In the recent decision of Maxam Opportunities1, the British Columbia Supreme Court determined that, absent clear language to the contrary, a lender cannot require a borrower to draw on funds made available to the borrower under a credit agreement, despite the fact that substantial effort has been invested by the lender to set up the credit facility.
In this case, the plaintiffs (collectively Maxam), were private equity funds providing financing to Canadian companies. The defendant, 893353 Alberta Inc. (893), was seeking funding to acquire additional car dealerships and entered into a “Term Sheet” with Maxam, under which the parties would move forward with the purpose of consummating a mezzanine loan agreement (the Credit Agreement). The parties experienced several delays in finalizing the Credit Agreement and eventually 893 was at a critical stage in finalizing the purchase of one of the car dealerships. With the conclusion of the Credit Agreement still uncertain, Maxam proposed the advancement of a $15 million, six-month “Bridge Loan” to 893, and the Bridge Loan was ultimately advanced. Both the Bridge Loan and the Term Sheet contained an exclusivity provision prohibiting 893 from entering into any agreement with a third party in respect of any “similar transaction”, given the substantial effort that Maxam would expend to complete the documentation required for the Credit Agreement.
After lengthy negotiations, Maxam, 893, and others finally executed the Credit Agreement. Under the Credit Agreement, a credit facility of “up to $30 million” for five years was made available to 893. During the process of finalizing the Credit Agreement, several disputes had arisen between the parties, resulting in tension in their relationship. As such, shortly after the Credit Agreement was entered into, 893 contacted a third party financer, the defendant 729171 Alberta Inc. (729), with a request to borrow $15 million on a short term basis. 729 advanced the money to 893 and 893 completed its purchase of a car dealership using the 729 loan, such that 893 never drew down on the $30 million credit facility provided to it by Maxam. Upon learning that 893 had used alternate financing to acquire that car dealership, Maxam issued a notice of default to 893 under the Bridge Loan asserting that the 729 loan was in breach the exclusivity provisions. Maxam ultimately filed a statement of claim alleging breach of contract, among other things.
One of the main issues before the Court was whether there was a breach of the Credit Agreement and, more specifically, whether 893 was obliged to borrow funds from Maxam to finance the acquisition of the car dealership.
Maxam took the position that if 893’s obligation to borrow from the credit facility was not found in the express words of the Credit Agreement, then the obligation to do so was an implied term of the Credit Agreement, as it would be commercially absurd to interpret 893’s ability to withdraw funds under the Credit Agreement as optional. The Court ultimately rejected Maxam’s position, finding that there was no express wording in the Credit Agreement obliging 893 to draw down on the funds and that such a term could not be implied.2 In doing so, the Court began by emphasizing the sophisticated nature of both parties as well as the fastidious way in which Maxam had considered and drafted the various agreements. The Court used Maxam’s meticulous approach to drafting the agreements as well as past examples of Maxam’s strict adherence to the written terms of the agreements to support the Court’s opinion that Maxam viewed the relationship between it and 893 as being governed by a strict reading of the language in the agreements.3
The Court then turned to the wording of the Credit Agreement and concluded that a plain reading of the terms in the Credit Agreement did not impose an obligation on 893 to utilize the funds made available to it under the Credit Agreement. In coming to this conclusion, the Court focused on the permissive language contained in the Credit Agreement, such as the “Credit Facility will be made available” and 893 has requested that Maxam “make available to it a mezzanine credit.” The Court concluded that this language did not impose a mandatory obligation upon 893 to draw funds and that, in essence, 893 was provided the option to draw funds or not.4
After determining that the Credit Agreement contained no express requirement on 893 to drawdown on funds, the Court considered whether there was an implied term obligating 893 to utilize the funds made available under the Credit Agreement. The Court found that an implied term requiring 893 to draw down upon the credit facility was not necessary to give business efficacy to the agreement.5 Maxam stood to earn in excess of $17 million in interest by making the credit facility available to 893, a fact that the Court concluded was “entirely consistent with business efficacy.” The Court also emphasized that implying such a term would be inconsistent with the Credit Agreement as a whole, particularly in light of language in the Credit Agreement expressly excluding any prior understandings or agreements relating to the Credit Agreement in conjunction with the sophistication of Maxam and its solicitors and the care and detail taken in drafting the agreements.6
The Court also rejected Maxam’s assertion that accepting the characterization of the Credit Agreement as an option leads to an absurd result. In doing so, the Court emphasized that resorting to construing a term in a contract through the rule against absurdity occurs only when ambiguity exists. In this case, the Court did not find any ambiguity in respect of the language of the Credit Agreement, nor did the Court find the outcome absurd or inconsistent with the Credit Agreement, concluding that while there was no doubt that 893 expected to utilize the credit facility provided by Maxam and that Maxam too expected this, that does not in itself create a legally binding and enforceable obligation.7
Not all loan arrangements contemplate an obligation to borrow, and the inclusion in a credit agreement of covenants requiring the payment of standby fees for making a credit facility available and work fees provide the lender with sufficient protection. However in those situations where the lender’s expected return is based primarily upon draws being made, the Maxam Opportunities decision serves as a reminder that in the absence of clear language requiring a borrower to drawdown on a credit facility, courts will not be willing to imply such a term into a credit agreement, particularly where great care has been taken in drafting the agreement and where the lender stands to obtain a substantial benefit should the borrower choose to drawdown on the facility.
1 Maxam Opportunities Fund Limited Partnership v. 729171 Alberta Inc., 2015 BCSC 271. [Maxam Opportunities]. The detailed judgment addressed several issues. This commentary focuses on the contractual terms relating to the contractual or implied obligation to borrow.
2 Maxam Opportunities, at paras. 111 and 123.
3 Maxam Opportunities, at para. 109.
4 Maxam Opportunities, at paras. 112 and 113.
5 Maxam Opportunities, at paras. 121 – 123.
6 Maxam Opportunities, at para. 122.
7 Maxam Opportunities, at para. 126.