Does COVID-19 allow parties to pull back from closing a signed deal?

The ongoing COVID-19 pandemic creates a lot of uncertainty that can turn your latest deal from safe to hazardous. In this context, you (or your counterparty) might be tempted to back away from your arrangements. But is this possible?

Legally speaking, parties are bound by a signed share purchase agreement (SPA) and they cannot back away. However, in case of Force Majeure (also referred to as an Act of God), a party might be freed from his/her contractual obligations.

Force Majeure

Force Majeure is defined as an extraordinary event or circumstance which is unforeseeable, unpreventable and external to the parties, and which renders the performance of one party’s obligations under the agreement impossible. In such case, the non-fulfillment will not constitute a contractual breach, and the parties will be freed from their liabilities under the agreement.

Covid-19

Within the framework of a share transfer, the occurrence of a pandemic cannot, as such, be regarded as Force Majeure. It does not prevent the parties to an SPA from closing the transaction and executing their obligations thereunder, because it is not, for that purpose, unpreventable. This remains true even though the deal has become less attractive, unbalanced, or even no longer desirable at all.

Governmental security measures

The exceptional and imperative security measures taken by the government to contain the pandemic, however, could in some cases be regarded as Force Majeure. In this respect, the prohibition of gatherings and the mandatory closing of certain businesses are major restrictions which might make it impossible for a party to fulfill one or more contractual obligations (other than paying the purchase price and delivering the shares). The same might be true for some of the conditions precedent provided for under the SPA. If this were to be the case, and unless waived (if possible), the transaction cannot be closed for reasons of Force Majeure.

Termination or suspension

In case a party cannot perform his/her contractual obligations due to a temporary Force Majeure, the agreement will be suspended for the duration thereof. When the Force Majeure stops, the parties must resume their obligations, as a temporary Force Majeure does not have a liberating effect.

Within the context of an SPA, it can be imagined that the agreement contains a so-called ‘long stop date’. This means that the non-fulfilment of the conditions precedent by such date result in the termination of the agreement and, in the context of Force Majeure, the liberation of the parties. However, the question can be asked whether, under the present circumstances, the long stop date itself should be suspended due to a temporary Force Majeure.

Burden of proof

The party relying on Force Majeure will have to evidence how the pandemic, and the governmental measures taken in this respect, make it impossible (and not merely just more difficult or burdensome) to perform his/her contractual obligations under the SPA.

Other legal principles or applicable contractual clauses

Alternatively, if Force Majeure does not apply, other legal principles and/or contractual clauses might allow for, or might be invoked within the framework of the attempt for, the renegotiation of the SPA:

MAC-clause

A MAC-clause is often used in M&A-practice and is regaining importance nowadays. This particular clause provides the parties, usually the purchaser only, the right to walk away from the deal in the event of a material adverse change occurring between the signing and the closing of the transaction (for more information click here).

Abuse of right-doctrine

An abuse of right is defined as the exercise of a right by the holder thereof in a way that exceeds the boundaries of a reasonable use by a normal and prudent person. It occurs for instance when a party has deliberately chosen the most damaging use of the right to the counterparty or when it creates an unreasonable disproportion between the damage caused and the advantage sought.

If a party to an agreement demands the performance of the other party’s obligations, despite tremendous, unforeseeable difficulties, such behavior could under certain circumstances be regarded as abusive, since the benefit for the first party would be disproportionate to the other party’s burden.

Hardship-doctrine

The so-called hardship-doctrine (in French, théorie de l’imprévision / in Dutch, imprevisieleer) provides that a change in the equilibrium of the performance of a contract due to changed external circumstances, which could not have been foreseen when the agreement was entered into, results in the obligation to renegotiate the terms thereof.

Although the hardship-doctrine occasionally has been applied in certain very specific circumstances, the hardship-doctrine is not generally accepted under Belgian law.

Hardship-clause

Alternatively, although less common in an SPA, the agreement might provide for an “hardship-clause”, which effect is substantially similar to the hardship-doctrine: the (contractual) legal obligation to renegotiate the terms of the agreement in case of abnormal and unforeseeable circumstances occurring in the course of the agreement, which alter the equilibrium between the parties and create an unreasonable imbalance detrimental to one of them.

The hardship-clause can freely be negotiated and included in an agreement. It typically only allows for the renegotiation of the agreement, rather than its termination.

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