Recently, the English Commercial Court in Grupo Hotelero Uravasco S.A v Carey Value Added SL & Anor considered how to interpret a material adverse change (mac) clause. In this case, Grupo as borrower brought a claim against Carey as lender for failing to advance funds under the loan agreement between them.

The lender's argument was that the borrower was in default under the loan agreement for breaching the representation that there had been no material adverse change in the obligors' financial condition.

The lender argued that the term "financial condition" in the mac clause should be broadly construed to include all aspects of the borrower's finances as well as the state of the markets in which the borrower operated. The borrower contended for a narrower construction, where a company’s financial condition should be based on an assessment of its position as shown in financial statements at the relevant date.

The court preferred the borrower's view and stated that the borrower's emphasis on its financial information was correct. The court also held that in order to be material, the adverse change must significantly affect the borrower's ability to perform its obligations under the loan agreement, in particular its ability to repay the loan.

In our August 2010 banking and commercial law update, we reported on Brighten Pty Ltd v Bank of Western Australia, in which the Australian court took the broad construction of an identically worded mac clause. In that case, the court held that the lender has an absolute discretion to assess whether the mac clause has been triggered, so long as the lender's decision was not made in bad faith, arbitrarily or capriciously. See that court decision here.

The narrow interpretation given to a mac clause in Grupo Hotelero Uravasco S.A serves as a reminder to lenders to consider carefully how to draft mac clauses and whether they can be relied upon to call an event of default.

See court decision here.