What Is a Hell or High Water Contract?
A hell or high water contract (sometimes called a promise-to-pay contract) is non-cancelable. A hell or high water contract requires the buyer to pay the seller regardless of circumstances. Hell or high water provisions obligate the buyer or lessee to follow the contract until its expiration.
Understanding Hell or High Water Contracts
Hell or high water contracts compel payment regardless of performance. Hell or high water contracts are usual when a service or product supplier takes a significant risk for the customer. Risk can relate to capital commitments. This danger might also mean there is no alternative buyer because the product is very configurable.
The payer assumes all seller, lessor, or lender default risk in a hell or high water contract. This might incentivize the obligor to accept a transaction they might otherwise reject due to the obligee’s default risk.
The expression stems from the idiomatic phrase “come hell or high water,” which means to follow through regardless of conditions.
The term implies that the speaker or obligee will keep their promise despite tremendous difficulty or catastrophe, including demonic or diluvial powers. Biblical connections to hell and high water relate to earth-shattering cataclysms like Noah’s deluge and Biblical Hell.
Special Considerations
Hell or high-water contracts can be enforced even if the property is defective. A lessee who rents or leases equipment under hell or high water terms is still responsible for payments even if the equipment breaks. The vendor or lessor may manage finance and have a passive role in the equipment.
Such a lease generally lets the lessee choose the equipment. Customers lease items after the lessor acquires them. A hell or high water finance arrangement ensures the lessee will pay the lessor on precise conditions.
Lessees choose the equipment they hire; hence, the lessor is usually not responsible for issues. The manufacturer or supplier might transport the equipment straight to the lessee without involving the lessor. Manufacturing defects may create equipment flaws. Suppliers or manufacturers may fulfill equipment-functioning warranties.
Finance Hell or High Water Contracts
Hell or high water contracts are appropriate for project finance, acquisitions, and high-yield indentures.
A purchase pact with hell or high water wording might require the potential buyer to handle antitrust regulatory divestitures or litigation. Thus, the purchase agreement’s viability may depend on the buyer’s capacity to address such issues and complete the sale.
Conclusion
- Hell or high water contracts require the obligee to perform regardless of the circumstances.
- Despite damage or destruction, lessors or borrowers must maintain payments in lease or loan arrangements.
- Hell or high-water contracts shift most of the risk of nonperformance or default on the obligee, which might entice lessors or lenders to accept riskier deals.
