In BM Brazil v Sibanye, the High Court has provided useful guidance on the interpretation of material adverse event (MAE) clauses under English law. 

In this case, the purchasers of a Brazilian mine argued that a MAE clause in an SPA had been triggered between exchange and completion, meaning that they could walk away from the deal. However, the judge was not persuaded and found that in seeking to terminate, the buyer had committed a repudiatory breach of the contract and the seller was entitled to damages. In so finding, the judge took the opportunity to provide helpful guidance on MAE clauses.

Background

The facts of the case were relatively simple.

• The deal concerned an open pit mine in Brazil.
• BM Brazil agreed to sell the mine to Sibanye Stillwater. The deal signed in October 2021, but two weeks later (and before the deal had completed) there was a failure in one of the slopes in an isolated part of the mine, which led to a modest landslide (which the parties referred to as a Geotechnical Event or GE). 
• The GE was not substantial in the context of the mine’s operations. No one was hurt; no machinery was damaged; mining was suspended for a few hours. 
• Following the GE, Sibanye visited the site as part of a planned trip. During the trip BM Brazil told the Sibanye team about the GE and they saw the fallout when they visited the mine. 
• Prior to completion, Sibayne sought to terminate the deal on the basis that the GE was a MAE. 

BM Brazil as seller sued for declaratory relief and damages over Sibanye’s failure to complete.  

The key question was whether the GE had been a MAE. It was a condition of closing under the SPA that “no MAE shall have occurred since the date [of the SPA]”. MAE was defined as: “any change, event or effect that individually or in the aggregate is or would reasonably be expected to be material and adverse to the business, financial condition, results of operations, the properties, assets, liabilities or operations of the Group Companies, taken as a whole…” [this was followed by a series of exclusions which were not relevant to the case].

The Court’s analysis 

In considering whether a MAE had occurred, there were three issues that the judge had to determine: 

1. the relevance of issues that the GE had revealed;
2. the nature of the objective test; and 
3. the meaning of “material”. 

In each case he found against the buyer, ultimately concluding that the circumstances did not qualify as a MAE and that the buyer had therefore been wrong to serve a notice seeking to terminate the deal.

To reach this conclusion, the judge helpfully conducted a brief review of the available case law on MAE clauses. In particular, he approved of the approach taken by the judge in Travelport v Wex when it came to borrowing authorities from different jurisdictions. Given the relative paucity of English case law on the subject, the judge considered relevant foreign authorities, especially from the Delaware commercial court, which has notable experience of construing MAE clauses. 

Relevance of revelatory events

The first question was whether a “revelatory event” fell within the scope of the definition of a MAE. A “revelatory event” is an aspect of the event which reveals something adverse which already existed, but of which the buyer had not previously been aware. In the context of the mine, the suggestion was that the GE was symptomatic of some underlying structural flaw, which had been revealed by the GE, but of which Sibanye had not been aware until that point. 

The judge found that, properly construed, a MAE would not include “revelatory” elements of the event. This was for two reasons: (i) it would be an “abuse” of the language to claim that the wording “change, event or effect” became “material and adverse” because it revealed something other than the event itself, and (ii) if such revelatory events were relevant, then the temporal parameters of the clause (i.e. something occurring between exchange and completion) would be compromised because latent issues that existed prior to this period would now fall into the definition. Such latent issues were more properly a subject for the due diligence phase of the deal. If a purchaser had not discovered any such issues at that stage then that was their risk to bear. 

The judge drew a distinction in that the consequences of the MAE were to be taken into account only to the extent to which they “quantify or illuminate the significance” of the event itself, and not the extent to which they might reveal “some other, distinct, problem”.  

The nature of the objective test

The second interpretive point was the nature of the objective test created by the words “would reasonably be expected to be material and adverse”. The parties were agreed that the word “reasonably” meant that this was an objective test, to be judged from the perspective of the ordinary reasonable person in that position.  

The disagreement between the two sides was in respect of the nature of that objective position. The seller averred that whether the MAE was reasonably expected to be both material and adverse was a simple “yes or no” question. The purchaser argued that the reasonable position should be broad enough to accommodate a range of reasonable views, into which the position had to fall to satisfy the definition of a MAE. The judge rejected the latter argument, confirming the seller’s narrower view of what reasonable meant, as he considered this to be a truer reflection of the meaning of the wording in question. 

The judge expanded upon this to clarify that the parties’ contemporaneous assessment of the position would be relevant to this question because it would inform an assessment of what was reasonable to expect. A reasonable construction of whether something “would” be material and adverse also meant “more likely than not”. 

The meaning of “material”

The third question for the judge to decide was what was meant by “material” within the definition of the MAE. 

This was not a point that the parties had made many submissions on, as each was highly confident in its own position that the GE obviously was, or obviously was not, material. But the judge considered this inadequate, and despite what he called the “beguiling” simplicity of the parties’ positions, he considered it useful to set out some basic principles. 

The judge agreed with the comments of his US contemporaries that “there is no bright line test for what constitutes materiality which will be applicable to all MAE cases”. However, he added (following Decura v UBS) that “material” is intended to mean “significant and substantial”.  Borrowing again from Delaware case law, he adopted the position that the MAE ought to have an impact on the company’s earnings “over a commercially reasonable period […] measured in years rather than months”. He even went as far as quantifying material as meaning (on the particular facts before him) a reduction in the value of the business of “more than 15%”. 

Wilful misconduct?

The seller had further claimed that the assertion of a MAE was “wilful misconduct” on the part of the buyer (under the contract this would allegedly have entitled them to alternative remedies beyond contractual damages, though the judge did not agree that it made a difference). The seller argued that the buyer had no reasonable basis for believing the GE was a MAE, or that they were reckless as to whether the GE was a MAE. At trial the sellers abandoned a further argument from their pleaded case that the buyer had had no genuine belief that the GE was a MAE.

The judge rejected all of these arguments, finding that although the GE was not a MAE and the analysis conducted by the buyer’s technical advisors was “based on unjustified assumptions and unreliable”, the relevant individuals at the buyer did think that the analysis presented to them justified termination on the basis a MAE had occurred. They had not been reckless as to whether the GE was a MAE.

It was noted in the judgment that before seeking to terminate on the basis the GE was a MAE, the buyer had considered bringing a claim in misrepresentation (but ultimately did not issue any such claim). It cannot be known why the buyer in this case chose the course it did, but it raises the related point that in general, a successful termination on grounds of a MAE could be financially preferable to a misrepresentation claim as it would allow termination of the whole transaction rather than only leading to an award of damages that would be subject to any contractual liability cap. As such, if the facts of a case lend themselves to both possible claims, a claimant might choose to pursue the MAE route.