Havila v Abarca – what does it mean for banking?

The case in question is Havila v Abarca which has received attention as it looked at the concepts of heads of terms and “committed financing” - this will be of interest to those in the banking market and particularly those that work in origination.

Emmie Spring-Manek commented that “it’s an interesting case as we all understand the importance of clear and precise drafting, but this case really shone a light on a differing view on what “committed financing” might mean on a practical level. This is particularly important when you consider in originating financing there will be a series of documents produced and circulated by banks, none of which will represent a legally binding commitment to lend the financing detailed but also a reminder that if you intend “legally binding financing”, you should state this in clear and unambiguous terms. ”

The case itself related to two shipbuilding contracts. Havila had entered into contracts with Abarca (a shipyard) in respect of the purchase of two ships. Each of the shipbuilding contracts contained a number of conditions including that Havila needed to obtain long-term financing for the ships which were to be to confirmed with a “written commitment statement.” Abarca later sought to terminate the shipbuilding contracts when it deemed that Havila had failed to obtain financing.

Havila then issued proceedings arguing that they had received a non-binding term sheet, and providing details of the financing for the ships alone was sufficient to confirm financing. The court ruled in favour of Havila and held that the term sheet obtained by Havila was a “committed statement” of finance as required under the shipbuilding contract. The wording “committed” required a commercial commitment only, which could be satisfied with a non-binding term sheet or heads of terms only, as opposed to being unconditionally underwritten. The importance here is that if the parties had intended “committed” to mean a legally binding obligation to finance the deal then they could have easily expressed that intention.

This case reiterates and reinforces the importance of careful drafting when working on your finance documentation. Origination teams should ensure that any documentation (such as term sheets and commitment letters) clearly identify the level of commercial commitment that is intended – this can range from a non-binding term sheet/commitment letter with a term sheet on a ‘reasonable endeavours basis to provide (or subject to due diligence or credit approvals) to a fully underwritten and unconditional funding. Equally, if there is a commercial agreement that financing is to be obtained as a conditions precedent, it needs to be clear what this means in practice, do you only need evidence of an intention to finance or do you also need to see legally binding documentation? This is why it is important to specify exactly the nature of the funding required for the purposes of the contract and serves as a timely reminder to those drafting commitment arrangements for lenders as to how much care they need to take to specify what is intended.

Please contact Emmie and Brittany if you would like to discuss this further.