Contract liabilities and performance
Anticipated breach of contract and assessment of long-term contracts
Anticipated breach of contract
Another wave of buyers seeking to walk away from or renegotiate existing contracts or contract terms and financiers who drag their feet in yet-to-close M&A deals discretionary financing and capital expenditure financing is expected. Buyers and financiers are second-guessing compliance with every condition precedent, request additional confirmations in certificates, etc.
Assessment of long-term contracts
The current economic and geopolitical climate may give rise to higher costs and price increases. It is therefore worthwhile to assess price change mechanisms, MAC clauses and other relevant contractual terms in supply and purchasing contracts.
Broader considerations for (anticipated) breach of contracts
Another wave of buyers seeking to walk away from or renegotiate transactions and projects that have signed, but not yet closed, is expected. Buyers will second-guess every condition precedent and look for means to renegotiate a signed transaction. In this respect, we expect that there will be a continued focus on, and scrutiny of, antitrust and sanctions-related (closing) conditions, interim operating covenants (including any obligation to act in the ordinary course of business and/or consistent with past practice) and Material Adverse Change clauses in M&A and financing documentation.
In addition, we experience that financiers drag their feet in yet-to-close M&A deals, discretionary financing and capital expenditure financing, especially in bank and project financing not entirely committed as certain funds. As for bonds, they typically require a credit rating. If the rating has not yet been obtained, the ratings processes are currently on hold or very slow. However, if a credit rating has already been obtained, it is definite so there will not be any renewal issues. At this time, we have not yet seen Material Adverse Change or other clauses in drawn-financing being called.
It is key to face these potential risk and opportunities head on. Mapping related risks and opportunities on short notice, and preparing for various scenarios (i.e. having a plan A, B and C) together with financial and legal advisers ensures preparedness for any discussions. This allows the managing board to show the company's financiers and the buy- or sell-side that the board is in control.
Broader considerations for assessment of long-term contracts
For joint ventures that are active in Russia or have relationships with Russian counterparts it is advisable to assess how the JV may be affected and how any disagreement between the JV partners on the preferred course of action should be resolved.
Adverse economic circumstances may for example lead to disproportionate burdens for certain JV partners, e.g., where one JV partner supplies all raw materials that have increased in price whereas the other JV partner supplies personnel only.
The JV agreement may also provide for possibilities to dissolve the JV under certain conditions, and how the assets of the JV should in such case be distributed amongst the JV partners.
Damages that result from adverse effects of the war may be insured, but insurance coverage does not always extend to damages resulting from Acts of God or Force Majeure.
Although the definition of Acts of God typically only includes forces of nature, a Force Majeure definition may also cover man-made events such as government lockdowns or war.
Insurance terms should be closely reviewed in order to determine whether insurance coverage exists and to what extent.