Secondary-Default Remedies: Should Harshness Limit Enforcement?

Abstract

This Article examines a critical but largely unexplored issue in contract law: whether secondary defaults—that is, relatively minor or technical defaults not involving debt repayment—should justify enforcing severe contractual remedies. In the context of lending, this issue concerns whether those types of defaults should justify terminating financing commitments, accelerating the maturity of outstanding debt, and foreclosing on collateral, any of which can cause a firm's failure. Although this issue arises constantly and its resolution can be critical to a firm's survival, judges and lawyers lack clear answers. This Article analyzes and seeks to provide answers both under existing law and from a normative standpoint. It also investigates meaningful alternative secondary-default remedies—some that could be instituted by courts, others recommended to parties in contract design—that would not impose undue hardships on borrowers and third parties, including the public.