Cross-default clauses in financing agreements were introduced in Spain as a result of the influence of common law in the 70s of last century and they have become standard in syndicate lending. In the case of a cross-default event, if the borrower fails to comply with its payment obligations to the lender, all the debts under other loans with the same lender or with third-party lenders can be declared due and enforceable. Such a clause produces a sort of domino effect and can make a borrower collapse easily. They have therefore a dissuasive effect and force the borrower to comply generally with its financial obligations. Its justification derives from concerns of a lender regarding the ability of the borrower to repay the loan i.e., its financial solidity, and the fear that it may negotiate with other creditors a waiver that may eliminate the cross-default and remedial action in exchange for advantages that does not benefit the first lender. Therefore, it reinforces equal treatment between lenders of the same borrower.
Cross-default clauses are permitted by Spanish law although there is little jurisprudence on the matter, but there are also limitations to take into account. In principle, they can be justified under the freedom of contract principle (article 1255 of the Civil Code) and they cannot be mistaken with exceptions to the relativity of contracts. Broadly speaking they can be considered as based on an external fact (the breach of a contract with a third party) which can be the source of an obligation that strictly speaking is not performed by the borrower and consequently gives a termination right to the lender having this cross-default clause. Notwithstanding all of this, cross-default clauses will be considered as abusive in contracts with consumers as a cross-default involves lack of reciprocity because it can only be exercised by the financing party (article 82.4 of Royal Legislative Decree 1/2007 on consumer protection). Moreover, article 7.2 Spanish Civil Code does not generally admit the abuse of law and the “anti-social exercise of rights” by a contracting party. In Spanish practice, it is common to grant the borrower a grace period of one month in respect of financing transactions in the ordinary course of its business. In other cases, the cross-default clause is limited to certain amounts that depend on the turnover or the debt of the borrower or relate to longer grace periods. Or else, the clause is restricted to certain types of debts or to affiliate companies of the borrower to avoid the domino effect. When these restrictions are onboarded in the loan or facility, the risk of cross-default being considered abusive is significantly mitigated or eliminated in the event of loans or facilities granted to ordinary companies in situations when the documentation is freely negotiated between the parties. But of course, banks always are in a stronger negotiating position (although they assume greater risk if the borrower fails to perform). Summing up, the cross-default clauses would be generally considered valid and enforceable if they comply with the above restrictions.