Mac clauses in loan agreements

It counterclaimed for the repayment of advances already made, and brought its own claim against Grupo Urvasco S. A key issue was whether Carey could prove that there was a default under the loan agreement at the date it refused to make an advance, being 6 June Doing so involved the court in a lengthy and dauntingly detailed assessment. As Mr Justice Blair remarked, it is unusual for a case in the Commercial Court to involve so many contested breaches, and so many issues both of fact and law.

Interpretation of material adverse change clause in loan agreement - Publications - Allen & Overy

Just to add to the complications, the loan agreement between GHU and Carey was governed by Spanish law, a related share purchase agreement was under English law, and the court also had to consider the terms of a secured "senior loan" between GHU and another lender, since default under that facility would trigger the cross-default provisions of the Carey loan. But in fact the court held that for present purposes there was no difference between Spanish and English law in the interpretation of the relevant provisions of the loan agreements.

GHU represented under the loan agreement that there had been no material adverse change in the financial condition of the relevant obligors since the date of that agreement. A lender seeking to demonstrate a material adverse change should show an adverse change over the period in question by reference to that information. But the enquiry is not necessarily limited to the financial information if there is other compelling evidence to show that an adverse change is material.


  • A brief overview of Material Adverse Change clauses in credit documents;
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An adverse change is material if it significantly affects a borrower's ability to perform its obligations and to repay the loan, and must not be merely temporary. However, a lender cannot trigger such a clause on the basis of circumstances of which it was aware at the date of the loan agreement.

It is also up to the lender to prove the breach. In the event Carey prevailed, but not on the material adverse change ground. The court held that there had indeed been a material adverse change in the financial condition of GU between 21 December and 6 June The property bubble in Spain had burst, GU's business was highly leveraged, property sales were drying up, and the future was in doubt, to the extent that GU had ceased to pay its bank debts.

But Carey was relying on a cross-default triggered by breaches under the senior loan agreement, and the court was not satisfied that GU had made a representation under that agreement on 6 June that there was no material adverse change. It was also unable to establish a material adverse change in the financial condition of GHU or the other obligor at that date.

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Where Carey succeeded was in establishing that GU was in breach of other obligations under the senior loan. In particular it had entered into negotiations for a rescheduling of debt with another creditor "by reason of actual or anticipated financial difficulties", which triggered the cross-default provisions of the Carey facility. The result was that Carey had not been obliged to make the advance otherwise due at 6 June, and that its subsequent cancellation of the loan agreement was lawful.

Although Carey had in fact been looking to extricate itself from its commitments to GHU at the time, it had acted lawfully.

Interpretation of material adverse change clause in loan agreement

That was enough to decide the case, but as regards the "development defaults", Carey could not establish that progress on the development had been such that the long stop date for completion could not have been met, but the court was satisfied it had established a number of other defaults. The funding shortfall was such that the project would not in fact have got to completion. Carey disagreed that pre-existing circumstances should be taken into account and argued that this would make the interpretation of the clause dependent on the subjective state of mind of the lender.

The court agreed with the borrowers.

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Blair J referred with approval to U. Blair J considered that the law had been correctly stated in an article by Professor Rawlings when he stated that: Although Carey failed to establish an event of default on the basis of a misrepresentation in relation to the MAC clause, the court held that there had been other defaults and Carey therefore ultimately succeeded on its claim to recover the sums it had already advanced to the borrowers and on its claim under the guarantee that had been provided by one of the group companies.

Cases that consider the interpretation of MAC clauses are rare and this case therefore provides useful guidance, including by referring with approval to the academic commentary on MAC clauses referred to above. Our lawyers were ranked in Band 1 and 2 in categories across all Legal Directories, the highest of the global elite group of international law firms.

Understanding the MAC Clause

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Material adverse change (MAC) clause

About us Corporate responsibility Alumni Contact us Online services. North America United States. Latin America Brazil. Africa Morocco. South Africa. Africa Morocco South Africa. Rollup Image. The court quoted from academic commentary with approval, referring to: Footnotes Encyclopaedia of Banking Law F[]. Zakrzewski, Material adverse change and material adverse effect provisions: For more information please contact Sarah Garvey sarah.


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