COVID-19 Update: The Impact Of COVID-19 On Financial Contracts

Published date12 May 2020
AuthorMs Melis Acuner, Nick Shiren, Assia Damianova and Emma Farrow
Subject MatterCorporate/Commercial Law, Coronavirus (COVID-19), Contracts and Commercial Law, Financing, Litigation, Contracts and Force Majeure
Law FirmCadwalader, Wickersham & Taft LLP

The current market volatility arising from the restrictions imposed to reduce the risk of spread of COVID-19 has led many market participants to consider their position under existing contractual relationships, including, assessing their own obligations and whether any potential or actual event of default has occurred in respect of their counterparty. This memo illustrates practical issues to be taken into account by a counterparty to a financial contract in making these considerations using, as an example, a derivative transaction1.

What do I Need to Diligence Under My Existing Financial Contracts Given Current Events?

Do market closures affect my obligations?

The impact of COVID-19 has led to unprecedented measures being put in place in many jurisdictions around the world which have, or may in the future have, the effect of closing markets in a variety of locations. These closures, and the location of the markets which are subject to closure, will need to be carefully considered to determine their impact on a party's position under a financial contract.

For example, the standard form ISDA Master Agreement (both the 1992 version and the 2002 version) contains a number of provisions which utilise the concept of Local Business Day or General Business Day which are defined, depending on their use, by reference to whether commercial banks or settlement systems are open in various places, locations or cities. These definitions are used to determine the due date for payment obligations, the calculation of interest, and whether a notice has been effectively served. Further, financial contracts may also contain product-specific provisions dealing with market closure, for example, the provisions relating to Pricing Disruption Events and Settlement Disruption Events under ISDA's Equity Derivatives Definitions.

Do any force majeure provisions affect my obligations?

The expression 'force majeure' clause refers to a provision that is commonly found in commercial agreements, by which one (or both) of the parties are entitled to cancel a contract, or are excused from performance of the contract (in whole or in part), or are entitled to suspend performance or to claim an extension of time for performance, upon the occurrence of a specified event (or events) beyond a party's control. The 2002 ISDA Master Agreement, for example, provides for the imposition of a 'waiting period' following the occurrence of an Illegality or a Force Majeure Event, among other consequences.

A number of force majeure clauses have been tested before the English courts. The tendency of the courts has been to construe such provisions restrictively or to subject them to implied limitations. The onus is on the party seeking to rely on the force majeure clause to demonstrate that the facts in...

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