Force majeure events include war, riots, natural disasters, power outages, lockouts and labour disturbances. As a general rule, loan contracts do not contain a force majeure provision. In the event of non-payment by borrowers as a result of any of the above events, lenders would rely on the “essential adverse event” or any other relevant event in the late clause to assert their rights under the loan agreement. The declaration of a prohibition period by the government and the ban on trade following Covid-19 do not in itself reduce the repayment obligations of borrowers. Most construction loan documents contain certain termination provisions that require the borrower to notify the lender in writing of the occurrence of certain events, including the existence of a force majeure event. In recent weeks, many construction lenders have received force majeure information from their borrowers based on the circumstances surrounding COVID-19. Some borrowers have gone so far as to demand the standard form of the lender`s “pre-negotiation letter.” Many of these communications appear to have been sent by borrowers on a somewhat “preventive” basis. Borrowers and their boards should carefully consider whether they are premature when requesting force majeure notifications or pre-negotiation letters. To the extent that the definition of the construction loan contract in the event of force majeure requires both the occurrence of the claimed event and an actual delay or impediment to implementation, including a delay in the timely conclusion of the project (i.e. finalization on the date set out in the construction loan contract) , it is unlikely that the force majeure notification would have been duly issued if the two values of the definition were not met.
If the borrower is given prematurely in such situations, he should consider sending a new notice of force majeure in case of actual delay, in order to properly comply with the terms of the construction loan contract. Since force majeure is not in itself a default in most credit documents, but rather an excuse for the benefit, a pre-negotiation request is often misplaced. In any event, these letters may include excessive waivers and safeguards, to which any borrower must exercise caution. The most common argument will be that a client is suffering from financial difficulties due to the impact of COVID-19, since it is unable to repay, although borrowers could also argue that it is impossible for them to comply with financial agreements in their credit contracts in order to avoid a default being reported. COVID-19 must be the only reason why the borrower is unable to meet its obligations; if only one cause among others, then the force majeure clause would not be activated (Classic Maritime Inc v Limbungan Makmur SDN BHD  EWCA Civ 1102). Lenders must therefore check whether COVID-19 is the sole cause of the borrower`s problems or whether they were already in financial difficulty.