A hell or high water contract (also known as a promise-to-pay contract) is a non-cancelable agreement. It mandates the purchaser to make all specified payments to the seller, irrespective of any difficulties encountered along the way. These contracts bind the purchaser or lessee to the agreement terms until the contract’s end.
Key Attributes
- Unyielding Obligation: A hell or high water contract obligates the party to fulfill their side of the deal, no matter the difficulty.
- Risk Absorption: In leases or financing contracts, this means the lessee or borrower continues to make payments even if the asset is damaged or destroyed.
- Risk Transfer: The risk of nonperformance or default is placed almost wholly on the obligee, encouraging transactions that would otherwise seem too risky.
Understanding Hell or High Water Contracts
These contracts require payment whether the service or product works as intended or not. They are essential when the service provider takes a significant risk on behalf of the client. This risk could involve substantial capital or the unique customization of a product making alternate purchasers scarce.
In hell or high water contracts, the obligor assumes all the seller’s, lessor’s, or lender’s default risks. This can create an incentive for the provider to agree to the transaction despite the high default risk from the other party.
The term originates from the phrase “come hell or high water,” symbolizing a resolute commitment to follow through regardless of adversity or catastrophe, including demonic or diluvial (flood-related) challenges.
Special Considerations
Hell or high water clauses are enforced even if the involved property is defective. For instance, a lessee renting equipment under such terms remains responsible for payments even if the equipment fails. The vendor or lessor may solely handle financing, playing a minimal role regarding the equipment itself.
Here’s the typical process:
- The lessee selects the equipment they wish to lease.
- The lessor purchases the chosen item and leases it back to the lessee.
- Payment obligations exist irrespective of equipment functionality.
Any mechanical faults fall to the supplier or manufacturer, not the lessor. Any warranties about the equipment’s functionality are followed up with the supplier or manufacturer.
Hell or High Water Contracts in Finance
These contracts find their use in project finance, acquisition deals, and high-yield indentures.
For example, in acquisition deals with such clauses, the prospective buyer bears the responsibility for handling necessary divestitures or litigation from antitrust issues. Success hinges on the buyer’s ability to address these issues, allowing the deal to proceed.
Related Terms: lease agreement, financing contract, non-cancelable contract, lessee, lessor, default risk.
References
- Peter Breslauer. “Finance Lease Hell or High Water Clause and Third Party Beneficiary Theory in Article 2A of the Uniform Commercial Code”, Pages 321-322, 325-327. Cornell Law Review.
