Most businesses will have to make short-term alterations, with the likely result being a temporary tougher trading environment; either through the practical implications of governmental interventions (curfews, forced closures, interventions in the market etc.) or through a temporary reduction in consumer demand.
In response to the threat of Covid-19 and its potential disruption to the market, Issuers and sponsors of debt capital products should:
- assess and discuss with the appropriate transaction stakeholders the likely impact of the Covid-19 pandemic on their ability to deliver or perform their obligations and seek to agree pragmatic solutions to this temporary issue;
- check and discuss with their advisers any force majeure provisions of key transaction documentation or, in the worst case scenario, the applicability of the common law principle of frustration; and
- where appropriate, check any business interruption insurance to assess any income protections available (in respect of a trading business) or any general credit risk insurance in each case for losses suffered or to be suffered as a result of the response to Covid-19.
Investors in bonds and other debt capital products will likely be temporarily more cautious or even unwilling to invest until the market is more stable or has been given an opportunity to react to further governmental action, notwithstanding the curfews and travel restrictions in place in much of continental Europe and the recent emergency cuts to interest rates by both the Bank of England, the Federal Reserve, and the expected cut in interest rates by the European Central Bank.
Force Majeure and Frustration
Governmental action in response to the Covid-19 pandemic is likely to cause significant short-term difficulty for most businesses and may temporarily make the performance of certain contractual obligations difficult, if not impossible. Performance of contractual obligations could be affected by physical restrictions put in place by governments (such as travel bans and curfews) or the resulting reduction in economic activity, making businesses less profitable and therefore the servicing of debt more difficult.
To address scenarios where unexpected events have a material impact on a contractual parties' ability to meet its obligations there under, many contracts contain what is termed a "force majeure" clause. Force majeure clauses limit the liability of the parties to a contract where the performance of the obligations documented in that contract are affected by events outside the control of the parties (such as natural disasters, governmental interaction etc.).
English courts typically interpret force majeure clauses on their strict drafting and are unlikely to impute events in to a force majeure clause where no specific reference to that event is included. For this reason, force majeure clauses are typically drafted in such a way as to capture as many events as possible (for example "…any governmental actions…" or "…any other event or circumstance likely to have an impact…"). Issuers and sponsors should discuss with their professional advisers the coverage of their specific force majeure clauses to assess whether any relief is available.
Force majeure clauses often provide for specified reliefs in respect of specific obligations and often for a limited time or other obligations attached. Those further obligations typically include the requirement to take certain mitigating steps or to notify other parties of certain further events. Discussing any force majeure clause with professional advisers should ensure that the relief available pursuant to a force majeure clause is not invalidated.
In circumstances where the event in question makes the performance of certain contractual obligations impossible, the common law principle of frustration may apply and thereby reduce, delay or, in limited circumstances, remove the obligation or obligations which are no longer able to be performed.
Frustration provides that, where a serious event occurs (after the formation of a contract) which is both unexpected and beyond the control of the parties, and which renders it physically or commercially impossible to fulfil the contract (or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract).
Frustration is applied in limited circumstances only and, with the expected time-limited impact of Covid-19, it is unlikely to be applicable in many circumstances.