Acceleration Clause (Contracts) Definition
An Acceleration clause or contract is a law that permits a lender to demand an entire loan when the other party breaches a loan agreement. Acceleration clause or contract commonly occur in real estate, mortgages, and other loan or debts agreement. In this clause or contract, a borrower is mandated to repay an entire loan including the principal interest immediately. Lender often make this demand when the terms of a loan agreement are not met. Basic criteria for repayment of loan are usually outlined in the acceleration clause.
A Little More on What is an Acceleration Clause
In America, acceleration clause are contained in vouchers and the terms of this clause take effect immediately there is a default of loan or debt agreement. Failure to make payment upon maturity of a debt can cause acceleration clause to take effect as established by the voucher. Also, the existence of vouchers in a debt or loan agreement are tied to an acceleration clause. Hence, the term of every voucher is dependent on what is contained in the acceleration contract.
Contrary to the popular principle in securities that mandates a debtor to repay an entire loan and interest at the expiration date, this acceleration clause is not admissible in the law of Latin America. This is because the clause is seen to have two due dates. One conditional date and another uncertain date. Hence, the lender can dispose the terms in the clause either conditionally or at expiration.
Inadmissibility of acceleration clause refers to a situation whereby a terms contained in the clause are not allowed or tolerated. Given the fact that some of the terms of the acceleration clause are objectionable, its enforcement is not permissible in certain contexts. For instance, if the factors that cause the maturity of facilities or securities are not well stipulated in the clause.
Perez Fontana, an author also backs up the inadmissibility of the acceleration clause which is due to contradictions and efficiencies of the clause. Before acceleration clause can become valid and effective, there must be an issuance of a voucher which will establish partial maturities. Hence, if compliant and promissory notes and vouchers can be introduced, the terms of acceleration clause may then be valid and have effects.
There are terms of the acceleration clause is seen as arbitrary and excessively demanding. This clause or contract is one that compels a debtor to pay back an entire debt once they default on any of the payment. That is, if a debtor fails or delays the payment of one of the installments, the creditor or lender has the right to demand the total payment, both the principal and interest. This author sees this measure as one that is overly ambitious because it favors only the creditors in an excessive way. Also, for a debtor to default on any of the installments, the probability of repaying the entire debt is low.
The terms of the acceleration clause give lenders the power (legal weapon) to demand repayment of entire loan in a case of non-payment by debtors. However, this power is seen as unjust and the weapon illegitimate. This is due to the fact that some creditor may decide to misuse the weapon gruesomely and to the utter danger of the debtor. A good example is the case of a moneylender, shylock who used the acceleration clause against his enemy Anthonio and demanded a pound of flesh as repayment.
This clause looks more like a punishment than a measure to make debtors responsive to the terms of a loan. Hence, the acceleration clause is an excessive measure and should not be used in loan contracts and commercial agreements.
References for Acceleration Clause
Academic Research for Acceleration Clause
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Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges, Morrison, E. R., & Riegel, J. (2005). Am. Bankr. Inst. L. Rev., 13, 641.