Managing Risks in the Face of Uncertainty – Legal Tools for Businesses

Recent headlines are a stark reminder of the economic uncertainty facing global businesses. From escalating trade tensions to supply chain disruptions and rising inflation, companies across industries are grappling with the ripple effects of geopolitical and macroeconomic shocks. Managing Risks In The Face Of Uncertainty has become critical, especially as the Singapore government has downgraded its 2025 GDP forecast and set up a national task force to support businesses and workers in response to the ongoing trade tensions.

These developments underscore the need for business to be proactive in managing risks. Deals struck under stable conditions may no longer reflect current realities, and businesses must be equipped with tools that allow them to respond flexibly to unexpected changes. This commentary explores some contractual tools businesses can leverage to preserve commercial viability in times of disruption.

Material Adverse Change clauses

One possible risk-mitigation tool is the Material Adverse Change (“MAC”) clause, which offers contractual flexibility in uncertain conditions.

A MAC clause provides contracting parties with the ability to re-negotiate terms, suspend performance or even terminate a contract in response to significant or unforeseen events which may affect the parties’ performance or the expected outcome of a contract. The applications can be tailored to meet various commercial needs:

• In M&A transactions, they may serve as a closing condition – providing buyers with a mechanism to reassess or exit a transaction if the target experiences a material downturn.
• In banking and finance, MAC clauses function as credit monitoring tools, enabling lenders to suspend drawdowns, trigger default events, or accelerate repayments when unforeseen developments jeopardise a borrower’s financial position.
• In commodity trading and shipping, MAC clauses may be used to revisit pricing or performance obligations in response to external shocks such as sanctions, regulatory changes, or geopolitical disruptions.

The practical effectiveness of an MAC clause depends heavily on how it is drafted. Broad and inclusive clauses without clear definitions of what constitutes a “material adverse change” may lead to ambiguity and invite disputes. Overly narrow definitions risk excluding legitimate trigger events, leaving parties exposed. To mitigate this, parties should:

• Clearly define what constitutes a material adverse change. There are two common approaches: (1) specifying trigger events, or (2) setting objective thresholds. While thresholds offer greater certainty and reduce interpretative disputes, they may lack the flexibility needed in fast-moving or unpredictable environments.
• Align the consequences of invoking the MAC clause with the commercial intent of parties – a temporary suspension of obligations, a right to renegotiate terms, or termination of contract. It is not enough to define what constitutes a material adverse change – the clause must also be clear about what happens when such a change occurs.
• Consider if procedural requirements, such as notice provisions, should be included. Such requirements may provide the affected party with an opportunity to remedy or mitigate the effects of the event before drastic action is taken.

A well-drafted MAC clause can be a powerful tool, especially in long-term agreements where macroeconomic or regulatory changes may significantly alter the deal. When thoughtfully tailored, a MAC clause not only provides a contractual exit or adjustment mechanism – it also reinforces commercial certainty by aligning legal remedies with business realities in times of disruption.

Price adjustment and cost sharing mechanisms
Another critical strategy for managing economic volatility is risk allocation through pricing flexibility. Contracts may incorporate price adjustment mechanisms such as:

• Price adjustment clauses: Adjust pricing based on fluctuations in input costs, inflation indices, or exchange rates.
• Cost-sharing arrangements: Distribute unexpected costs—such as those arising from supply chain disruptions or regulatory changes—between the parties based on agreed formulas.

Price adjustment mechanisms are particularly valuable in contracts with long durations, high volatility, or reliance on global supply chains. And they are flexible tools:

• In M&A transactions, price adjustment clauses are commonly used to ensure that the deal value reflects the target’s actual financial condition at closing or post-closing.
• In financing transactions, interest margins can be stepped up or down based on the percentage of facility utilisation or based on the borrower’s financial ratios (e.g. debt/EBITDA) – this allows lenders to balance risk and return while providing borrowers with incentives to maintain strong financial metrics.
• Shipping companies face frequent exposure to cost fluctuations – fuel prices, war risk premiums, congestion surcharges, and route changes driven by geopolitical instability. Price adjustment clauses in shipping contracts and cost-sharing arrangements in charterparties help manage these risks.

Key considerations when drafting such clauses include:

• Identifying specific trigger events that justify adjustment (e.g., inflation levels, changes in law, utilisation rates, financial ratios), including when and how these trigger events are assessed.
• Establishing transparent formulas or benchmarks to guide recalculations.

The challenge lies in defining the appropriate trigger events and structuring cost allocation terms that are fair and acceptable to the parties involved. That said, if done right, these mechanisms help maintain economic equilibrium in the deal, and ensure that margins are not eroded due to shifting market conditions.

For more information, please do not hesitate to contact:

Zhida Chen – zhida.chen@helmsmanlaw.com

Lynette Koh – lynette.koh@helmsmanlaw.com

Constance Leong Koi Yaun – constance.leong@helmsmanlaw.com

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