The unforeseen coronavirus pandemic as we all know has disrupted personal lives as well as businesses. The concern is not only limited to the meltdown of the stock market or shortage in manufacturing and supply chain but also towards the performance of commercial contracts. Contracts like transaction agreements, supply and manufacturing contracts, leave and license agreements, lease arrangements, project finance and construction agreements, amongst others are likely to be affected by the lockdown imposed due to the Covid-19.
Events like the Covid-19 pandemic change the course of society for many years to come. Medical science has advanced at lightning speed, however, it has not yet offered protection from Covid-19 and is unlikely to offer total protection from a possible future pandemic. The ultimate question that arises is: what happens next, and how to legally prepare for it?
A lot can be and must be done on the personal front in terms of legally protecting oneself. Contractually speaking however, the difficulty faced by many companies and individuals in combating the non-performance of existing contracts makes us ponder over the future of contract drafting and negotiation. In light of the present crisis, and the unfolded arguments to and fro as regards the fulfilment of a contract, makes it interesting and perhaps absolutely necessary to revisit certain clauses. In this article, we put forward the key considerations that would need to be borne in mind for negotiating and drafting a few, if not all, important clauses typically considered in transaction contracts.
Material Adverse Change (MAC)/ Effect ("MAC Provision")
This is perhaps one of the most featured and important provision of an agreement. Certain agreements that have a conclusion date, a MAC Provision is important up unto the date the transaction is concluded. For on-going agreements however, a MAC Provision remains important until the end. Let us begin with the meaning of a MAC Provision. A MAC Provision in an agreement is usually an event, development or a situation which if occurs, or is reasonably expected to have occurred, brings about a material adverse effect, on the validity and enforceability of the agreement or on the assets, liabilities, business, financial condition or operation of the entity in concern ("Target"). MAC Provision allows an acquirer/ investor to walk away from a transaction if an event occurs, which brings about a negative change in the Target. MAC Provision also absolves a party to a contract to not fulfil its end of the obligations, if the benefit derived by such party under the agreement, is hindered. In both cases however, careful drafting of the agreement and the MAC provision within the Agreement are paramount, in so much so, MAC provision is not a legal protection but a contractual protection.
As such, in the current scenario what is being asked repeatedly is whether a pandemic like the Covid-19 can be covered as a MAC and therefore affecting the agreements in question?
The answer to this question is not simple and is certainly not standard. Whether Covid-19 would qualify as a trigger under a MAC Provision will have to be assessed along with the express language of the agreement and thereafter the essence and the very nature of the agreement. The MAC Provisions should not only be defined accurately to cover its inclusions but should also be drafted craftily to cover its exclusions. Certain businesses may very heavily be impacted by a pandemic such as Covid -19 and at the same time, certain businesses may not be. Yet again a pandemic like Covid-19 may bring to a standstill how one party enjoys its rights under an agreement, while yet another party under a different arrangement and a different agreement may totally be unaffected by a pandemic situation such as Covid-19. Would it then be enough to draft a MAC Provision the same for all industries, all agreements and all arrangements or should it be drafted differently keeping in mind the actual impact each inclusion of the definition will have on the parties to the contract and more specifically their arrangement?
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Originally published by Rajani, on June 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.