LEGAL ISSUES

Issues with lenders/loan agreements and force majeure clauses


LENDERS/LOAN AGREEMENTS

Businesses that borrow money to finance inventory or for working capital should look at various components of their loan agreement to see if they’re impacted by the coronavirus outbreak.  Some examples include one-time expenses that may impact net income or EBITDA calculations, whether you can draw additional cash from a revolving line of credit, if there are any mandatory pre-payment provisions that could be triggered, and if there are any defaults on financial covenants.  Loan agreements can be complex documents and it’s important to understand all your rights and obligations so that you can continue to borrow cash as needed and not receive a notice from your lender demanding repayment. Additional commentary on this topic is available here.

FORCE MAJEURE CLAUSES

A force majeure clause excuses one or both party’s performance under a contract if circumstances arise, beyond the parties’ control, that make it impossible or impractical to perform.  Such circumstances typically include acts of God (flood, fire, earthquake, etc.), wars and terrorism, and labor disputes. Some force majeure clauses also include epidemics, such as the coronavirus outbreak, and governmental actions, such as emergency closure of businesses.  

A party that invokes a force majeure clause will typically not have to perform its obligations under the contract.  Certainly, the coronavirus is having a significant harmful impact on many businesses throughout the world and this could potentially implicate a force majeure clause in a contract.  However, force majeure clauses are different in every contract and interpretation of a force majeure clause is different in every state. Whether contract performance is excused because of the coronavirus impact is a case-by-case analysis and you should speak with your legal counsel to determine the impact on your business. 

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