Return of the MAC (clauses) and practical steps for the retail world

The COVID-19 crisis is putting Material Adverse Change (or material adverse effect) (MAC) clauses back in the spotlight, none more so than in the world of retail.

Why does it matter? 

As more challenges arise from the current pandemic, we anticipate that retailers and their suppliers will continue to review their contracts to see how best to navigate the challenges they face, ie, renegotiating or terminating existing contracts and considering additional provisions to include in contracts going forwards. It is therefore worth considering whether any MAC clauses have been triggered as a result of Covid-19 or should be included in future agreements.

MAC clauses are most commonly used in M&A transactions but are often also included in significant or long-term commercial arrangements. Whereas force majeure provisions usually only bite if a party’s performance becomes impossible, MAC clauses typically cater for unpredictable events or circumstances, or a significant deterioration in financial position, which materially alters the basis on which the deal was originally struck (even though performance of obligations may still be possible).

In a retail context, for example, a MAC clause (or similar termination provision) might include a buyer’s right to terminate the contract if any one of a number of situations occurs that prevent the supplier performing the contract or substantially affects the nature of the deal - for example, where disruption to the global supply of raw materials significantly increases the cost of producing the end product (eg, a product at an agreed price of £1 now costs £2 to produce due to shortage of supply), rendering the intended nature of the deal commercially unviable. 

Each MAC clause needs to be reviewed carefully and interpreted on the basis of the wording of the provision, in the context of the contract in which it appears and the relevant background at the time it was agreed, and bearing in mind business common sense.

What action should you consider?

There are some practical points that should be considered if you are reviewing a MAC clause in one of your existing retail contracts:

1. look at the precise MAC clause wording and related provisions. MAC clauses are often interpreted narrowly so the specific definition is very important

2. to be ‘material’, the adverse change must substantially affect the nature of the deal reached or the affected party’s ability to perform its obligations under the contract. The change cannot just be a case of ‘buyer’s remorse’

3. any change in circumstances must have a permanent impact on the bargain or the affected party’s ability to perform under the contract

4. do the relevant changes affect businesses across the sector or are there factors that are specific to the affected party in question? 

5. check how these rights tie-in with the force majeure provisions and other related provisions (ie, service level agreements, liquidated damages, insolvency and general termination rights), and consider whether they are consistent with a MAC event/termination

6. parties that wrongfully rely on a MAC clause and terminate an agreement may be liable for repudiatory breach of contract (entitling the other party to terminate and claim damages)

7. if a MAC has occurred (or has arguably occurred), this may provide a good opportunity to renegotiate (without exercising the right / terminating the agreement). Commercial discussions (on a without prejudice basis) may provide a good outcome for both parties – so consider all commercial options before exercising any legal rights