Facility Agreement Force Majeure: What You Need to Know
Force majeure is a legal term that refers to unforeseeable circumstances that prevent parties from fulfilling their obligations under a contract. Facility agreements are no exception, and it’s important to understand how force majeure clauses work in such agreements.
A facility agreement is a contract between a borrower and a lender that outlines the terms and conditions of a loan, including repayment schedule, interest rate, and collateral. The agreement also includes clauses that protect both parties in case unforeseen events occur. One of these clauses is the force majeure clause.
A force majeure clause is typically found in the boilerplate section of a facility agreement, and it defines the events that can be considered force majeure. These events can include natural disasters, acts of terrorism, wars, strikes, pandemics, and other extraordinary circumstances outside the control of the parties. The clause excuses the borrower from performance of its obligations if one of these events occurs.
However, it’s important to note that facilities agreement force majeure clauses are usually narrowly interpreted by courts. The event in question must be the direct cause of the borrower’s inability to perform, and the borrower must have taken reasonable steps to mitigate the impact of the event.
For example, if a borrower is unable to pay back a loan due to a hurricane that destroyed their business, the force majeure clause may excuse them from performance. However, if the borrower did not have insurance and did not take any steps to secure the property before the hurricane hit, the force majeure clause may not apply.
Additionally, force majeure clauses do not automatically terminate the agreement or the obligation to pay interest on the loan. The clause simply excuses the borrower from performance of its obligations for the duration of the event.
It’s crucial for both parties to carefully review and negotiate the force majeure clause in a facility agreement. The events included in the clause should be specific and relevant to the borrower’s business operations, and there should be clear guidelines on how the clause will be invoked and what steps must be taken to mitigate the impact of the event.
In conclusion, the facility agreement force majeure clause is an essential provision that protects both parties in case of unforeseeable events. However, borrowers must understand that courts may interpret the clause narrowly, and it’s crucial to negotiate clear and specific terms in the agreement. With these precautions in mind, you can ensure that your facility agreement is effective and that you are protected in case of emergencies.