Force Majeure Clause In A Loan Agreement

Is it not time for lenders and borrowers to consider including a « force majeure » clause or similar provision in loan contracts to account for global pandemics such as Covid-19? Under South African law, the case of force majeure grants a party (the « party concerned ») a facilitation in the event of an unforeseen circumstance that prevents the party concerned from fulfilling its contractual obligations to the other party. The inclusion of a force majeure clause in a loan agreement should be carefully considered by a lender and tailored to the lender`s specific requirements. There must be a link (direct or indirect) between the occurrence of the force majeure event and the borrower`s omission. To reach the threshold of this defence, a force majeure event must alter the circumstances so that the performance of one party is virtually worthless to the other, thus nullifies the objective of the second part, for which it has declared itself ready to do so. In other words, without this objective, the transaction would not have made much sense when it was created. Given that force majeure is largely due to contract law, the explicit language of the definition of events mentioned in its scope and the context in which such a concept is used in a loan contract is essential, since courts must generally interpret these definitions and clauses strictly. In the current context, it is important to first determine whether and how COVID-19 and its effects fit into a definition of force majeure. Indeed, some definitions of force majeure explicitly provide for or contemplate « epidemics, » « pandemics, » « contagious diseases » and other public health events. But many don`t. Other definitions may, in general, be broad and provide indeterminate definitions that allow us to understand the general spirit that a party is not responsible for events outside its control and that provide « including but not restricted » linen lists of objects that would be covered but not exclusive.

If the definition of pandemics, etc., such as COVID-19, does not clearly cover, an analysis must be conducted to determine whether COVID-19 or any of the potential outcomes of COVID-19 can be covered by the definition of force majeure. Examples may be, depending on the explicit language of the definition, such as « national emergencies, » « material shortages, » « financial market disruptions, » « disruptions to domestic or international transport, » « state bans or regulations » or similar terms. Covid-19 is itself a declared « national state of emergency »4 and would therefore be included in a definition incorporating national emergencies. To the extent that supply chain disruptions (including the supply of materials) or government responses to these disruptions have been or have occurred as a result of covid 19 or state responses to such disruptions, such disruption could result in a « material shortage » or be interpreted as a disruption of transport resulting in a case of force majeure. In order to argue a case of force majeure, it must therefore be determined that the particular event or condition claimed (COVID-19 and its results in the current situation) is in fact within the explicit contractual definition or the applicable clause of the loan contract. Otherwise, there is no valid right to a case of force majeure. « significant negative effects, » a material adverse effect on (a) assets, assets, prospects or condition, or the financial or other condition of the parties to the loan, b) the ability of a party to meet its obligations; (c) the lender`s security links, or the priority of those links, or (d) the lender`s ability to assert its rights or remedies in a loan file.