Canada: Litigation Of Material Adverse Change Clauses In Derivatives Contracts

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Litigation, April 2008

As noted recently in the Financial Post, both Wall Street and Bay Street are closely watching the next court ruling that may assist in providing parameters of how and when a party may lawfully terminate a contract based upon a material adverse change clause (MAC). Given the high stakes that are often involved, few of these cases go to trial, but there may be more litigation arising as a result of the current credit crisis.

A MAC (also called a material adverse event/effect or MAE) clause is a way for parties to allocate risk. MAC clauses are frequently used in the context of mergers and acquisitions to allocate risk between buyers and sellers. MAC clauses are also prevalent in other commercial agreements, such as those used in the derivatives industry. This article discusses MAC clauses in the context of derivatives contracts. For a discussion of MAC clauses in the context of M&A transactions, please see "Recent Developments in Market Practice and the Law Governing Material Adverse Change Clauses" in Blakes Bulletin on Mergers & Acquisitions, April 2008.

A MAC clause generally refers to a defined term in an agreement delineating what constitutes a material adverse change or a material adverse event/effect. The exact wording of a MAC clause varies from transaction to transaction and is often subject to much negotiation. In general, in commodity contracts, a MAC is a defined set of financial parameters beyond which a collateral event occurs that typically permits the unaffected party to call for performance assurance in the form of security. A MAC is generally not a basis for immediate termination of a contract unless expressly provided. Generally, only where the affected party has failed to provide adequate performance assurance after receiving a written notice and sufficient opportunity to preserve the integrity of a transaction does a MAC become a terminating event that entitles the unaffected party to terminate the contract.

Whenever a credit event is of concern, most industry practices require that the unaffected party give notification of that concern — affected parties cannot speculate or attempt to anticipate what those credit concerns, if any, may be. Again, most industry practices do not impose a requirement on an affected party to voluntarily provide performance assurance. Once that need has been identified, it is typical for a dialogue between the parties to ensue to work out, among other things, the details of the credit support needed and the circumstances under which it will be provided.

In CP&L v. Dynegy, the U.S. District Court for the Eastern District of North Carolina considered a coal supply agreement that was terminated by the plaintiff as a result of an alleged MAC caused by Dynegy's credit rating being downgraded. Although CP&L gave Dynegy notice of the alleged MAC and received back a written reply declining to provide any credit enhancement, CP&L ignored Dynegy's reply and then purported to terminate the contract. The court held that Dynegy's written response was commercially reasonable and appropriate and thus CP&L's termination of the agreement constituted a breach of contract.

The concept of providing a reasonable opportunity to comply with a demand for payment in the context of a demand obligation is well settled in Canada. The application of that principle and the amount of time to be given to a counterparty will depend upon all the facts and circumstances in each case. Whether those well-settled principles will be regarded by the courts as applicable to demand obligations under MAC clauses remains to be seen, although absent contractual provisions to the contrary, it appears there are strong reasons to impose such requirements depending on the facts of each case.

The requirements of notice requesting performance assurance vary by contract. However, safe and effective practice requires that such a notice should: (i) be sent to the contracting party in writing to ensure the request is properly given, particularly if termination of the contract is contemplated; (ii) reference the proper contract to confirm what transaction is in issue; (iii) provide the reason or credit event prompting the demand to ensure the affected party is notified of the precise credit issue; (iv) set out the amount of the performance assurance being requested so the affected party can understand specifically what is being requested to cure and preserve the contract; (v) set out what type of performance assurance is being requested to allow the counterparty to arrange for such security; and (vi) set a deadline for response to set a time by which the affected party must act to preserve the transaction.

Some agreements provide that, even in the event proper notice requesting and opportunity to provide performance assurance is provided, the right of termination remains discretionary in nature. As a result, such provisions invariably involve a consideration of the requirements of good faith and fair dealing. Where a contract grants one party a right to exercise a discretion, that right must always be exercised honestly, fairly and in good faith.

There has been a paucity of court decisions directly concerning MAC clauses outside of the M&A context. However, that trend now appears to be changing with the increased uncertainties surrounding the credit market and the associated economic downturn. There have been no leading cases in Canada interpreting MAC clauses, although some limited U.S. cases provide some insight into how MAC clauses will be interpreted. A recent Canadian trial that considered these and a number of other issues, which is currently awaiting judgment, involves the termination of a long-term natural gas derivative contract that Marathon Canada terminated with Enron Canada arising from a purported MAC caused by the credit rating downgrade of its indirect parent, Enron Corp.

Given the high stakes of many contracts that contain MAC clauses and the plethora of issues that arise in exercising MAC-related termination rights, it is critical to carefully draft these clauses and closely examine the rights and obligations they create and impose to avoid being faced with litigation alleging the wrongful termination of a contract.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

12 Nov 2018, Other, Toronto, Canada

Stories aren’t falsehoods. Stories are the root of all effective human communications: they motivate, animate and clarify. If you aren’t telling stories, you probably aren’t getting your point across.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions