Frustration Of Loan Agreement

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Phys­ical signing and the con­clu­sion of credit trans­ac­tions are rare today, but prac­tical ques­tions arise because of the cur­rent envi­ron­ment, including: with respect to the oblig­a­tions to be pro­vided to lenders (including the financing of advances) under a New York law gov­erned by credit law, the covid-​​19 crisis raises the ques­tion of whether lenders can invoke a common law case of force majeure (or sim­ilar legal the­o­ries) to excuse such an achieve­ment. In the absence of an explicit clause in a con­tract lim­iting per­for­mance in a force majeure event (which would be unusual in a typ­ical credit con­tract), New York law pro­vides for two lim­ited facil­i­ties, on the basis of common law defences: (1) impos­si­bility and (2) futility. Both bars are dif­fi­cult to imple­ment suc­cess­fully and, even if suc­cess­fully invoked, offer only a lim­ited facility to lenders or an agent who wish to bog down ben­e­fits under a credit con­tract. Although the courts may enter into a con­tract because it is frus­trated, it will only do so in lim­ited cir­cum­stances. The main Irish case mcGuill/​Aer Lingus Teo­ranta and United Air­lines Incorporated[1] has deter­mined whether a con­tract can be can­celled on the basis of a frus­trating con­tract. In this case, Mr. McGuill was a tour oper­ator and entered into an agree­ment with Aer Lingus and United Air­lines to trans­port a group of pas­sen­gers from Dublin to Hawaii. How­ever, due to a Strike by United Air­lines workers, it was unable to ful­fill its side of the agree­ment and Mr. McGuill had to enter into agree­ments with an alter­na­tive air­line. When Mr. McGuill attempted to recover these costs from United Air­lines, he argued that the con­tract had been thwarted.

Jus­tice McWilliam rejected United Air­lines‘ argu­ment and set out the fol­lowing prin­ci­ples in case of frus­tra­tion: because of COVID-19‘s dif­fi­cult finan­cial sit­u­a­tion, gov­ern­ments in many Asian coun­tries have imple­mented dif­ferent sys­tems to assist bor­rowers. Many include a tem­po­rary mora­to­rium (or freeze) on loan repay­ments and/​or the exe­cu­tion of loan com­mit­ments. Regard­less of this, bor­rowers should note, among other things, that we have seen an increased use of the MAC default case to refuse the intro­duc­tion of an existing revolving loan when loans are granted to bor­rowers in cer­tain trou­bled sec­tors. In recent weeks, force majeure clauses have been put for­ward in the wake of the global coro­n­avirus out­break. They are common in many com­mer­cial con­tracts, such as Z.B. Sales con­tracts, goods pur­chases and delivery contracts.

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