Loan document terms are ambiguous when they are reasonably capable of being interpreted in more than one manner. Contract law often provides that an ambiguous term in a loan document is interpreted against the drafting party. This is especially true in a situation where the parties have unequal bargaining power. For lenders, this means that if a loan document contains ambiguous language, a court might interpret the disputed language in a way that favors the borrower and results in a disastrous or costly outcome for the lender.
Even in situations where the above principle is inapplicable, such as a loan involving a sophisticated commercial borrower being represented by sophisticated counsel, loan document ambiguities may mean that the “best case” outcome for a lender still requires long, contentious and costly litigation in order to achieve.
Lenders should take the following steps to avoid the above outcomes:
- Avoid cutting and pasting summaries of key requirements contained in credit approvals directly into loan documents;
- Be careful not to overly complicate important loan terms, such as financial covenants, payment structures, release terms, default provisions and rights and remedies;
- Define important terms within the loan documents themselves or refer to a credible and commonly used outside source (such as GAAP or the UCC) for definitions;
- Ensure consistency within each loan document and across multiple loan documents;
- Ask a colleague to review and provide their interpretation of key points or provisions;
- Consider having loan documents (or certain key provisions) drafted or reviewed by legal counsel to help identify any potential ambiguities; and
- Maintain records of communications and negotiations with the borrower to support the intended meaning of key terms.
If you have questions or need help drafting and negotiating loan documents, the Financial Services attorneys at Poyner Spruill LLP would be happy to assist.
