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Can Covid-19 cause a material adverse effect?

Posted by Joshua Atkinson on 1st December 2020

A recent hearing before the Commercial Court has provided some much needed clarity on a notoriously opaque but crucial subject – whether COVID-19 can be deemed to have caused a materially adverse effect.


This particular case involves Travelport Limited and others v WEX Inc.

Travelport Limited were the claimant (“the Seller”) whilst WEX were the defendants (“the Buyer”).

Their case arose out of a share purchase agreement under which WEX was to acquire from Travelport Limited the entire issued share capital in two travel payment providers, eNett International (Jersey) Limited and Optal Limited, worth an approximate $1.7 billion.

The share purchase agreement (SPA) entered into earlier this year contained a ‘materially adverse effect’ clause.  Such clauses are included commercial contracts to allow contracting parties an opt-out of some or all of the terms of the contract, should an event occur that is deemed under the contract to cause a material adverse effect. As is often the cause, disputes can arise if the drafting isn’t clear on what does and does not constitute a material adverse effect.

In the contract, the relevant clause states:

“Since the date of this Agreement there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a Material Adverse Effect”

There was an additional provision accompanying the substantive clause relating to “conditions resulting from pandemics”, allowing WEX to rely on this clause if the event has had a disproportionate effect on [Enett and Optal] taken as a whole, as compared to other participants in the industries in which they operate.

What happened?

On 4th May 2020 the Buyer gave notice to the Seller that due to the Coronavirus pandemic there had been a materially adverse effect on eNett International (Jersey) Limited and Optal Limited, due to the financial hardship being faced by the travel payment industry. Accordingly, the Buyer was triggering the relevant clause and the purchase would not go ahead.

The Sellers disagreed that there had been a materially adverse effect on the position of eNett and Optal and believed the Buyer was still obliged to complete the purchase under the SPA. The Sellers applied to the court for a declaration that effects of the pandemic did not qualify as a materially adverse effect under the relevant clause as drafted and secondly, that nothing had occurred which would negate the clause under the contract.

The Seller was of the opinion that for the purposes of the relevant clause in the SPA, eNett and Optal should not be viewed in the narrow industry sense (ie the travel payment provider industry), but instead viewed within the broader payments industry. As such, a central preliminary issue (in establishing if the two companies had suffered a materially adverse effect) would be to confirm which industry they operated in.

Judicial Interpretation

Following guidance from both British and US courts (specifically those in the State of Delaware), the Commercial Court has found that there is no exclusive “travel payments industry”. And that the two companies should be viewed as operating within the broader “payments industry”.

This preliminary finding will, undoubtedly, strengthen the Seller’s position in that the payments industry has enjoyed a reasonably strong performance throughout 2020, compared to companies operating within the travel industry. In other words, the Sellers ought to be able to show that the transaction ought to complete, ie the materially adverse effect “opt-out” does not apply here.

This case reinforces the need for parties to seek, to the fullest extent possible, that agreements they enter into are drafted in unambiguous terms to reflect their intentions. The court effectively said that had Travelport Limited wanted to be so specific about the restricted class of industry participants that were to be scrutinized for the purposes of deciding whether the pandemic had a materially adverse effect on them, they ought to have said so!

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