Financing arrangements and material contracts
You may have seen our recent article offering practical tips for businesses considering the impact of COVID-19 on their commercial agreements.
When considering your position under contracts with customers, suppliers and other contractual counterparties, in light of the COVID-19 outbreak, it is important not to overlook the impact on your business’ financing arrangements and how those arrangements might affect your rights and obligations under other commercial agreements.
If you are considering terminating a commercial agreement, whether under a force majeure clause, as a result of a counterparty’s failure to perform or otherwise, below are some considerations that may be relevant to your business.
When a financier lends to a party whose business is heavily dependent on one or more material contracts, it is common for the financier to insist on taking security over those contracts and to require the parties to those contracts to enter into what is commonly known as a “side deed” or “tripartite deed”, or to provide some form of acknowledgement, undertaking or side letter to the financier.
These documents often restrict the ability of contractual parties to take action under the contract without first complying with certain requirements, including giving a period of prior notice to the financier.
Before seeking to terminate or taking other action under a commercial agreement, consider whether you have entered into any such side arrangement with a financier and, if so, how it affects your rights and obligations.
Even if no such side agreement has been entered into in relation to a particular contract, it is not unusual for the comprehensive loan and security documents used by banks and other lenders to include broad terms which restrict the borrower, guarantors and security providers from taking action to terminate material contracts without the financier’s prior consent.
These types of documents may also contain “cross-default” provisions with the effect that an event of default under the financing arrangements will occur if a material contract is breached, terminated or otherwise prejudiced.
If you are concerned about the ways in which your financing arrangements may affect your rights and obligations under material contracts, or about your position under your financing arrangements generally in light of the COVID-19 outbreak, our Banking and Finance team can review your finance documents and provide practical advice and guidance.