Contracts sometimes provide that a party can terminate simply on the grounds that something has happened to the other party that could undermine its ability to perform its obligations. In other words, if there are signs – usually of a financial nature – that the other party has run into trouble, the contract can be brought to an end promptly without having to wait until the other party actually fails to deliver.

These material adverse change (or MAC) clauses are common in share and business sale agreements, and also in joint ventures, investment agreements and lending facilities. They can be very specific: for example, in spelling out what can and cannot be taken into account, and what counts as material and how it should be measured. They rarely come before the court – perhaps because it is often easier to invoke other grounds for termination or because the specific triggers are well-drafted and clear.

In Grupo Hotelero Urvasco SA v. Carey Value Added SL the High Court had to analyse a very short MAC in a loan agreement. The judge’s commentary on even so brief a clause provides a valuable insight into the court’s approach to MACs generally.


The case centres on the development of a hotel and apartment complex on the Strand in Central London. In December 2007 the developer entered into a loan agreement, which included a representation (deemed to be repeated at each draw-down of funds by reference to the circumstances at the time of repetition) that:

There has been no material adverse change in [the borrower’s] financial condition … since the date of this Loan Agreement.”

The timing was significant, and when in June 2008, in the midst of the financial crisis, the developer tried to draw down the lender refused, citing among other things a material adverse change in the developer’s financial condition. The lender believed that it was relevant to consider the deterioration of the market in which the developer operated. The borrower sued for breach of the loan agreement.

The judge’s analysis

As the MAC was so short and did not contain its own specific criteria or triggers, Mr Justice Blair was able to set out a number of ground rules in this area:

  • The assessment of a company’s financial condition should usually begin with its published financial information, but interim financial information and management accounts could also be used where the assessment fell during the course of an accounting year.
  • Other compelling evidence, such as whether the company had ceased to pay bank debts, might also be highly relevant.
  • Where the MAC concentrates on the company’s financial condition as at a particular date no account should be taken of external economic or market conditions; nor of matters such as the company’s prospects or its ability to pay future liabilities not yet incurred. This is especially so where (as was the case here) the company is a special purpose vehicle without resources of its own and therefore reliant on its parent company to fund any liabilities once they have been incurred.
  • The adverse change will be material if it significantly affects the company’s ability to perform. Also, any change must not be merely temporary.
  • The other party cannot trigger the MAC on the basis of circumstances it was aware of at the time of the contract, since it will be assumed that the parties intended to contract in spite of those circumstances. It would be a different matter, though, if the conditions worsened in a way that made them materially different in nature.
  • It is up to the party invoking the MAC to prove the breach.

On the facts the judge concluded that a material adverse change had not occurred, but the developer was in breach of the loan agreement on other grounds.


In practice, MACs tend to be rather more elaborate or specific. The judgment can be regarded as setting out snags that can be avoided in the drafting (depending on the parties’ negotiating strengths): for example, allowing reference to a deterioration in market conditions in the reasonable opinion of the party invoking the MAC; or specifying materiality thresholds by reference to fixed amounts or percentages. Where a party’s securities are publicly traded the MAC can be triggered if a decrease in the traded price is greater by a fixed percentage than a general decrease in prices in the relevant sector. The clause could also define the period after which a change is not to be regarded as temporary only.

The question of the other party’s knowledge, as a benchmark from which to measure the materiality of the change, could be a contentious issue. A party with a strong hand could insist that its knowledge for this purpose is to be regarded as limited to an agreed set of facts, so that, if the MAC is triggered by something not on the list, the party in default cannot resist on the grounds that the other knew all about that matter from the start.

In all cases, it is advisable to consider carefully, according to the nature of the transaction, whether and, if so, in what circumstances a party should have the right to walk away from its contractual obligations.