Hell or High Water Contract A hell or high water contract (also called a promise-to-pay contract) is a non‑cancelable agreement that obligates one party to make the agreed payments regardless of problems that arise with the goods or services. These clauses shift most performance and default risk to the paying party (lessee or borrower) and are common in leases, project finance, and certain acquisition and financing transactions. Key takeaways
* The obligor must continue payments under almost any circumstance, even if the leased or financed asset is damaged, defective, or destroyed.
* Such clauses transfer nearly all operational and market risk to the payer, making transactions acceptable to lessors, lenders, or other providers who would otherwise face excessive risk.
* They are frequently used where the provider takes substantial capital or market risk—e.g., highly customized equipment or projects with limited secondary markets.
How it works
* In finance leases, the lessee selects equipment, the lessor purchases and leases it, and the lessee promises to pay regardless of the equipment’s performance.
* The lessor often plays a passive financing role and may never take physical possession of the asset; liability for defects or warranties typically remains with the manufacturer or supplier.
* Because the payment obligation is unconditional, the obligor cannot cancel or stop payments simply because the asset fails to work as expected.
Why parties use them
* They allow lessors or lenders to commit capital to higher‑risk deals by minimizing their exposure to equipment malfunction, market fluctuations, or project failure.
* For providers, the clause creates predictable cash flow and reduces the need to perform ongoing asset oversight or assume maintenance responsibility.
Special considerations and risks
* Enforceability: Courts generally enforce hell or high water clauses, even when the asset is defective, though specific outcomes can vary by jurisdiction and contract wording.
* Risk for obligors: The payer bears extensive risk, including repair, replacement, and financing obligations, and may need to pursue remedies separately against suppliers or manufacturers.
* Allocation of warranties: Any functional warranties are typically addressed with the manufacturer or supplier, not the lessor/financier.
* Transaction types: These clauses are used in project finance, acquisition agreements (e.g., placing burdens such as divestitures or regulatory remediation on the buyer), and high‑yield indentures.
Practical advice
* Review contract language carefully to understand the scope of unconditional obligations and any carve‑outs or force‑majeure provisions.
* Negotiate allocation of repair, replacement, and warranty responsibilities where possible.
* Consider insurance, escrow, or performance guarantees to mitigate extreme loss scenarios.
* Seek legal review to assess enforceability in the relevant jurisdiction and to identify potential defenses or limitations.
Conclusion A hell or high water clause creates a strong, often unconditional payment obligation that reallocates risk to the payer. It facilitates financing and leasing of higher‑risk or specialized assets but requires careful contract drafting and risk management by the party assuming the payment obligation. Explore More Resources