In the article, I mentioned “Most Favored Nations” and “Material Adverse Changes” clauses. Some of you may not know what these are.
Our online course Supply Management Contract Writing covers Most Favored Nations clauses, so I won’t go into detail on those here. But I will address Material Adverse Changes clauses.
Material Adverse Changes clauses are more common to merger and acquisition agreements than they are to purchase contracts, however, they definitely have their place and should be increasingly used in long-term agreements. Essentially, they say that if the market experiences dramatic and unanticipated changes during the agreement that affect the way in which business is done, one or both of the parties may have the right to terminate the agreement.
Think of a case like the Transportation Security Administration taking over security at airports. That is a service that used to be purchased by airlines. But due to new regulations – unforeseen before 9/11 – the market dramatically changed and those contracts had to be adjusted accordingly. That would be a situation where a Material Adverse Changes clause could come in handy.
Also, consider imaging or data industries where formerly paper output has been replaced by digitized output. Fifteen years ago, few people may have imagined that the film camera would be virtually extinct in 2009. So that is another example of a material adverse change that an educated buyer would be prepared for.
Material Adverse Changes clauses are an important tool to have in your toolbox. Like any tool, you won’t need to use it in every situation. But it’s good to know that it is available.]
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