Force Majeure and Loan Agreements or Promissory Notes

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Force Majeure and Loan Agreements or Promissory Notes

May 18, 2020

The following is a case study in our series about force majeure. For background, please see Force Majeure, Impossibility and Triggering Events.

We’ve discussed multiple types of contracts where force majeure clauses may relieve parties of their obligations in the midst of the coronavirus pandemic. Now, as the uncertainty continues and unemployment rises, you may be wondering how force majeures affect your required performance of a loan agreement or promissory note.

Unfortunately, loan agreements and promissory notes function a little differently than the other types of contracts we’ve been looking at. Promissory notes rarely excuse the borrower from making his or her payments on the basis of a force majeure event; most do not even include force majeure language.

Okay, you say, but what about California Civil Code section 1511(2), which excuses contractual obligations “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary?” Cal. Civ. Code §1511(2). If there is no force majeure clause in a contract, Civil Code Section 1511 codifies this “common-law defense in an action between contracting parties for breach.” Northrop Corp. v. Triad Int’l Mktg. S.A., 811 F.2d 1265, 1270–71 (9th Cir. 1987), amended, 842 F.2d 1154 (9th Cir. 1988). In other words, this defense is implied in every contract.

What about impossibility or impracticability “because of extreme and unreasonable difficulty, expense, injury, or loss involved?” Autry v. Republic Productions, 30 Cal.2d 144 (1947). Alas, courts are reluctant to enforce impossibility or impracticability doctrines in the context of loan agreements and promissory notes.

If you think about it from a commonsense standpoint, it makes sense why this is the tack courts must take. If borrowers could simply list a (albeit legitimate) reason why they do not have the money to pay back a loan, the whole loan process would fall flat, and lenders would never have any assurance that a borrower would actually be required to pay back the money he or she had been loaned. In the vein of protecting lenders, some promissory notes even include clauses which accelerate repayment should the borrower’s finances begin to deteriorate.

It is important to look at the specific terms of your promissory note to understand potential shifts in obligations, knowing that while a force majeure clause may help relieve you of other contractual obligations during the pandemic, your obligations under a promissory note almost surely, firmly remain.

Pfeiffer Law Corp is a Santa Monica, California firm that represents entertainment clients.

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