The recent events in Ukraine have caused some concern among lenders of cross-border loans into Ukraine. We have put together some questions and answers below regarding the principal issues to consider when looking to the future and analysing the management of a loan relationship should the crisis deepen.
Would “force majeure” apply?
“Force majeure” is not present in English law as a separate concept and therefore cannot be invoked, for example, to cancel or terminate a contract, or to relieve a party from obligations under a contract. If the contract itself provides for force majeure, then those provisions are enforceable as a matter of contract law, but such provisions would be highly unusual for a loan agreement.
Could the loan agreement be considered as “frustrated” under English law?
The English law concept of “frustration” of a contract applies when performance of a contract becomes impossible either due to the occurrence of an unforeseen event, or to radical changes in a party’s principal purpose for entering into the contract. If frustration is proved, the contract is discharged and the parties are relieved from their obligations. Neither party may claim damages and the parties must account to each other to preserve or restore their respective positions as if the contract had not been entered into by them. In the context of a loan agreement, this would require, among other things, the return of funds. However case law shows that the courts hold that a contract is frustrated only in fairly rare circumstances. In broad terms, an event must occur which is so fundamental as to be regarded by law as striking at the heart of the contract, and therefore makes performance of the contract impossible or illegal or radically different from what the parties originally contemplated. In our view, it is unlikely that a court would hold that the recent events in Ukraine would constitute such an event, so as to cause cross-border English law governed loan agreements to be considered to be frustrated.
Does the current situation give rise to a “Material Adverse Change”?
The event of default arising from a “Material Adverse Change” and the associated definition of “Material Adverse Effect” (MAE) are not interpreted widely by English courts, and ultimately will come down to the pragmatic question of whether the borrower is able to continue to perform its financial obligations in respect of the loan and, in some circumstances, its financial covenant obligations. There needs to be a clear and certain event that causes an MAE. At this current stage it is likely to be very difficult to determine if there is an MAE and dialogue with the borrower is important to understand the impact for current events on their business.
Acceleration of a loan based on MAE is rare and could put lenders at risk of litigation if the courts disagree that an MAE has occurred. Using MAE as reason to refuse further lending of undrawn commitments has a clearer history but, again, there needs to be detailed consideration of the precise language of the relevant definition of MAE and the circumstances.
What other events of default may be relevant?
The answer very much depends on the loan agreement in question, which would require careful consideration, however in general terms the following are likely to be relevant in the current circumstances:
- Credit Rating: a drop in Ukraine’s credit rating giving rise to a specific event of default, or mandatory prepayment event. On 21 February 2014, S&P downgraded Ukraine to CCC with a “negative” outlook which could suggest further downgrades in the future.
- Changes in law: changes in foreign exchange/currency control regulations (or similar), and general changes or proposed changes in law. We are not aware of any such changes at present, but with the more uncertain legislative environment in Ukraine we should watch carefully for developments as it continues to assess its foreign debt obligations. The key issue remains whether a Ukrainian company can acquire foreign currency and make payments out of the country in foreign currency without obstacles.
- Market Disruption: the applicability of these provisions depends upon funding implications for a financial institution in lending into Ukraine.
- Disruption to commercial activities: for certain types of loan, specifically project finance and trade finance, there might be issues relating to the proper performance of underlying commercial contracts and specific events of default regarding non-performance of these contracts. Such contracts may contain force majeure provisions and therefore could be at risk of being set aside as a result, if fundamentally incapable of being performed.
As the future of Ukraine remains uncertain, it is important to maintain an open dialogue with the borrower regarding their business and the manner in which it is, or might be, affected by the current crisis. For club loans it might be preferable for the agent to obtain some written explanations from the borrower for communication to the wider group of lenders. Each situation, and the relevant documentation, should be considered carefully in order to determine how the loan might be affected, and the rights of the lenders in the circumstances.