Akey purpose of many commercial contracts is to allocate risk between the parties and identify what consequence should arise if any economic or financial risks increase as a result of a change in circumstances or the occurrence of an adverse event after the contract was signed. Often the change in circumstances or the adverse event was not foreseeable by the parties on the date on which the contract was signed. This article examines material adverse changes (MAC) clauses and their legal treatment. It begins by defining a MAC clause and outlining how it works in a contractual sense, and the different contexts in which it may be used. It then examines the various ways in which such clauses have been interpreted in common law jurisdictions, and in China.
What is a MAC clause?
In general terms, a MAC clause allows one party to exercise certain rights in the event that a material adverse change occurs. The right might be the right to terminate a contract (for a discussion about the basis on which a contract may be brought to an end, see China Business Law Journal, volume 2, issue 1, page 58: When a contract comes to an end) or the right of the relevant party to choose not to perform, or continue to perform, its obligations under a contract. MAC clauses are sometimes referred to as material adverse effect clauses. As a result of its potential impact, a MAC clause is often heavily negotiated between the parties and their lawyers.
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.