9/12/19 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) 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.
