Before Covid-19, the price was the main consideration in corporate contract #negotiations, but now risk minimization has become the order of the day. So companies involved in current negotiations are scrambling to include—or exclude—pandemics in force majeure provisions and in often-boilerplate “material adverse change” (MAC) clauses in mergers-and-acquisitions deals. And businesses will likely face demands to pay more or give up something else for the ability to walk away from a deal in the event of a second wave of the virus or some future outbreak. Think of it as the pandemic premium.
With companies increasingly seeking to upend pending deals negotiated in the pre-virus era, contract disputes are piling up. Many buyers still in negotiations are demanding significant discounts to carry on with M&A deals in a more uncertain world. Sellers, on the other hand, are trying to get in writing that the virus won’t prevent a transaction going forward, just like they’ve done following other #catastrophic events.
Such M&A termination penalties, which averaged 7% of the deal value for buyers in 2019 are typically included in agreements only when a transaction faces significant financing or regulatory hurdles. Brian Patterson, a Silicon Valley attorney with Gunderson Dettmer, says termination fees may become more standard for all deals, not just the largest. But Mark Harms, chairman of merchant bank Global Leisure Partners, says there will be horse-trading involved when structuring the walkaway terms: “You want a MAC clause? Put a bigger termination fee in it so it’s at least painful for you to think about.” It is apparent that in this economic climate we live in, the party that has the money in a negotiation is most likely to have the #advantage.
In the hard-hit world of commercial real estate, the toughest negotiations ahead might be with insurers rather than between tenants and landlords. Future leases will probably require some kind of pandemic insurance to be maintained but insurance companies are going to be fighting tooth and nail over this to limit their exposure.
Companies are now working out how to incorporate emerging health and #safety protocols into future contracts with venues, caterers, and other service providers. More rigorous cancellation clauses will be a big part of the discussions, though the emphasis will likely be on how dates can be reset.
Force majeure
Force majeure provisions will probably become far more specific and complex, noting that simply including the word “pandemic” may offer little protection if a company’s business is damaged more by the resulting economic downturn than by the disease itself. Parties will likely try to work in more specific ways to renegotiate when a contract becomes uneconomical.
A London partner with Norton Rose Fulbright (NRF), Holly Stebbing, cautions that including force majeure clauses may not offer #pandemic protections indefinitely. “Now that Covid-19 has happened and there are medical suggestions that highly contagious respiratory viruses may be the norm,” she says, “it’s no longer unforeseeable that this will happen again.”
While there may indeed be disputes about what’s predictable, many lawyers still expect the use of force majeure clauses to increase. Whether or not it is stated as alien abduction or tsunami, the concept is meant to be that, in the event that something terrible happens, the contract performance is exempted. But lawyers will be adding the specific term “pandemic” to their clients’ new agreements as no lawyer is going to take that risk.
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