What Is a Hell or High Water Contract?
Let me explain what a hell or high water contract is—it's essentially a promise-to-pay contract that's non-cancelable. In this type of agreement, you as the purchaser are required to make the specified payments to the seller, no matter what difficulties you might face. These clauses lock you into the terms until the contract expires, so you're committed come what may.
Key Takeaways
You need to know that a hell or high water contract means the obligee agrees to fulfill their side no matter how tough it gets. If it's a lease or financing deal, that obligates the lessor or borrower to keep paying even if the asset gets damaged or destroyed. Essentially, this setup puts almost all the risk of nonperformance or default on the obligee, which can encourage lessors or lenders to take on deals they'd otherwise see as too risky.
Understanding Hell or High Water Contracts
These contracts demand that you make payments whether the good or service works as expected or not. They're typically used when the provider is taking on significant risk for the client, like committing a lot of capital or dealing with highly customizable products that might not have other buyers.
In such a contract, the party obligated to pay absorbs all the default risk from the seller, lessor, or lender. This can motivate you to enter a transaction you might otherwise avoid due to the other party's default risk.
The term comes from the phrase 'come hell or high water,' which signals an unconditional commitment to see something through, regardless of circumstances. It implies you'll follow through even amid severe adversity or catastrophes beyond your control, drawing from Biblical references to hell and Noah's flood as ultimate disasters.
Special Considerations
These contracts hold up even if there's a fault or defect in the property involved. For instance, if you lease equipment under these terms, you're still on the hook for payments if it malfunctions. The vendor or lessor might just handle financing and stay passive otherwise.
Usually, you as the lessee pick the equipment, and the lessor buys it to lease to you. The agreement ensures you pay without question. If there's an issue with the equipment, it's not typically the lessor's fault since you chose it, and it might ship directly from the manufacturer. Any manufacturing flaws or warranties are on the supplier or manufacturer to handle.
Hell or High Water Contracts in Finance
You see these contracts in project finance, acquisition deals, and high-yield indentures. Take an acquisition: the agreement might require the buyer to handle any divestitures or litigation from antitrust issues, tying the deal's success to resolving those matters.
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