The commercial environment has been challenging over the past few years. Businesses across a variety of industry sectors have had to deal with the effects of COVID-19, the Russia-Ukraine war, the 2021 Suez Canal obstruction, the semiconductor chip shortage and Brexit.
At Bird & Bird, it’s our job to understand the commercial framework in which our clients operate and adapt our approach to contracting according. Lawyers from our Commercial, Finance and Dispute Resolution teams recently came together at an internal session to share their views on how contracting is being affected by economic and global factors, the various challenges that our clients are facing in performing their existing contracts in an uncertain world and how we are helping them to manage those changes.
Our panel of lawyers was made up of: Simon Shooter and Ronald Hendrikx, partners in our Commercial team; Jennifer Bird, Legal Director in the Finance & Financial Regulatory team; and Jonathan Speed, partner and Russell Williamson, senior associate, both from our Dispute Resolution group.
Below we list our panel’s recommendations for businesses (i) at the pre-contract stage when there is much uncertainty about future economic conditions (Recommendations 1 – 4) and (ii) where existing contracts have become difficult (or impossible) to perform as a result of a change in circumstances outside of the parties’ control (Recommendations 5 – 7).
During pre-contractual considerations and negotiations, in drafting the force majeure clause a party should always:
There can be pitfalls to drafting too specifically. Parties should make sure that they draft into contracts measures that are consistent with market practice. Simon says:
‘Trying to be too accurate where you are trying to foresee exactly what may happen in the future is not going to work very well, so we are going to have to come back to some generalities.’
Jennifer spoke specifically about contractual drafting in finance documents. In these agreements, there isn’t usually the concept of force majeure, primarily because a borrower’s obligation to repay a loan will survive whatever event or circumstance befalls the borrower. Instead, under such contracts a borrower will look to employ a ‘material adverse effect’ (“MAE”) concept, which is used to qualify certain of their representations, undertakings and the events of default under a facility agreement, so as to reduce the likelihood of inadvertent breaches thereunder. A lender may look to include a material adverse change (“MAC”) event of default, which is triggered where the occurrence of an event or circumstance has or is reasonably likely to have a MAE on the borrower . The extent to which a borrower will be able to negotiate the MAE definition and related provisions depends on its bargaining power, the sector and the jurisdiction in which their business operates.
A borrower or lender should seek to negotiate the definition of MAE to make it more favourable to their position. Jennifer emphasised the value of a well drafted MAC event of default, which makes use of the MAE…
Oct 03 2023
Oct 02 2023