Hungary passes ordinance recognising force majeure in financing transactions

On 16 April 2020, the Hungarian government amended the legal framework of force majeure events, allowing the Hungarian Export Credit Insurance Limited Private Company (MEHIB) to provide credit insurance to cover the credit risk of Eximbank arising from the economic impact of the current pandemic. For more details, follow this link to the main article.

The amendment provision contained in government decree 126/2020 (IV 16) lists the events for which MEHIB can provide credit risk coverage insurance in respect to Eximbank’s lending activity and adds the current coronavirus pandemic into the list of recognised force majeure events.

Specifically, this revised provision states that credit risk insurance can be provided in respect to “force majeure events (in particular acts of war, civil war, revolt, riot, rebellion or any other similar political events or circumstances, natural or nuclear catastrophes, an outbreak of a pandemic), which prevent the performance of a party under a foreign export trade agreement or credit facility agreement, provided such risks of non-performance have not been insured or may not be insured otherwise”.

Generally, Hungarian law lacks a definition of force majeure. Therefore, parties to commercial contracts or financing transactions are encouraged to consider the inclusion of the above-mentioned provision (or any analogous provision) in their agreements to mitigate the adverse impact of the coronavirus outbreak.

So far, force majeure clauses were historically linked to commercial contracts rather than financing transactions. Due to the coronavirus outbreak, however, lenders are increasingly finding that their borrowers are struggling to meet certain contractual obligations under their financial documents, including meeting obligations related to the discharge of increased development costs, obligations related to financial covenants and repayment.

The protective measures and restrictions introduced under the state of emergency to tackle the coronavirus outbreak has affected the business model of borrowers, on which lenders based their original decision to lend these businesses funds, in some cases many years ago. The introduction of protective measures arising from the pandemic could enable a lender to avoid obligations of disbursement by relying on a force majeure clause or seeking out insurance to obtain risk coverage.

Traditionally, standard financial documents, including the documentation of the Loan Market Association (LMA), lacked force majeure clauses. Force majeure events were dealt with within the scope of provisions linked to material adverse effects (MAE). Since MAEs are generally interpreted narrowly, the bar to success is rather high in proving that the pandemic has had a material adverse effect on the borrower’s performance. Lenders, however, would require a provision in their agreements expressly designating the outbreak of a pandemic as a trigger event for which performance under the finance documents can be declined.

Over all, parties are free to agree commercially on the list of events applicable to force majeure. Neither the MAE provisions of the LMA facility agreements nor Hungarian law provide a definite list of events or circumstances leading to force majeure. If the MAE provision or force majeure clause does not expressly cover an event such as the coronavirus outbreak, lenders will struggle to suspend future disbursements, cancel available commitments or declare an event of default due to the ongoing pandemic.

Now, the application of a force majeure provision regarding the pandemic has finally been introduced into the financing transactions of a state-owned bank by law through the recently passed government decree 126/2020 (IV 16). The provision had already set down conventional force majeure trigger events such as acts of war, civil war, riot, rebellion, similar political events or circumstances, and natural or nuclear catastrophes. However, the novel feature of the government decree is the incorporation of the outbreak of a pandemic into the list of trigger events.

In comparison, LMA agreements or any other financial documents may be updated with clauses expressly addressing the outbreak of a pandemic as a trigger event for force majeure or MAE in order to provide lenders with a powerful tool to mitigate potential losses incurred by a financially struggling borrower hard hit by the pandemic.

For more information on the above measures and other financial industry issues in Hungary, contact your regular CMS advisor or one of the following local CMS experts.

Article co-authored by Zsolt Beregi.