Listing of events of default: Overview, definition, and example
What is a listing of events of default?
A listing of events of default refers to a section of a contract, typically in a loan agreement, credit agreement, or other legal documents, that outlines specific situations or conditions under which a party (often the borrower) is considered to be in default. These events trigger certain rights for the other party (such as the lender), such as the ability to demand immediate repayment, terminate the agreement, or pursue legal action. Events of default can range from failure to make payments, to breaching covenants, to insolvency or bankruptcy. The listing provides clarity on what actions or failures by the borrower will result in default under the terms of the agreement.
Why is a listing of events of default important?
A listing of events of default is important because it clearly defines the conditions under which a party can be considered in default and what actions can be taken as a result. This is crucial for protecting the interests of the non-defaulting party, especially in financial agreements where timely repayment and adherence to terms are critical. By outlining these conditions in advance, both parties can have a shared understanding of the rules and consequences, reducing the likelihood of misunderstandings or disputes if things go wrong. For businesses, having a clear listing of events of default helps manage risk and ensures that they can act swiftly if the other party fails to meet its obligations.
Understanding a listing of events of default through an example
Imagine a small business takes out a loan to fund its expansion. The loan agreement includes a listing of events of default, which might include conditions like:
- Failure to make a scheduled loan payment.
- Breach of any financial covenants, such as failing to maintain a certain debt-to-equity ratio.
- Insolvency or filing for bankruptcy.
- Defaulting on other significant debts that could affect the company’s ability to repay the loan.
If any of these events occur, the lender can declare the business in default and may have the right to demand full repayment of the loan immediately, or take other actions to protect their investment.
In another example, a supplier might have a contract with a retailer for regular deliveries of goods. The contract could include a listing of events of default that includes conditions such as:
- Non-payment for delivered goods within a specified time frame.
- Failure to meet agreed-upon delivery schedules.
- Breaching quality standards set out in the agreement.
If any of these events happen, the supplier may have the right to terminate the agreement or pursue other remedies for breach of contract.
An example of a listing of events of default clause
Here’s how a clause about events of default might appear in a contract:
“The following events shall constitute events of default under this Agreement: (i) failure to make any payment due under this Agreement within 30 days of the due date; (ii) the Borrower’s insolvency or filing for bankruptcy; (iii) failure to comply with any financial covenants set forth in Section 5; (iv) the Borrower’s breach of any material term of this Agreement that is not cured within 10 days of notice from the Lender.”
Conclusion
A listing of events of default is a critical provision in contracts that helps define the specific conditions under which one party can be considered in default and outlines the potential actions that the non-defaulting party can take. It provides both parties with clarity on their rights and obligations, helping manage risks and ensuring that the contract is enforceable. By clearly listing events of default, businesses can better understand the consequences of non-performance and take proactive steps to avoid triggering default scenarios.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.