Material adverse change (MAC) clauses
A MAC clause seeks to deal with a change in circumstances which could not have been foreseen when the contract was entered into. The form, content and impact of the MAC clause (including the particular events mentioned in the clause) will vary from contract to contract and each clause will be bespoke to the particular circumstances. For instance, it may give specific carve-outs for events that do not apply or it may specify particular events which will qualify as a MAC. MAC clauses can be useful in food supply chain contracts to relieve a party from its obligations under the contract if a significant event occurs (e.g. import/export restrictions due to Brexit and/or COVID-19) that drastically changes a party’s obligations under the contract.
Subject to the particular clause wording in the context of the contract as a whole and the circumstances surrounding the event, the MAC event must be material (i.e. substantial, significant and lasting for a significant period of time). Depending on the wording of the clause, both Brexit and COVID-19 may be considered a MAC.
For a MAC clause to be triggered by COVID-19, it will need to specifically refer to a pandemic/epidemic (or equivalent wording) being a material event. A MAC clause can also be triggered indirectly through particular consequences (e.g. the Government imposing a lockdown resulting in the business needing to be closed down and being unable to supply the food products).
For a MAC clause to be triggered by Brexit, it will need to be shown that Brexit has had a MAC on the contract. In the context of food, this may be as a result of unexpected and enhanced import/export documentation which is imposed as a result of Brexit making it much more difficult to import/export.
For both COVID-19 and Brexit, it could be construed that a MAC clause in a contract entered into as at today’s date would not be triggered as the circumstances surrounding COVID-19 and Brexit are known to the party seeking to rely on the clause. It could be argued that it is triggered if the conditions worsen in such a way that it makes the contract materially different in nature.
In all cases, the burden of proof that a MAC has occurred is on the party seeking to rely on the clause.
Due to the uncertainty of Brexit and the ongoing COVID-19 pandemic, now is the ideal time to update your standard contracts and consider whether a MAC clause should be included. If you would like to discuss this article further and/or have your standard contracts reviewed/amended, please contact Jack Shreeve.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2021.