Corporate Contracts Get a Rewrite for the Post-Pandemic Era

When EasyJet Plc announced a long-term deal with Airbus SE in 2013 to buy 135 jets, the budget airline boasted that it had negotiated a “very substantial discount” from the list price of about $13 billion. Analysts estimated the price break at about 40%. But what EasyJet traded to get that discount wasn’t laid bare until last month. Under pressure from its largest shareholder to cancel the remaining undelivered planes from that order as the coronavirus flattens demand for air travel, the carrier said it couldn’t. Its contract with Airbus would require it to pay back the discounts it was given on the 45 planes it had already received and also to compensate the plane maker for any future losses it would incur from the deal’s termination. The company said it had no recourse to a so-called force majeure clause, which allows a party to exit a contract because of some unforeseen catastrophe—like a global pandemic.

Before Covid-19, price was the main consideration in corporate contract negotiations, but now risk minimization has become the order of the day. So companies involved in current negotiations are scrambling to include—or exclude—pandemics in force majeure provisions and in often-boilerplate “material adverse change” (MAC) clauses in mergers-and-acquisitions deals. And businesses will likely face demands to pay more or give up something else for the ability to walk away from a deal in the event of a second wave of the virus or some future outbreak. Think of it as the pandemic premium.