How Easily Are Mac Clauses In Indian M&A Contracts Enforceable?

Background

Material Adverse Effect ("MAE") or Material Adverse Change ("MAC") clauses are often used in mergers and acquisition ("M&A") agreements. MAC clauses are a double-edged sword. On the one hand, they protect an acquirer from adverse or unfavourable events or changes to the target company which may negatively affect the business prior to closing. However, on the other hand, a MAC clause can be detrimental if the acquirer tries to frustrate the M&A agreement alleging that the circumstances under which the transaction was agreed have materially changed.

Legal position

The doctrine of impossibility and frustration has been covered in Section 56 of the Indian Contract Act, 1872 (the "ICA"). Under this doctrine, a contract to do an act which, after the contract is made, becomes impossible, or becomes unlawful, by reason of some event which the promisor cannot prevent, then the contract becomes void when the act becomes impossible or unlawful. Where one