Return of the MAC (clauses): renegotiating or exiting your supply chain contracts
As more challenges arise from the current pandemic, suppliers and customers in the retail supply chain will be looking at their contracts to see how best to navigate the challenges they face. This may involve reviewing existing supply chain arrangements and seeing if there is a way to renegotiate or exit existing contracts.
Force majeure provisions have of course been receiving a great deal of attention in the current circumstances, but it is also worth considering whether any Material Adverse Change (or material adverse effect) (“MAC”) clauses have been triggered as a result of the recent pandemic.
MAC clauses are commonly used in corporate documents and lending agreements, but are often also included in significant or long term commercial arrangements. These types of clauses typically go beyond the scope of traditional force majeure provisions and are drafted as broad, "sweeper" clauses to capture unpredictable events or circumstances, or a significant deterioration in financial position, which materially alter the basis on which the deal was originally struck.
In a retail context, for example, a MAC clause might include a buyer's right to terminate the contract if any of the following impacts the supplier: (1) the supplier fails to deliver a specific percentage of orders or of meeting orders underpinning agreed targets; (2) specific agreed targets are affected by production or business interruption; (3) there is a significant fall in the supplier's financial performance.
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.
There are some practical points that should be kept in mind if you are reviewing a MAC clause in one of your existing contracts:
Look at the precise words of the MAC clause and related provisions within the contract. MAC clauses are often interpreted narrowly - so the specific definition of the relevant material adverse change and associated termination rights are very important.
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 can't just be a case of 'buyer's remorse' or making it a bit more difficult for the affected party to carry out its obligations.
If there has been a change in circumstances, typically the change in circumstances or effect cannot be merely temporary – the change has to have a permanent impact on the bargain or the affected party's ability to perform under the contract.
Do the relevant changes affect businesses across the sector or are there factors that are specific to the affected party in question? If the MAC clause is directed at a party's position, evidence of general economic or market changes (such as a global economic crisis) may not in itself constitute a MAC, as that party may perform better (or worse) than the rest of its sector.
Check how these rights tie-in with the force majeure provisions and other related provisions (eg service level agreements, liquidated damages, insolvency and general termination rights), and consider whether they are consistent with a MAC event / termination.
Parties are generally wary of wrongfully relying on a MAC clause and purporting to terminate an agreement, as they may then be liable for repudiatory breach of contract (entitling the other party to terminate the agreement and claim damages).
- If a MAC has occurred (or has arguably occurred), this may however 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.