Covid-19: legal scope of borrowers to claim ‘force majeure’ in bank loan agreement

Due to sudden turn of events, the borrowers have been facing unprecedented operational disruption, low revenue, raw materials shortage, weak demand for products and services, capital deficiency, poor cash flow and other difficulties.  Following these, most of the borrowers are no longer able to repay the availed loan liability being smashed by the impact of COVID-19.

Many countries are giving legal and regulatory protections to their business sectors to overcome the ordeal of these extraordinary times. On February 20, 2020, Indian Ministry of Finance has issued office order to consider this pandemic as 'force majeure'. China issued record number of 'force majeure' certificates worth of billions covering its different business sectors affected by COVID-19. In the U.S.A., regulatory direction has been issued stating that, financial institutions should work constructively with borrowers. 

Regrettably, our prevailing banking laws and regulations do not cover pandemic situations like COVID-19. Typically, it is argued that, for invoking 'force majeure' it must be included in loan documentations. Alternatively, borrowers are advised to claim frustration of contract under Section 56 of our Contract Act, 1872.  But in case of banking-related loan agreements, doctrine of frustration happens to be legally inapt. This doctrine applies only where performance of contract is impossible, unlawful or could be performed in a significant different way from the contract originally entered into. Likewise, the doctrine of restitution of contract as stipulated in Section 65 and doctrine of contingent contract under Section 32 cannot be applied to bank loan documentations.

Generally, loan agreements disproportionately benefit lenders while all risks are borne by the borrowers. Resultantly, 'force majeure' is not included in the loan documentations. It is argued that 'force majeure' cannot be invoked in the absence of express terms in loan contracts. Nevertheless, the courts and the authorities have legal scope.

The modern legal theories empower the courts to construe a contract considering the intention of both parties that may be impliedly agreed upon but not expressed. As per the modern doctrine of 'implied terms,' courts can imply terms of 'force majeure' in loan documentations, even though the same was not expressly articulated there. Considering the devastating impact of COVID-19, based on reason and for the sake of doing justice, the courts and the authorities may protect the borrowers from perdition by taking a liberal approach and filling in the gaps of 'force majeure' clause in loan documentations.

The impact of COVID-19 scrutinised with terms and conditions of loan agreements casts no doubt that now the lenders are under implied obligation to be lenient, fair, and reasonable to their borrowers-customers.

Another parallel doctrine is 'presumed intent'. Here the contracting parties never foresaw such a situation like COVID-19 would arise. If they had foreseen such situation, they presumably would have agreed upon a fair and reasonable solution. The courts can apply this sound doctrine to construe the loan agreements keeping away the literal and absolute words of loan documentations. In such uncontemplated situation, application of 'presumed intent' doctrine will be reasonable, just, and fair for both parties.

The aim, object, and commercial purposes of bank loan agreements are significantly different. The loan agreements have considerable impact on national revenue, employment, export, import and others. For that reason, the lenders and borrowers can't claim it as all over only between them. So, there is ample legal scope for courts and laws to construe the loan documentations in new situation. 'Force majeure' in loan agreements should be construed looking at all prevailing circumstances induced by COVID-19.

The usual pursuits against the enforcement of 'force majeure' in loan agreements are fruitless in modern times. In addition, the devastating and unexpected impact of COVID-19 in business and economy has also rendered this argument obsolete. The present situation requires legitimate and practical considerations of 'force majeure' by the courts and the authorities to safeguard the best interests of both lenders and borrowers. Erosion of collateral securities' value and depletion of resources already have multiplied the vulnerabilities of the borrowers. In such crisis, the lenders should not trigger their loan agreements conventionally.

Covid-19 was not within the reasonable control and apprehension of the borrowers. They have suffered badly having no direct or indirect contribution, negligence, willful conduct or default. It has been continuing for an indefinite period of time and still its actual impact is unknown.

However, the Hon'ble Supreme Court of Bangladesh has already shown some positive and optimistic approach addressing the unbearable sufferings of the borrowers and people in general. In the Case of Md. Fazlul Haque Sarder and others v. Grameen Phone Limited and others (Civil Appeal no. 28 of 2019) the Hon'ble Appellate Division has also acknowledged the pandemic of COVID-19 as 'Act of God' and further illustrated it as an unprecedented, unwanted, and unavoidable circumstance. Hence, the said observation was given in the said case in order to extend the period of limitation under special laws which were itself an extraordinary and pro-people initiative by the Apex Court.

Similar approach is also expected in case of addressing the hardship and sufferings of the borrowers. The Supreme Court of Bangladesh, under the constitutional mandate, is well equipped and empowered to extend its hand and interfere in the loan agreements by implying "force majeure" clause in loan agreements and protect the borrowers for the sake of national economy.

The writer is an Advocate, Supreme Court of Bangladesh.