Key Takeaways

  • A hell or high water clause (sometimes referred to as an "on the water clause") requires a party—often a buyer or lessee—to make payments regardless of difficulties such as equipment failure, delays, or other unforeseen events.
  • These clauses are common in equipment leasing, construction contracts, and merger/acquisition agreements where they shift risk to one party.
  • They are generally enforceable under the Uniform Commercial Code (UCC) unless fraud, misrepresentation, or non-acceptance of goods occurs.
  • In M&A deals, the clause can obligate a buyer to take all steps necessary, including bearing antitrust clearance risks, to close the deal.
  • Similar clauses include hardship clauses and force majeure provisions, but hell or high water clauses typically offer stronger payment certainty.

A hell or high water clause in a contract is a provision that states that a purchaser must pay the stipulated payments at the agreed time regardless of any difficulties he may encounter. Some of the difficulties that may be encountered include equipment failure, damage, loss, and even death of the purchaser. The clause is normally intended to reduce the possibility of the purchaser breaching the contract with the excuse that the contract became impossible to fulfill.

Why You May Need a Hell or High Water Clause

The term "hell or high water clause" comes from the expression “come hell or high water,” which means that an action must be done regardless of what happens. The expression seems to have its origins on the late 19th-century Midwest ranches where determined cowboys would drive their herds of cattle through high water and “hell.” Businesses may insist on having a hell or high water clause in their contracts for a number of reasons:

  • If the supplier took on a loan to finance his operations, the supplier will need assurance that he will get payments to pay the loan. The payments will enable the supplier to stay afloat despite difficulties like equipment breakdown.
  • Equipment lessors may require the equipment lessee to continue making payments even if the equipment breaks down. In this case, the payments may help with repairs or financing.
  • In a merger or purchase agreement, a hell or high water clause may be included when one of the parties to the agreement requires the other to take on all the antitrust risk arising from the transaction.

Hell or high water clauses are usually part of construction and equipment leasing industry contracts. Some suppliers of equipment insist on the clause to be able to supply uninterrupted. The clause is also popular with suppliers of equipment like computers and industrial equipment.

Common Uses of an On the Water Clause in Business Transactions

The “on the water clause” or hell or high water clause serves as a risk allocation tool across various industries:

  • Equipment Leasing: Lessors use the clause to ensure steady payment streams even if leased equipment fails, is damaged, or becomes obsolete.
  • Construction and Infrastructure Projects: Contractors or suppliers rely on the clause to secure payment despite supply chain disruptions, cost escalations, or project delays.
  • Mergers and Acquisitions: In M&A agreements, the clause can commit the buyer to consummate the deal regardless of regulatory obstacles, financial market changes, or adverse developments, including taking on the burden of obtaining antitrust approvals.
  • Shipping and Logistics Contracts: When goods are “on the water” during transit, sellers may require this clause to guarantee payment even if goods are delayed or damaged in transit, reducing commercial uncertainty.

This makes the clause particularly valuable in long-term, high-value deals where financing, delivery schedules, and operational continuity are critical.

What Courts Think of the Hell or High Water Clauses

The phrase “hell or high water” is usually not included in the contract because it has limited meaning legally. Precise wording is used to show that the purchaser will pay all sums unconditionally regardless of difficulties. Because a hell or high water contract clause may have serious ramifications for the parties to a contract, it is wise to involve an experienced lawyer when drafting an agreement that contains the clause.

Hell or high water clauses are protected by the Uniform Commercial Code (UCC). Article 2A of the code, in particular, gives special protection to the clause. Bar a few exceptions, U.S. courts in most states enforce the hell or high water clause in contracts. Courts have historically ruled that the clause is valid in different lawsuits.

Drafting Considerations for Enforceability

To increase the likelihood that an on the water clause is enforced, careful drafting is essential:

  • Use Clear, Unambiguous Language: Avoid colloquial phrases; instead, specify that obligations are “absolute and unconditional.”
  • Define Triggering Circumstances: Outline exactly which events will not excuse performance, such as delays, defects, regulatory issues, or market changes.
  • Incorporate Governing Law: Identify the jurisdiction and confirm that its courts have a history of upholding such clauses under the UCC or relevant statutes.
  • Align with Related Clauses: Ensure consistency with other contractual terms like termination rights, warranties, and indemnities.
  • Consider Negotiation Balance: While favoring one party, overly rigid terms may invite disputes or encourage courts to interpret them narrowly.

When a Contract Cannot Be Enforced Even If It Has a Hell or High Water Clause

  • Situations of Fraud: The hell or high water clause cannot be used to compel a purchaser to pay for goods when there is fraud at any stage of the relationship. This was affirmed by a landmark ruling in the 1997 Colonial Pacific v. McNatt case in Georgia.
  • The Purchaser Refuses to Accept the Goods: Generally, unless otherwise specified by the contract, the hell or high water clause is not enforceable unless the purchaser accepts the goods supplied. An example is when a supplier of computer printers supplies defective printers to a bank. On inspection, the bank's IT team finds the equipment defective and rejects the consignment and informs the supplier. In such a case, the hell or high water clause cannot be used to force the bank to pay for the equipment.

Regulatory and Public Policy Limitations

Even when drafted carefully, certain external limits may prevent enforcement of an on the water clause:

  • Regulatory Prohibitions: Laws in some jurisdictions restrict contractual provisions that excessively limit remedies or impose unconscionable burdens.
  • Antitrust and Competition Law: In M&A contexts, while the clause can require a buyer to pursue approvals, regulators may still block the transaction for policy reasons, rendering performance impossible.
  • Bankruptcy Proceedings: If a party files for bankruptcy, payment obligations may be stayed or restructured despite clause language.
  • Consumer Protection Rules: In consumer-facing contracts, particularly leases or financing agreements, some states limit or void clauses that remove all defenses to payment.

Comparing the On the Water Clause to Related Provisions

While a hell or high water clause is distinctive in its unconditional nature, it often operates alongside other contractual tools:

  • Absolute Obligation Clauses: Similar to an on the water clause but may cover broader performance obligations beyond payment.
  • Liquidated Damages Clauses: Pre-set damages for breach, which can complement an on the water clause by addressing non-payment consequences.
  • “Efforts” Clauses: Such as “best efforts” or “reasonable efforts” obligations, which set the standard of diligence required to fulfill conditions like regulatory clearance in M&A transactions.

Understanding how these provisions interact ensures a balanced contract that protects both payment certainty and operational flexibility.

Other Contract Clauses Similar to the Hell or High Water Clause

There are a number of clauses that can be used in a contract to try to limit the excuses that a party has for breaching the contract. Popular clauses apart from the hell or high water clause include the following:

  • Hardship Clause: A hardship clause is similar to a hell or high water clause. It compels one of the parties to a contract to perform his part of the bargain despite hardships.
  • Force Majeure Clause: A force majeure clause absolves one or both parties to a contract from performing their part of the contract when natural disasters make it impossible to perform the contract.

Frequently Asked Questions

  1. What is an on the water clause?
    It’s a contract provision requiring payment or performance even if difficulties like delays, defects, or regulatory issues arise.
  2. Is an on the water clause enforceable?
    Generally yes, especially under the UCC, unless fraud, non-acceptance of goods, or other legal exceptions apply.
  3. Where is this clause commonly used?
    In equipment leases, construction contracts, shipping agreements, and M&A deals to shift risk to one party.
  4. How does it differ from a force majeure clause?
    Force majeure excuses performance due to unforeseen events; an on the water clause enforces obligations despite such events.
  5. Can it be used in consumer contracts?
    Some states restrict or void these clauses in consumer agreements to prevent unfair burden shifting.

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