Force Majeure vs. Material Adverse Change (MAC) Clauses

In commercial contracts and merger agreements, two clauses often determine who bears the risk when unexpected events occur: Force Majeure and Material Adverse Change (MAC). While both address unforeseen circumstances, they serve fundamentally different purposes. This guide explains the distinctions, common applications, and how to negotiate these critical provisions.

Understanding Force Majeure and MAC clauses is essential for managing contractual risk in uncertain times

Quick Summary:

• Force Majeure: Excuses performance when an extraordinary event beyond a party’s control (e.g., natural disaster, war) prevents contract fulfillment. It focuses on temporary inability to perform.
• MAC Clause: Allows a buyer to walk away from a merger or acquisition if the target company suffers a significant, sustained deterioration before closing. It focuses on long‑term business value.
• Key Difference: Force majeure addresses unforeseen events affecting performance; MAC addresses unforeseen events that fundamentally undermine the value or viability of a transaction.

What Is a Force Majeure Clause?

Force majeure (French for “superior force”) is a contractual provision that excuses a party from performing its obligations when an extraordinary event or circumstance beyond their control makes performance impossible, illegal, or commercially impracticable. Common force majeure events include: acts of God (hurricanes, earthquakes), war, terrorism, strikes, pandemics, and government actions (embargoes, new regulations). The clause typically suspends performance during the event and may allow termination if the event persists beyond a specified period. Without a force majeure clause, a party may be held liable for non‑performance even if the failure was caused by an unforeseeable event.

What Is a Material Adverse Change (MAC) Clause?

A MAC clause (sometimes called Material Adverse Effect or MAE) is most commonly found in merger and acquisition (M&A) agreements. It gives the buyer the right to walk away from the deal if, between signing and closing, the target company experiences a significant, sustained deterioration in its business, financial condition, or prospects. MAC clauses are heavily negotiated because they allocate risk: sellers want a narrow, highly defined MAC that excludes broader economic downturns; buyers want a broad MAC that allows exit if the target’s value materially declines. Courts interpret MAC clauses strictly—a temporary dip or general industry downturn typically does not trigger a MAC.

How to Evaluate and Negotiate These Clauses: A Step‑by‑Step Guide

• Step 1 – Identify Which Clause Applies to Your Contract Type: In supply, service, or commercial contracts, force majeure is the primary risk‑allocation tool. In M&A or investment agreements, the MAC clause is critical. Both may appear in complex transactions.
• Step 2 – Define Covered Events Precisely: In force majeure, list specific events (pandemic, natural disaster) and include a catch‑all like “other events beyond reasonable control.” In MAC clauses, define what constitutes a “material adverse change”—often excluding changes affecting the broader industry, general economic conditions, or changes in law.
• Step 3 – Establish Consequences and Timelines: Force majeure should specify notice requirements, suspension period, and termination rights after a defined period (e.g., 60 days). MAC clauses should clarify that the buyer must prove the change is both material and persistent, not temporary.
• Step 4 – Consider Carve‑Outs and Exceptions: Force majeure often includes exceptions for events the party could have mitigated. MAC clauses frequently carve out events that the seller can remedy or that result from the buyer’s actions.
• Step 5 – Consult Jurisdictional Precedents: How courts interpret these clauses varies by jurisdiction (e.g., Delaware courts in the U.S. have extensive MAC case law). Understanding local legal standards informs negotiation leverage.

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Common Pitfalls When Drafting or Invoking These Clauses

• Assuming “Act of God” Covers Everything: Without explicit mention of events like pandemics, supply chain disruptions, or government shutdowns, courts may not interpret force majeure to include them. Specificity matters.
• MAC Clauses That Are Too Broad: A buyer with an overly broad MAC clause may find it challenged in court. Sellers should push for clear carve‑outs to prevent walkaways over minor fluctuations.
• Failure to Follow Notice Procedures: Most clauses require prompt written notice. Missing notice deadlines can waive the right to invoke the clause.
• Confusing Temporary Impracticability with Permanent Material Change: Force majeure is for temporary suspension; MAC is for permanent deal‑break. Using the wrong clause in negotiations can create confusion.

Benefits of Understanding and Properly Drafting These Clauses

• Risk Allocation Clarity: Both parties know who bears the cost of unforeseen events, reducing costly litigation.
• Transaction Certainty: In M&A, a well‑defined MAC clause gives buyers confidence to proceed without fear of being locked into a deteriorating deal, while sellers gain protection from frivolous walkaways.
• Operational Continuity: Force majeure allows businesses to suspend obligations during crises without breaching contracts, preserving long‑term relationships.

Frequently Asked Questions

Can a pandemic trigger force majeure?

Yes, if the contract explicitly includes “pandemic,” “epidemic,” or “public health emergency.” After COVID‑19, many force majeure clauses now specifically list these events. Without such language, courts may not automatically consider a pandemic a force majeure event unless it makes performance impossible (e.g., government closure orders).

Who typically initiates a MAC clause?

In M&A, the buyer initiates the MAC clause. It gives the buyer the right to terminate if the target’s business materially deteriorates between signing and closing. Sellers often try to limit MAC to events directly affecting the target uniquely (not industry‑wide) and include “cure” periods.

Can a contract have both force majeure and MAC clauses?

Yes, especially in complex transactions like asset purchases that also involve ongoing supply or service agreements. Force majeure applies to performance obligations; MAC applies to the transaction’s viability. They are complementary but should be drafted consistently to avoid conflicts.

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Conclusion

Force majeure and Material Adverse Change clauses are essential tools for managing contractual risk in an uncertain world. Force majeure focuses on temporary inability to perform due to extraordinary events; MAC clauses focus on whether a transaction still makes sense given a significant decline in the target’s value. When drafting, be specific about triggering events, procedural requirements, and consequences. When negotiating, understand the balance of risk each clause represents. With careful attention, these provisions provide the flexibility and protection needed to navigate unexpected challenges while preserving business relationships.

References

• American Bar Association – “Force Majeure Clauses in a Post‑Pandemic World”
• Harvard Law School Forum – “Material Adverse Change Clauses in M&A”
• International Bar Association – “Force Majeure and MAC Clauses: A Comparative Analysis”
• Skadden – “M&A Clauses: Force Majeure vs. Material Adverse Change”
• Latham & Watkins – “Negotiating Force Majeure and MAC Clauses”
• AkzoNobel Legal – “Understanding Force Majeure and MAC Clauses in Commercial Contracts”