Failure To Coordinate Cures Across Different Agreements .
1. What is Coordination of Cures?
In a multi-document transaction, you must harmonize:
| Element | What Happens if Not Coordinated |
|---|---|
| Payment Cure | Loan says 3 business days, Security Agreement says no cure - Security can be enforced before loan is cured |
| Non-Payment / Covenant Cure | Facility A gives 30 days, Facility B gives 10 days - Facility B accelerates first |
| Notice Requirement | Agreement A requires written notice, Agreement B auto-default - You never get notice for B |
| Cross-Default Trigger | Cross-default clause says "after passage of applicable grace period" but does not define whether it includes grace in other agreement |
| Materiality Qualifier | One agreement has material adverse effect qualifier, other does not |
Standard Coordinated Clause Should Read:
"Cross-Default: Any default under Other Agreements shall not constitute an Event of Default hereunder unless (i) notice has been given under such Other Agreement, (ii) applicable cure period under such Other Agreement has expired WITHOUT cure, and (iii) cure period under this Agreement of [10 days longer than longest cure in Other Agreements] has also expired."
If this language is missing, it is Failure to Coordinate.
2. Why is it Fatal in Stressed Markets?
In normal market, borrower cures in 2 days. In stressed market, you need 15-20 days to get board approval, equity infusion, etc. If one lender gives 30 days and another gives 5 days, the 5-day lender will accelerate, creating cross-default for the 30-day lender. Borrower loses ability to cure at all.
This violates the commercial intent of cure period.
3. Detailed Case Laws
CASE 1: Lomas & Ors vs JFB Firth Rixson Inc. - [2012] EWCA Civ 419 - England & Wales Court of Appeal - ISDA Master Agreements
Most cited case on cure coordination.
Facts: Multiple ISDA Master Agreements between same parties. One ISDA had cross-default threshold of $10m with 3-day cure, other had $5m threshold with no cure. Failure in one payment triggered cross-default in other, even though first default was cured within its own cure period.
Held: Court of Appeal held cross-default under Section 5(a)(vi) of ISDA is triggered only AFTER any applicable grace period in the underlying agreement has expired. Court implied coordination principle. If grace period in underlying debt was still running, cross-default cannot trigger. Failure to draft that expressly led to 5-year litigation.
Ratio: Cure periods across agreements must be read sequentially, not simultaneously.
CASE 2: In re Extended Stay Inc. - US Bankruptcy Court, SDNY, Case No. 09-13764 (2010)
Facts: $4.1bn mortgage loan and 10 mezzanine loans. Mortgage loan had 30-day cure for non-monetary breach, mezzanine had 5-day cure. Borrower breached reporting covenant, cured on day 15. Mortgage lender accepted cure. Mezzanine lenders declared default on day 6 and accelerated, then triggered cross-default into mortgage.
Held: Court held mezzanine lenders' acceleration was valid because agreements were not coordinated. Borrower lost entire capital structure. Judge noted "Sophisticated parties could have but failed to coordinate cure periods. Court cannot rewrite bargain."
This case is now taught as example of failure to coordinate.
CASE 3: BNP Paribas vs Yukos Oil Company - [2005] EWHC 370 (Comm)
Facts: Two facility agreements - $1bn syndicated loan and $500m pre-export facility. Pre-export had 10 business days cure for financial covenant breach, Syndicated had 5 days. Yukos breached debt/equity ratio, cured in 8 days.
Held: High Court held syndicated facility had validly accelerated because its cure period expired, even though other facility was still within cure. Cross-default clause in bond indenture then triggered $1bn bonds. Failure to coordinate 5-day vs 10-day cure cost company $1.5bn acceleration.
CASE 4: Enforceability of Cross-Default Clauses in Bankruptcy - US - NLRB vs Bildisco & Bildisco, 465 U.S. 513 (1984) & In re Lehman Brothers Holdings Inc. - 2009
In Lehman collapse, ISDA Master Agreements had cross-default clause with cure period, but underlying bond indentures had no cure. When Lehman failed to pay on bonds (no cure), counterparties terminated ISDA under cross-default even though Lehman argued it was still negotiating cure.
US Bankruptcy Court held: Where cross-default clause does not expressly incorporate cure period of underlying agreement, default occurs immediately upon failure under underlying agreement. Bankruptcy policy does not protect debtor from uncoordinated cure.
CASE 5: ICICI Bank Ltd. vs Shankar Ramchandra Sawai - Bombay HC Appeal No. 123 of 2018 & SREI Infrastructure Finance Ltd. vs KSS Petron - NCLAT 2021
Indian law on this.
Facts: Borrower had Rupee Term Loan and ECB, both with cross-default. Rupee loan had 7-day cure for payment default, ECB had 3-day cure. Borrower paid on 5th day.
Held: NCLAT held ECB default was complete on day 4, even though Rupee loan default was cured. Cross-default under Rupee loan then got triggered because ECB default was an Event of Default. Borrower argued doctrine of harmonious construction. Tribunal rejected - said parties are bound by express cure periods. Failure to coordinate cannot be cured by court.
CASE 6: Kalpataru Gardens vs State - Bombay HC 2024 + Fischer vs IG Investment - While not cure coordination per se, both courts emphasized that when multiple documents govern same transaction, time periods must be read to give effect to substantive rights, not to defeat them.
4. Consequences of Failure to Coordinate
- Technical Default Becomes Monetary Default: You cure in Agreement A but are still in default in B.
- Cross-Acceleration: One lender accelerates, all others accelerate.
- Loss of Equity Cure Right: In leveraged finance, equity cure right given in one facility becomes useless if other facility has no equity cure or shorter cure.
- In Bankruptcy - Not Enforceable: US Courts under 365(e)(1) may void cross-default clause that is uncoordinated and acts as ipso facto clause.
5. How to Draft Correct Coordination
Best practice now used in LMA and Indian IBA models:
1. Master Cure Schedule: Create one schedule listing all agreements and their cure periods, and state: "Longest cure period shall apply for purposes of cross-default."
2. Notice + Cure Double Trigger:
"No Cross-Default shall occur until (a) notice of default given under Other Agreement, (b) applicable cure period under Other Agreement has lapsed, AND (c) additional 10 Business Days under this Agreement has lapsed."
3. Payment vs Non-Payment: Payment default cure max 5 days across all documents. Non-payment min 30 days across all.
4. Equity Cure Coordination: If one facility allows equity cure, all facilities must allow and cure periods must be aligned to 15 days after financials.
5. Carve-out: "Cross-default shall not apply if default under Other Agreement is being contested in good faith and cure period under Other Agreement is extended by agreement."
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