Every business is grappling with the difficult and novel challenges of keeping its employees safe, managing its finances, and staying abreast of daily developments. All this in addition to fulfilling obligations to shareholders, regulatory bodies and in some cases creditors. Some of the most important decisions are whether to enforce, defer or perform contractual obligations and these should be informed by an understanding of their legal and contractual context.

In this note, we highlight some key legal issues for banks and other lenders faced with a counterparty struggling to perform.

Breach by the borrower

The financial impact of Covid-19 on businesses is likely to cause many borrowers to default under facility agreements. This could include a failure to make payments when due; breach of financial or other covenants; or an insolvency-related Event of Default (Default).

If the borrower is in breach of any of its obligations, constituting an Default, the lender must decide whether to call the Default or to waive the breach. Calling a Default can set in train other consequences such as triggering cross-default under other agreements. It may impede a borrower’s ability to trade out of a temporary difficulty. If the lender does decide to waive the Default, it should issue a full reservation of rights letter. If the lender does not wish to enforce, a more wide-ranging amendment of the facility or a refinancing may be needed.

At all times, the lender will need to consider whether the borrower’s difficulties are wholly due to Covid-19 or whether they pre-date the pandemic. Even if Covid-19 was the predominant cause of the default, the lender must assess the borrower’s prospects of surviving an extended economic downturn.

Of course, a key consideration for the lender is the adequacy of its security: how badly is Covid-19 affecting the value of the secured assets, their liquidity, and the solvency of any guarantor.

Material Adverse Change Clauses

Lenders may wish to invoke Material Adverse Change (MAC) clauses. These allows them to suspend further drawdowns, accelerate repayment or call for additional security. A MAC may result in a breach of a repeating representation given by the borrower that there has been no MAC. Alternatively, the MAC itself may constitute a Default.

A lender may be reluctant to invoke a MAC clause as the sole basis for a Default as such clauses are construed fairly narrowly by the courts. Whether a lender can successfully rely on a MAC clause will depend on the specific wording. There is some uncertainty whether Covid-19 could give rise to a MAC. The guidelines in Grupo Hotelero Urvasco v Carey Value Added SL [2013], established that for a change in circumstances to constitute a MAC, the effect must be more than temporary and it must impact that particular borrower. Some companies and sectors will be better able than others to ride out the pandemic and some will be able to adapt to new ways of doing business: for example, retail business closing stores and moving online. Sadly, for some, Covid-19 will prevent them from carrying on their business. Where a business is seriously affected a lender will be in a stronger position, if it wishes, to invoke the MAC clause but each case will need to be assessed on its own circumstances.


A borrower in default may look to the common law doctrine of frustration for assistance. Under English law, this doctrine applies when a supervening event beyond the parties’ control, which is not provided for in the contract, renders the contract impossible to perform or changes the parties’ rights and obligations significantly from what was contemplated at the time of the contract. If established its effect is to kill the contract and release both parties from their liabilities.

The courts will not invoke the doctrine lightly. In Canary Wharf v European Medicines Agency [2019] (EMA), the EMA argued that Brexit was a frustrating event: it would be impossible to perform its function in London post-Brexit and those circumstances were ‘not contemplatable at the time of entering into the Lease’. The court rejected the EMA’s arguments finding that it still had the ability to use the property and pay rent under the lease and there was no legal reason it could not remain in the UK.

The mere fact that Covid-19 has a negative impact on a borrower’s ability to repay is unlikely to be a frustrating event. A new Covid-19 inspired law making a borrower’s performance of its underlying commercial contracts illegal might amount to frustration, but would not in itself make performance of the facility agreement impossible. But the mere fact of a more difficult trading environment which hampers the ability of the borrower to meet its repayment obligations would not of itself frustrate the loan agreement.

Force majeure

Although it would be unusual to find a force majeure clause in an English law facility agreement, it is worth clarifying that under common law systems, unlike the civil law, force majeure is not a legal doctrine, but a type of clause in a contract setting out a list of events upon which the contract can be terminated. These often include Acts of God beyond the parties’ control such as fire, storm or earthquake. As with frustration, one or both parties to a commercial contract can be discharged from their obligations on the occurrence of a force majeure event.

Force majeure clauses have been brought into focus in recent weeks as a result of the global outbreak of coronavirus. They are common in many commercial contracts, such as acquisition agreements, sale of goods and supply agreements. To determine whether Covid-19 would amount to a force majeure event, the wording of the clause would need to be looked at carefully to see if it applies in the current circumstances. For a discussion of the application of force majeure clauses in the context of coronavirus, please see our article on this here


Whether a lender wishes to call an Event of Default for a borrower’s breach under a facility agreement will depend on the particular financial circumstances and its business relationship with the borrower. Most lenders will only want to call an Event of Default as a last resort and will be keen to support a borrower’s business where they can. This is not least because calling an Event of Default may have a serious impact on a borrower’s business and, while a lender may be secured, in these uncertain times the value of the security may have fallen significantly.

Of course, the legal and regulatory landscape is changing almost daily in response to the pressures of the Covid-19 pandemic. The FCA has already issued guidance on payment holidays and a moratorium on repossession in the home finance sector. It is possible that wider measures will be implemented to mitigate the economic shock, which may impact the ability of lenders to enforce under facility agreements. Druces will continue to monitor any developments in this respect.

For advice on any of these matters please speak to your usual Druces contact or:

  • Charles Spragge at or +44 (0)20 7216 5548
  • Antony Cotton at or +44 (0)20 7216 5592
  • Rebecca Pinder at or +44 (0)20 7216 5595

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