Across Ireland there are still a significant number of loan facilities yet to be fully drawn down by borrowers. Draw down requests may be imminent if green shoots of recovery prove to be true and then a lender's only recourse may be to rely on the "material adverse clause" (MAC Clause) so as to avoid its commitment to lend funds. However, lenders should beware – wrongfully invoking a MAC Clause may be deemed to be a breach of contract exposing the lender to claim for damages. There is virtually no case law on this issue within Ireland and, to avoid the pitfalls, Neil O'Keeffe sets out some guidance garnered from abroad.

A standard MAC Clause states that the lender will not be obliged to perform its obligations under the facility letter, unless at the time of so doing, it is, in its absolute discretion satisfied that no material adverse change has occurred in the borrower's business, undertaking, assets or financial condition since the date of the facility letter.

No absolute discretion, but it can be invoked provided it can satisfy the issue of materiality.

The UK House of Lords has refused to imply a term requiring the Lender to act reasonably in determining a material adverse change and instead there is an obligation to act in good faith (see Concorde Trust v Law Debenture Trust Corporation (2005) 1 WLR 1591). A breach of an obligation of good faith would require a party to show that there was dishonesty or an improper motive. To some extent, however, the notion of good faith imports some element of materiality and substance to the change in question. A lender is therefore not necessarily obliged to act reasonably in the sense that every other lender would take the same view but it must be able to stand over the decision from its own perspective looking at the facility itself, to its particular circumstances and the decision to terminate. If a lender were to seize on some relatively minor or trivial issue as a basis for termination, or took a global view which meant it did not look at the particular circumstances at all, the point could certainly be made against it.

Tangible evidence is required to support the lender's determination of a material adverse change.

Tangible evidence should be maintained to support the lender's determination because the absence of documentation implies a certain lack of investigation of the change of circumstances and, furthermore, a court is unlikely to make a decision in a vacuum. The records of the determination itself should recite the grounds and should ensure that all grounds which are in contemplation are considered and dealt with. The grounds for determination should not be too narrowly drawn in case it later precludes the lender from relying upon other facts which were known to it at the time and which played some part in the decision. Preferably, independent valuations ought to be obtained, which would facilitate a "then and now" assessment. US authorities are of some guidance for more general wholesale changes in so far as they have stated that material adverse change should be measured in terms of whether the company has suffered a material deterioration measured against its past performance and whether the deterioration is likely to cause substantial long-term effects on the earning power of the company.

Notice of the lender's determination must be issued to be borrower.

A private resolution by the lender not to lend is of no effect or value whatsoever. Unless the facility letter provided for an automatic termination of the lender's commitment, termination can only occur when it is communicated to the other party. Absent communication, there is a risk that a court will treat any private determination as a nullity and this may expose the lender because circumstances may have yet changed again by the time that the actual cancellation takes place. Furthermore, silence can often amount to a waiver of the material adverse change or may be inferred as an election not to exercise a right.

Be consistent in dealings

While courts will not impose an express obligation to be reasonable, the absence of reasonableness, however, may be used as an indicator that there was not a good faith decision made. A court would have to be satisfied that the cancellation of a commitment was itself in good faith and not for a collateral purpose. Inconsistency across the facilities may reveal a collateral purpose. If it is the case that part of the facilities have already been drawn down then the lender will have to be consistent in its treatment of those facilities vis-á-vis those yet to be drawn down. In this regard if the material adverse change is also an event of default, it is desirable that such default should cause a demand for a payment of the previously advanced facilities or at the very least a reservation of rights letter.


In conclusion, lenders are advised to be very wary of invoking MAC clauses without first receiving legal advice on their determination. If a lender is deemed to have improperly invoked the MAC clause it exposes the lender to a claim for damages. Accordingly, while the MAC clause does give the lender protection it is a double edged sword that can hurt the lender without appropriate oversight.