Material adverse change clauses: play to the whistle

Material adverse change clauses: play to the whistle

Overview

The High Court recently considered whether the delay to the Premier League season caused by the first COVID-19 lockdown triggered a material adverse change clause (commonly known as a MAC clause) in contracts for broadcasting rights. In this briefing we look at how this compares with previous cases on MAC clauses and what the lessons are when drafting such provisions.

What are MAC clauses and how do the courts normally approach them?

Material adverse change clauses are usually intended to provide protection from unforeseen events or circumstances which have a detrimental impact on the parties to a contract. Where an unforeseen event or circumstance occurs within the scope of the clause and which has a material adverse effect on the rights and/or obligations of one or more of the parties, this may trigger a right to require the parties to renegotiate specific aspects of the contract or even a right permitting a party to terminate the contract in its entirety.

The two-stage test

Most MAC clauses contain two elements: a "trigger event" which activates the clause in the first place, followed by a requirement for that trigger event to have a material adverse effect. As a result, the courts have typically applied a two-stage approach:

  • Stage 1: Has there been a relevant "trigger event"?

  • Stage 2: If so, has the trigger event had a material adverse effect on a party to the contract?

Stage 1: the trigger event

In practice, it has often proven difficult for a party seeking to rely on a MAC clause to establish that the conditions for the trigger event were met. For example, in Decura v UBS (2015), an outsourcing contract contained a MAC clause allowing the customer, Decura, to terminate if its supplier, UBS, ceased to carry on a "material part" of its investment bank business and this had a material adverse effect on UBS's ability to market Decura's products. However, although UBS had significantly scaled back its activities in certain areas, the court found that it had not ceased to carry on any part of its business – and that, as a result, there was no relevant trigger event.

Stage 2: material adverse effect

With regard to the second stage of the test, convincing the court that the adverse effect has been sufficiently material will not always be straightforward either. The courts often interpret "material" as meaning "substantial" or "significant", which suggests a reasonably high threshold. For example, in the Decura case discussed above, the court concluded that even if the scaling back by UBS had amounted to a trigger event, it remained able to market Decura's products effectively and there was no material adverse effect on the latter. However, that is not to say that the threshold is virtually impossible to meet. For example, in a dispute between the European Medicines Agency (the EMA) and Canary Wharf over termination of a lease as a result of Brexit, the court found that although the contract had not been frustrated, Brexit had indeed had a material adverse effect on the EMA (although as the lease did not contain a MAC clause, this finding did not assist the EMA). To read more about that case, please see our discussion in this briefing.

The commercial context of the MAC clause is typically also significant; for example, where it allows one party (as will often be the case) to terminate or avoid its contractual obligations, this tends to make the courts incline towards a higher threshold. MAC clauses may also be found in a variety of different types of contract, ranging from licensing or supply arrangements (as in the PPLive case) through to loan agreements and M&A deals (although MAC clauses remain relatively unusual in an M&A context; whilst they are almost always included in loan agreements, lenders rarely invoke them, in part because of some of the difficulties highlighted in this briefing). This can also have a bearing on the interpretation of the clause.

What happened in this case?

The Football Association Premier League Limited (the "Premier League") and PPLive Sports International Limited ("PPLive") entered into two contracts, together worth over US$709 million, to show live footage and highlights of Premier League football in China and Macau. In March 2020, the UK entered the first COVID-19 lockdown and, as a result, the season was initially paused for three months, and upon its return was subject to scheduling changes and strict rules on attendance.

PPLive withheld payment of the licence fees on two occasions – the first (totalling US$210.3 million) was due on 1 March 2020, which was before the Premier League season was temporarily suspended on 13 March 2020 and formally suspended on 3 April, and the second (totalling US$2.673 million) was due on 1 June 2020. The Premier League continued to provide all relevant footage and highlights of matches to PPLive for all remaining fixtures (which were eventually played in June and July) despite the non-payment. The Premier League subsequently terminated both contracts on 3 September 2020 and brought a summary judgment application seeking payment.

While PPLive sought to rely on a number of other more "creative" defences (including unjust enrichment, penalty clauses, relief from forfeiture and set-off) and a proposed counterclaim for breach of warranty (all of which were swiftly dismissed by the court), its primary defence was in seeking to rely on a clause which provided that, where there was a fundamental change to the format of the Premier League competition, it would be entitled to enter into good faith negotiations with the Premier League to seek a reduction in the fees – a so called "MAC clause".

The material adverse change clause

Both contracts included a warranty given by the Premier League that, during the term of the contracts, "the format of the Competition will not undergo any fundamental change which would have a material adverse effect on the exercise of the Rights by [PPLive] and, for [these] purposes… a fundamental change shall include any change which results in: (i) the total number of Clubs being reduced to less than eighteen (18); or (ii) the Competition ceasing to be the premier league competition played between professional football clubs in England and Wales."

The contracts also provided that if any such fundamental change occurs, then PPLive "shall be entitled to enter into a period of good faith negotiations with the Premier League in order to discuss a possible reduction of the Fees payable by [PPLive]… in order to reflect the effect of that fundamental change on the exercise of the Rights granted to [PPLive] hereunder."

Could PPLive rely on the material adverse change clause?

Applying the two-stage approach explained in section 1, Mr Justice Fraser in the High Court explained that "the main issue… is whether the conditions under which the interrupted 2019/2020 season resumed in June 2020 are properly characterised as a "fundamental change" – or indeed fundamental changes – to "the format of the competition"… It is only if the changes can be so characterised, that it would be necessary to turn to the second limb of that clause, to consider whether such changes had a "material adverse effect on the exercise of the Rights" by [PPLive]."

Mr Justice Fraser considered several factors put forward by the parties as reasons for and against there being a fundamental change to the format of the Premier League and came to the conclusion that the changes caused by the COVID-19 lockdown had been insufficient to meet this trigger. In his judgment, he also noted the types of changes which could have been fundamental with regard to the format of the competition (as set out in the following text box).

Format changes

  • Changes to the member clubs
  • Changes to the number of times teams play one another or the number of matches in the season
  • Home and away fixtures not being played
  • Changes to the points awarded for results
  • Changes to the organisation of the league table

For Mr Justice Fraser, the key determinant was whether the changes affected the "format" of the competition (even before considering whether such changes were "fundamental"), which would include only those changes which went towards "the way that the competition was undertaken". He found that PPLive was primarily complaining about non-format changes, such as delays to the season, empty stadia or rescheduling of matches (e.g. changes to kick off times/days on which matches are played). It was also clear in both contracts that the fixture list was "indicative" only (and subject to change upon notification by the Premier League) and the Premier League also had a clear discretion as to when matches were to be played. Whilst matches taking place on weekdays and at inconvenient times in China and Macau may have been relevant with regard to the effect on PPLive (the second stage of the test), the fact that a fundamental change in format had not occurred meant that PPLive had already fallen at the first hurdle.

What can we take from this decision?

Although the approach taken by courts to MAC clauses will always depend on how they are drafted, this decision provides a further example of the two-stage approach highlighted in section 1. The key lessons when drafting MAC clauses are as follows:

Get the trigger event right

If you may need to rely on a MAC clause, think very carefully about the scope of the trigger event. In both PPLive and Decura, the events that the party seeking to invoke the MAC clause cited as potential triggers were found to be outside of its scope, even though it is relatively easy to see why they were viewed by those parties as "the sort of thing that a MAC clause might cover". MAC clauses are not viewed by the courts as "get out of jail free" cards whenever things do not go according to plan. On the contrary, as Mr Justice Fraser observed in the PPLive case, "The English law of contract does not require, or expect, contracts to be renegotiated or rewritten simply because events transpire differently to what is expected. This would lead to confusion and indeed chaos."

Conversely, if a party concedes the inclusion of a MAC clause benefitting the other party, it should ensure that the circumstances in which it will be triggered are sufficiently limited and well-defined.

Don't assume that obligations to renegotiate are unenforceable

As in the PPLive case, MAC clauses will sometimes contain an obligation to "enter into a period of good faith negotiations" with a view to adjusting certain aspects of the contract. The Premier League argued that this provision could not be enforceable on the basis that it was merely an "agreement to agree". However, whilst not directly relevant to the outcome of the case and therefore obiter, Mr Justice Fraser rejected this argument. His view was that an obligation to negotiate in good faith cannot simply be ignored – it will generally be enforceable such that at least some form of negotiation should take place (and a degree of good faith may need to be demonstrated).




How can Travers Smith help?

The Commercial, IP & Technology team at Travers Smith has considerable expertise and experience in drafting and negotiating the full range of commercial contracts, including material adverse change clauses. Please feel free to get in touch.

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