Law News | 08 Feb 2023 | 3:35 pm | 2 min. read

A recent English High Court decision demonstrates the importance of precision when referring to and drafting written committed statements of financing, according to two legal experts.

Mhairi Morrison of Pinsent Masons said the dispute between Havila Kystruten AS and Hijos de J. Barreras SA made it clear that banks needed to “take care when drafting term sheets and commitment letters” to ensure “that they are clear and reflective of whether or not a legally binding commitment is being entered into”, and that any offer, which is not intended to constitute a legal binding commitment, “is subject to provisions of documentation that are satisfactory to the bank.”

The case arose when Hijos de J. Barreras SA, a shipbuilding yard in Spain, attempted to terminate two contracts it entered into with Havila for the design and production of two vessels. Havila had agreed a term sheet for a financial leasing arrangement with Chinese lender BoComm Financial Leasing Co. Ltd in July 2018, notifying the yard via email. In November, BoComm also wrote to the yard confirming that its board had approved the term sheet. It said that drawdown would be available once further documentation had been completed and conditions met.

But in November 2019, having provided an additional indicative term sheet to the yard that was signed by an alternative lender, GTLK, in June of that year, the yard said Havila had failed to comply with a contractual obligation to provide a “written committed statement of financing” for both ships. Havila claimed that the yard was not entitled to terminate the contracts and itself gave notice to terminate them in February 2020.

In December 2022, the High Court found that the failure to provide a “legally binding document” did not constitute a breach of the contractual requirement to provide a “written, committed statement of financing”. Handing down his judgment, Mr Justice Henshaw said that a “written committed statement” is “simply, a statement in writing of the bank's commitment to lend”, and that it “would be a strange choice of words” in a legal document to describe “a binding legal obligation to lend”. Mr Justice Henshaw added that the wording used in both contracts was “more apt to refer to a commercial commitment to lend, whereby the bank has given an 'in principle' indication that it will lend on specified terms, but without any binding legal agreement yet having been entered into”.

“Term sheets, agreed heads of terms and comfort letters are frequently used as a stage in the formulation of a deal, providing a degree of commercial assurance that proposed terms which have been negotiated (often at length) are agreed in principle, but with no binding legal commitment having yet been entered into. A legally binding agreement may be reached only after further stages which may include internal approvals, legal opinions or agreement on full documentation,” Mr Justice Henshaw said.

He added that references to "conditional conclusion" and "final approval", used the language of commercial decisions about whether or not to proceed in principle with a lending proposition. “At the very least, they do not point clearly towards a need for binding legal documentation to have been concluded,” Mr Justice Henshaw said. He dismissed the yard’s claim.

Jaygo Norris of Pinsent Masons said: “Term sheets can demonstrate commercial intention to finance but will not constitute a binding legal obligation, provided that it is clear that any offer to lend is subject to the provision of documentation satisfactory to the lenders, satisfaction of internal conflict and credit checks and other internal approvals to be carried out by the lenders. In this case a term sheet was sufficient to fulfil the ‘written committed statement’ component of the agreement, and therefore there were no grounds for termination of the contract.”

He added: "Accordingly, termination on the basis that only legally binding documents would suffice was, in this case, a repudiatory breach by the yard and therefore entitled Havila to damages, including for further costs incurred as a result of wasted expenditure."

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