Hell Or High Water Clause
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A hell or high water clause is a clause in a
contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
, usually a
lease A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...
, which provides that the payments must continue irrespective of any difficulties which the paying party may encounter, usually in relation to the operation of the leased asset. The clause usually forms part of a
parent company guarantee A parent company guarantee (PCG) is a guarantee by a parent company of a contractor’s performance under its contract with its client, where the contractor is a subsidiary A subsidiary, subsidiary company or daughter company is a company owned ...
that is intended to limit the applicability of the doctrines of
impossibility In contract law, impossibility is an excuse for the nonperformance of duties under a contract, based on a change in circumstances (or the discovery of preexisting circumstances), the nonoccurrence of which was an underlying assumption of the ...
or
frustration of purpose Frustration of purpose, in law, is a defense to enforcement of a contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract such that the performance of the contract is rad ...
. The term for the clause comes from a colloquial expression that a task must be accomplished "come hell or high water", that is, regardless of any difficulty.


History

Linguistic historian Robert Hendrickson claims in his book ''Encyclopedia of Word and Phrase Origins'' that the saying derives from a phrase used by sailors in the 1600s “between the devil and the deep blue sea”. The first mention of a hell or high water clause in United States case law was in the February 2nd, 1960 case of ''Matits vs. Nationwide Mutual Insurance Co.'' In that case, Nationwide sought to deny insurance coverage to a woman who loaned her car to a friend, after the friend got into a collision. Due to the particular wording of the omnibus clause within the insurance policy, which in itself contains the hell or high water clause, the court ruled that Nationwide must provide coverage for the collision.


Applicable transactions


Equipment leases

One of the most common uses for a hell or high water clause is the writing of equipment leases. Whether or not the phrase "hell or high water" is explicitly written, the general meaning of it has been included in a majority of equipment leasing contracts over the past few decades. The clause requires that the lessee assumes virtually the entirety of the risk associated with the rented equipment, even in extreme cases. This includes but is not limited to cases where the equipment is destroyed, lost in some way, deemed inoperable, neglected repairs, deemed unfit for use, or even when the purchaser dies.


Project finance transactions

Another key aspect of the protections provided by the hell or high water clause is that it applies to the lessor's funding sources. In the industry of equipment leasing, lessees have two broad options: lease equipment from a company that owns the equipment or sign a contract with an equipment finance company which will pay for the equipment. Even if the person or organization that funds the transaction did not sign the contract between the lessor and lessee, they are still shielded by the clause and can rest assured that nearly all the risk is attributed to the lessee, except in the case of credit failure. In cases where the lessor is viewed solely as a source for money, the lessor is provided special protections by Article 2A of the
Uniform Commercial Code The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UC ...
discussed in the “Enforceability” section of this article.


Real estate leases

The concept of hell or high water exists in the real estate market, but only in commercial real estate. It is not very widely used in real estate, and is generally only used in
bond lease In United States real estate, a bond lease, also called an absolute triple net lease, true triple net lease or even a hell-or-high-water lease is the most extreme form of the NNN lease, in which the tenant is responsible for every fathomable real ...
s, which are also referred to as "triple net leases" or "hell or high water leases". Typical triple net leases require tenants to be responsible for paying rent, utilities, maintenance, HVAC expenses, roofing repairs, and even property taxes. Hell or high water leases take the typical triple net lease a couple steps further by making the tenant to be responsible for every fathomable expense related to the property, which in effect makes the hell or high water lease the most extreme form of triple net leases. As with some other applicable transactions of hell or high water, this type of lease makes the tenant responsible for payments associated with unexpected events which some refer to as acts of god. At no point is the tenant allowed to terminate the lease or receive rent abatements. If a property is condemned for whatever reason, the tenant must continue to pay rent despite not being able to inhabit the property. If the property is destroyed or damaged, not only does the tenant still need to pay the agreed upon rent, but the tenant must pay to either replace or repair the building regardless if the insurance claim covers the cost.


Mergers and acquisitions

When attempting to merge two businesses or acquire another, one big roadblock that companies typically come across is
antitrust law Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...
. Companies must negotiate on how to split the costs of potential litigation, fines,
divestitures In finance and economics, divestment or divestiture is the reduction of some kind of asset for financial, ethical, or political objectives or sale of an existing business by a firm. A divestment is the opposite of an investment. Divestiture is ...
, and expensive antitrust investigations. When one party has more leverage in this negotiation, they may consider utilizing a hell or high water clause. This allows one party to assign all the financial risks associated with antitrust approval to the other party. It may seem surprising that any company would agree to a merger with a hell or high water clause, but sometimes agreeing to the clause is the only way the party with less leverage can secure the deal (e.g. because there are competitors for the stronger company). Additionally, companies may agree to a hell or high water clause because they assess that the risk of antitrust complications is low, or simply because the opportunity outweighs the risk. If a company agrees to take responsibility for all the risk by signing a hell or high water clause then they are required to take all actions possible to secure antitrust approval.


High-yield bonds (junk bonds)

When a company's
credit rating A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. ...
falls it may have difficulty raising money via debt financing. Since it is riskier to buy a bond from a company with bad credit, their bonds are rated below invest-grade and referred to as junk bonds. To mitigate risk for noteholders, companies with low credit ratings that issue bonds must operate within a set of covenants that restrict the issuer's ability to take on further risk. Many of the covenants relate to the company incurring additional debt, but some covenants address changing ownership structure, paying
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-in ...
s, or selling off assets. Despite all the restrictions of the covenants, companies are allowed some freedom through an idea called "baskets", where the company is allowed to bypass a certain covenant, usually by incurring a limited amount of debt in specific, agreed upon situations. The concept of hell or high water comes into play with a special basket that is named either the hell or high water basket or the general basket. This basket permits the company to incur a limited amount of debt for any reason, especially come hell or high water.


Enforceability

In both United States law and U.K. law, the hell or high water clause has historically been upheld in numerous cases. In the United States, this clause is given special protection under Article 2A of the
Uniform Commercial Code The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UC ...
when the agreement is classified as a finance lease. The article states that this special protection applies to a lease that “consists of an overall three-party transaction in which: (1) the lessor does not select, manufacture or supply the goods, (2) the lessor did not own the goods before the lease was arranged and (3) the lessee either approves the purchase contract or receives specified warranty and supplier information before signing the lease agreement”.


Exceptions

There are some exceptions to the enforceability of the hell or high water clause: * Fraud: The hell or high water clause is not enforceable when fraud is present at any point in the relationship. If the lessor allegedly lures a lessee into a dubious arrangement the agreement may be determined to be null and void. Another example of this is when the employees of an equipment vendor fraudulently represent themselves as agents of a finance lessor. See McNatt vs Colonial Pacific case. * Purchaser refuses to accept goods: Unless it is explicitly specified otherwise in the contract, lessees can generally break an equipment leasing contract if they refuse to accept the goods, especially if the equipment or goods are faulty upon arrival. * Intentional or Willful Acts of Lessor Violating Public Policy * Intentional or Willful Acts of Lessor to Prevent Lessee from Fulfilling Contract


Effects of COVID-19

Some lawyers believe that hell or high water clauses will be upheld during the pandemic, given that pandemics are seen as an act of god, and because in the past acts of god such as Hurricane Sandy have not exempted lessees from their obligations under a hell or high water clause. Some lawyers instead draw a distinction between past acts of god and COVID-19 in that the government forced many businesses to shut down, and speculate that courts would be hard-pressed to rule in favor of the lessor in this situation.


Example clause


Notable cases

''General Electric Capital Corp. v. FPL Services Corp.'', 986 F. Supp. 2d 1029 (N.D. Iowa 2013) ''Hitachi Data Sys. Credit Corp. v. Precision Discovery, Inc.'', 17-Cv-6851 (SHS), (S.D.N.Y. Sep. 24, 2020) ''McNatt v. Colonial Pacific Leasing Corp.'', 221 Ga. App. 768 (472 S.E.2d 435) (1996) ''Equitex, Inc. v. Ungar,'' 60 P.3d 746, 750 (Colo. App. 2002) ''Matits vs Nationwide Mutual Insurance Co.'', 59 N.J. Super. 373 (1960) (described in “History” section)


See also

*
Hardship clause Hardship clause is a clause in a contract that is intended to cover cases in which unforeseen events occur that fundamentally alter the equilibrium of a contract resulting in an excessive burden being placed on one of the parties involved. Hardsh ...
*
Force majeure In contract law, (from Law French: 'overwhelming force', ) is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such ...


References


External links

* *
Uniform Commercial Code
{{DEFAULTSORT:Hell Or High Water Clause Contract clauses