Whether an event falls within the definition of an EAF depends on (i) the definition of the AED and the magnitude of any carve-outs; and (ii) whether the adverse event is “essential” to the agreement as a whole. In addition, the applicability of the provision may also depend on the extent to which the parties were able to foresee the event in question and/or specifically negotiate the risk of the event. An adverse event is generally considered essential when it “seriously threatens” the basic agreement “in a significant manner”. See Akorn, Inc. vs. Fresenius Kabi AG, WL 4719347 2018, *53 (Oct. 1, 2018). Short-term hiccups are usually not enough; On the contrary, it is to be expected that the adverse event “will continue significantly in the future”. See Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 738 (Del. 2008), See also In re IBP, Inc. Shareholder Litig., 789 A.2d 14, 67 (Del.
Ch. 2001) (the adverse event must be “far-reaching. . . . over an economically reasonable period of time, which is thought to be measured in years and not months”). Although there is no quantitative threshold for determining legal significance, many courts will be mindful of defining the significance of securities law and may require at least 10% influence on relevant financial ratios. Therefore, it is always preferable for a TOE clause to be clearly identified in a contract to avoid confusion. The clause can be titled “Time is of the Essence Clause”.
Or the clause may contain plain language such as “time is essential in this agreement”. Clear language will help avoid unnecessary delays or misunderstandings in the future. Even if not explicitly included in the language of a definition of EAF, some courts will involve the requirement that neither party has reasonably anticipated the AED. While there is no precise definition of when an event is reasonably foreseeable, parties and courts will seek evidence (in emails, business documents, or industry publications) that the party exercising the right expected the event to occur and that it could have an impact on the transaction. For example, in Capitol Justice LLC v. Wachovia Bank, N.A., Wachovia had asserted its rights under an MAE clause to terminate a loan obligation for a loan that was to be secured by CMBS financing when the CMBS market ceased to function in 2007.1,706 F. . . .