Can You Walk Away From Your Contract?

There’s many a slip ‘twixt the cup and the lip’



This week, one case law update around the very topical subject of one party using a particular type of clause to try and walk away penalty free from a contract due to the pandemic and an update from Companies House.

Can you bring a contract to an end without paying anything if you have a Material Adverse Effect/Material Adverse Change clause?

Maybe, as with so many things, it depends on the wording and the circumstances.

A lot of opinions have been given about the nature and effect of called Material Adverse Effect/Material Adverse Change clauses. These profess and are designed to allow a party to pull out of an agreement (without cost), where there has been a material change before signing.

Usually, these kinds of clauses are found in corporate and finance agreements, but they are being put into other types of commercial agreements too. The key thing to remember about these types of clauses is that usually on the way they are drafted, a general decline or downturn in economic conditions as a result of the pandemic is unlikely on its own to trigger them.

A recent case concerned a share purchase agreement where the Material Adverse Effect clause excluded pandemics. However, it has an exception if the pandemic had a disproportionate effect on the seller as compared to other participants in the “industries” in which it operated.

On the facts of the case question, the court’s preliminary ruling was that there had been a Material Adverse Effect and the purchaser was entitled to pull out of the deal. What went for the purchaser in this case was the general nature of the word “industries”, which the court thought was wider than terms such as “markets” or “sectors” or “competitors”

Much of the case turned on what was meant by “industries” and how narrowly that should be defined (namely whether it was confined to the “travel payments industry” or the wider “business-to-business payments industry”). The judge noted that “industries” is wider than “markets” or “sectors” or “competitors” and then went on to find that there is no “travel payments industry”. That was significant here, since the pandemic had affected the whole travel sector, so it would be hard to argue that the exception in the clause applied if that had been the comparator. Instead, the relevant industry was the business-to-business payments industry.

The key thing here is to check any such clause carefully to make sure that the specific wording is not either too wide or if it is determined by reference to a certain market, sector or industry, be clear what that comparator is.

Companies House and striking off

Breaking news from Companies House, which has announced that with effect from 21 January 2021 voluntary and compulsory strike off processes will be “paused” for the period of one month until 21 February 2021. This doesn’t mean a free pass for those companies who are late filing their annual accounts or confirmation statement – Companies House will continue to write to them. The main reason for it is to assist companies with more time to update their records and to help them avoid being struck off the register. It does also mean that creditors and other interested parties who wish to object have now more time to respond, and Companies House more time to process any such responses.

Stay safe and well.