This case illustrates the challenges inherent in interpreting MAC clauses given they tend to be heavily negotiated and tailored provisions, with the Court acknowledging that interpretation is likely to be “complicated and case-specific”. When drafting a MAC clause, particular care should be given to the events which constitute a MAC and the standard of “evidence” required (ranging from a belief of one party that an event may occur, to the event actually occurring).
Minumbra Lancewood Pty Ltd (Minumbra) sought orders preventing AM Lancewood Investment Nominees Pty Limited (Lancewood) from acting upon a notice of default issued under a Loan Agreement in connection with an accommodation village. The notice of default was issued pursuant to a material adverse change (MAC) clause in the Loan Agreement in which a MAC was defined as:
“….any situation occurs which in the opinion of the Lender gives it grounds to believe that a material and adverse change in the business or financial condition of the Borrower has occurred or that the ability of the Borrower to perform its obligations under this Agreement has been or will be materially or adversely affected or that any other Event of Default is likely to occur”.
In August 2013, following an analysis of Minumbra’s business which highlighted lower occupancy levels and profitability, reliance on short term users and financial underperformance, Lancewood served a formal notice of default on Minumbra relying on the occurrence of a MAC. Minumbra challenged the validity of the notice of default on the basis that Lancewood had not formed the relevant “opinion” under the Loan Agreement.
In the Supreme Court of New South Wales, Justice Robb found that a MAC had occurred and therefore that the default notice had been validly issued.
Robb J rejected the submission that Lancewood’s opinion had to be not only honest but also formed in good faith. His Honour emphasised that while considerations of honesty and good faith can overlap, the latter “seems to require that the Lender in forming its opinion must act not only in its own interests but also have regard to the interests of the Borrower”. Robb J found that Lancewood was entitled to exercise its rights without regard to the 50/50 nature of the investment, and also found no reason to doubt that the opinion had been formed honestly.
Robb J then drew attention to the broad wording of the MAC clause, noting that it required only grounds for believing that a MAC had occurred, not the actual occurrence of the MAC. Accordingly, it was not necessary for Lancewood’s opinion to be objectively supported by established facts. As long as the opinion was formed honestly and not capriciously, it was effective unless no reasonable person could have formed it. In Robb J’s view, there was substantial room for legitimate differences of opinion on what the business or financial condition of a particular borrower was.
Finally, on whether Lancewood’s opinion needed to go to Minumbra’s ability to perform its obligations under the agreement, Robb J held that the division of the clause into two limbs connected by the word “or” indicated an intention for the limbs to operate separately from one another. On a proper construction, the first limb was not only concerned with changes affecting the ability of Minumbra to perform its obligations but also changes which would cause Lancewood to wish not to continue to be bound by the existing terms, or to continue on significantly different terms.
See the case.