“Default or Event of Default”

A few months ago a reader asked me what I thought of the phrase default or event of default. Here, belatedly, is my answer, along with my thoughts on a related phrase, has occurred and is continuing:

“Default or Event of Default”

The phrase default or event of default is a fixture of loan agreements. Usually default and event of default are used as defined terms.

Event of Default is straightforward enough—it’s defined to mean any of the sorts of bad things a bank wouldn’t want to have happen to its borrowers. As for Default, it’s given the following definition, or some variation:

“Default” means any event that with notice or passage of time, or both, would constitute an Event of Default.”

Consistent with that, Charles Fox’s Working With Contracts (the first edition—I don’t yet have the second edition) says the following:

Many agreements characterize breaches that have not yet become “events of default,” because required notices have not been given or required cure periods have not yet run, as “defaults.” The existence of a default may trigger lesser remedies, such as the creditor’s refusal to make additional advances.

That’s all well and good, but a defined term should give the reader some sense of the definition. Considering the defined terms Default and Event of Default without consulting the definitions, one would be entitled to wonder whether they don’t in fact mean the same thing.

That’s why some agreements use instead the defined terms Potential Event of Default and Event of Default. I recommend that you follow their lead—those defined terms reflect the definitions better.

“Has Occurred and Is Continuing”

While I’m at it, let’s consider the phrase has occurred and is continuing.

Contracts refer to remedies that are triggered by an event of default. They also make it a condition that an event of default (and potential event of default) not have occurred. In the latter context, contracts often use the phrase has occurred and is continuing:

The obligation of Lenders to make any Loan is subject to the further satisfaction or waiver of each of the following conditions: … (c) no Default or Event of Default has occurred and is continuing as of the date that Loan is made.

To state the obvious, an event of default is defined by reference to events, not status. For example, filing for bankruptcy protection is an event.

That works when an event of default is a trigger, but it’s problematic when you’re dealing with conditions, which are geared to status on a given day. It generally doesn’t make sense to attempt to turn an event such as a bankruptcy filing into a status by projecting it into the future by means of “is continuing.” A filing happens at a moment in time—it doesn’t continue. And if a borrower representation was inaccurate, it was inaccurate at signing or closing; it doesn’t make sense to say that the inccuracy “is continuing.” (But if the borrower fails to do something, such as make a payment, it’s OK to say that the failure is continuing.)

So it might be a good idea to come up with two sets of default terminology, one to use with default as a trigger, the other to use with default as a condition. But I’m in no immediate danger of having a bank ask me to redraft its loan documents, so I’ll leave it at that for now.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

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