In a recent decision in the case of Grupo Hotelero Urvasco S.A. v Carey Value Added S.L. & Anor (2013), the Commercial Court has provided clarification in relation to the interpretation and application of material adverse change ("MAC") provisions.  Whilst the Court has reaffirmed that the analysis as to whether a MAC in the financial condition of a company may have occurred remains highly fact sensitive, it has helpfully set out guidance on the relevant factors which must be taken into account when interpreting concepts such as "financial condition" and "MAC", including the potential relevance of derivatives liabilities.

The decision is of particular note as, whilst MAC or Material Adverse Effect ("MAE") clauses are standard in many types of financial contracts, particularly loan agreements, they are rarely the subject of English authority.  Furthermore, the existing authorities in which MACs/MAEs have been considered tend to address extreme circumstances which are not usually representative of the less than clear-cut situations in which many lenders considering terminating an agreement might find themselves and so from which they might draw support.


Grupo Hotelero Urvasco S.A. ("GHU"), a Spanish hotel company, brought a claim against Carey Value Added, S.L. ("Carey"), a Spanish real estate fund which invests in hotels.  The claim related to a hotel and apartment complex in central London which was owned and being developed by an English subsidiary of GHU, Urvasco Limited ("Urvasco").  Since acquisition of the site in 2004, Urvasco had obtained lending for the development though a Credit Agreement with the Spanish bank, BBVA, an arrangement to which GHU's parent company Grupo Urvasco, S.A. ("GU") acted as guarantor.  When it later became clear that further funding would be required to complete the development, in December 2007, GHU entered into a Loan Agreement with Carey. Lending was stopped by Carey in June 2008 and GHU claimed damages against Carey for failing to advance the remaining funds which were due under the Loan Agreement.  Carey contended that it was not obliged to advance any further funding as GHU was in breach of the Loan Agreement.

In fact, Carey alleged numerous defaults of both a financial and construction-related nature.  The principal alleged financial defaults were that, at the date that the lending had stopped (and the next tranche of the loan was due), there had been MACs in the financial condition of GU, GHU and Urvasco.  In the cases of GHU and Urvasco, Carey alleged that this rendered false GHU's representation under the Loan Agreement that there had been "no material change in [GHU's and Urvasco's] financial condition (consolidated if applicable) since the date of this Loan Agreement", a representation which was deemed to be repeated on each Subsequent Advance Date (as defined).  In the case of GU, Carey alleged that this rendered false a similar representation which GU had made under the BBVA Credit Agreement and deemed to be repeated on the date of each Request (as defined), on each Utilisation Date (as defined) and on the first day of each Interest Period (as defined). In the event that such a representation had been made by GU at the relevant time, this would amount to a default for the purposes of the Loan Agreement.

The Parties' Approaches

The parties took very different approaches to prove/disprove that a MAC had occurred in the case of each of GU, GHU and Urvasco as at 6 June 2008 (being the date that the next tranche of the Loan Agreement was due).

Carey's case was based on a very broad interpretation of the term "financial condition". It contended that its meaning was not limited to a company's financial statements and instead allowed consideration of all aspects of a company's finances including the company's prospects and the external economic conditions.  Using this framework, Carey's expert conducted an analysis of the financial condition of the companies by reference to their financial statements as at 31 December 2008.  Based on a conclusion that MACs had occurred by December 2008, Carey's expert then worked backwards to conclude that MACs must have occurred by 6 June 2008 based on various factors including: the general state of the economy and the Spanish property market; comments made in the directors' reports of the year-end financial statements; contemporaneous press reports; and specific facts relating to GU including the sale of its wind farm business in June 2008 and an approach to (and subsequent engagement of) Spanish restructuring specialists in July 2008.

GHU's case, on the other hand, was based on a more restrictive interpretation of "financial condition".  It said that the analysis should not involve a consideration of various external economic factors but rather focus on the specific company's financial statements at the relevant date, with a particular focus on the balance sheet.  If it had been intended that the analysis should extend to external factors beyond the relevant company's control, these would have been expressly set out in the clause.  Accordingly, its expert sought to analyse the interim financial statements of the companies on or around June 2008.  Whilst accepting that there were inherent limitations of using unaudited interim financial information, GHU argued that, as the purpose of a company's financial statements was to provide a snapshot of its financial condition at a given date, this was the best and most reliable evidence.

The Commercial Court Decision

In his judgment, Blair J made important findings regarding the points of contention between the parties:

  • The interpretation of a MAC clause depends on the specific terms of the clause construed according to well established principles of English contractual law.  This involved giving effect to what the parties had stipulated in the agreement either by applying unambiguous language or, where the language may have more than one potential meaning, ascertaining what a reasonable person with all the background knowledge reasonably available to the parties would have understood the parties to have meant.
  • As to the interpretation of "financial condition", the Court agreed with GHU's approach:

"In my opinion, an assessment of the financial condition of the company should normally begin with its financial information at the relevant times, and a lender seeking to demonstrate a MAC should show an adverse change over the period in question by reference to that information. The financial condition of a company during the course of an accounting year will usually be capable of being established from interim financial information and/or management accounts. On the broader construction proposed by the lender, the enquiry becomes wide ranging and imprecise."

The Court drew support from the definition of MAE in the BBVA Credit Agreement which included reference to an MAE on the company's business or financial condition. It concluded that the "inclusion of events which have a material adverse effect on the company's business covers a broader scope than the MAC which is limited to the company's financial condition".  The specific contextual reference to "consolidated if applicable" in the MAC clause contained in the Loan Agreement also supported this analysis as it appeared to be a reference to the use of consolidated accounts.

  • As regards the interpretation of the concept of "MAC", the Court agreed with Carey that the analysis was not necessarily limited to the company's financial information if there was other compelling evidence.  In this particular case, the Court considered that GU's decision to stop paying bank debts (as a prelude to a rescheduling) from mid to late June 2008 "may be highly relevant to the question of whether a material adverse change has occurred in GU's financial condition".
  • However, in relation to materiality, the Court rejected Carey's argument. It held that the adverse change will only be material if it significantly affects the borrower's ability to repay the loan in question.  It also reaffirmed that, in order for the change to be material, it must not be temporary.
  • In relation to pre-existing circumstances, a lender will not be able to trigger a MAC clause on the basis of circumstances of which it was aware at the time of the agreement.

Applying these conclusions to the facts of the case, the Court held that GU had suffered a MAC by June 2008; however, as Carey could not establish that GU had made a representation to BBVA on or about 6 June 2008, its case failed for that reason.  The Court also held that Carey had failed to make out its MAC case on the evidence in relation to GHU and Urvasco.

Derivatives Liability

A further interesting aspect of the decision in this case was the Court's comments in relation to derivative transactions and, in particular, the relevance of uncrystallised "losses" which may be in existence at the relevant date for the purposes of a potential MAC default.

Both GU and GHU were exposed to various derivatives transactions, including foreign exchange forward agreements, listed options and interest rate swaps, which, on account of the effects of the financial crisis in 2008 and new accounting rules introduced in Spain on 1 January 2008, resulted in a change in "fair value" of €82.6 million being recorded in GU's profit and loss account as at 31 December 2008.

GHU argued that these "losses" were not relevant for the purposes of MAC because they were unrealised at June 2008; the economic data suggested that the majority of the changes in fair value occurred in the second half of the year (i.e. after 6 June 2008); and, in any event, Carey (having the burden of proof) had not put any reliable information before the Court as to the appropriate "fair value" provision at 6 June 2008.  Carey had put forward marked to market valuations of the derivatives at various dates (but crucially not at 6 or even 30 June 2008) and also had sought to criticise GU/GHU management for the lack of evidence on valuation being on account of their failure to monitor the derivatives arrangements properly.

The Court agreed with GHU that, even if a change in the fair value of the derivatives was relevant to an assessment of the financial condition of the companies, (a) there was no evidence as to the fair value provisions at the relevant date and (b) the evidence suggested that the notional losses on its derivatives contracts did not significantly affect its ability to repay the Loan Agreement.  The Court again stressed that the burden of proof was firmly on Carey and, in this regard, exonerated GHU's management of any blame for the absence of valuation information, noting that "the combination of unsophisticated buyer and complex product has unfortunately become a familiar story since the 2008 financial crisis".

However, the Court did go on to suggest that, depending on the particular facts and taking into account potential factors such as the likelihood of margin calls or compulsory close out prior to maturity, a MAC in a borrower's derivatives exposure (if it can be demonstrated) may go to show a MAC in the borrower's financial condition for the purposes of a MAC clause.


This decision is of importance to lenders and borrowers alike. It can be said that the ultimate purpose of a MAC clause is to protect the lender's rights to the payment of interest and the repayment of principal and, specifically, its obligations to lend in circumstances where a significant deterioration of the borrower's financial condition threatens its ability to repay that principal and/or interest.  However, with the benefit of this safeguard comes (a) the often onerous burden of proof to demonstrate that a MAC has occurred (within the meaning of the relevant clause) which would entitle the lender to cease lending; and (b) the risk of potentially severe consequences in the event of wrongful invocation. Unsurprisingly, therefore, in practice, lenders have rarely sought to rely on MAC clauses and, consequently, there is very little English authority on the subject.  As Andrew Shutter has stated in "A Practitioner's Guide to Syndicated Lending", pages 165-166: "…the potentially severe consequences for a lender failing to lend when it is legally obliged to do so indicates why lenders are rarely prepared to rely on a MAC provision to avoid funding but instead prefer to rely on a clearer, objective condition to funding. A MAC provision is open to broader interpretation and therefore less legal certainty than a more specifically drafted provision of a funding document".

Whilst this decision reaffirms that cases involving alleged MAC defaults will primarily be decided in accordance with their specific factual matrices, it provides helpful guidance on the interpretation of the concepts of "financial condition" and "MAC".  As the burden of proof rests squarely with the lender, it also demonstrates the importance of ensuring that, to have their desired effect, MAC clauses must be detailed; be drafted with as little ambiguity as possible; and contain properly defined terms, including, for example, the concept of materiality where the parties intend to depart from the default position that the adverse change will be material if it significantly affects the borrower's ability to repay the loan in question and/or reference to the effect of external economic factors, where these are intended to be taken into account on any assessment of a company's financial condition.

The particular circumstances of the case also highlight the importance of ensuring that, where borrower companies (or their guarantors) may be subject to MAC provisions through related agreements with different lenders, a breach of which would amount to a default for the purposes of the present agreement, documents should be streamlined as far as possible.  In particular, mismatches between the dates that any representations are deemed to be given should be minimised to ensure that an alleged MAC default does not fail on a technicality.

Whilst it remains to be seen whether this recent clarification will lead to an increase in alleged MAC defaults based on existing agreements, the judgment certainly provides food for thought for both borrowers and lenders.  It is also a reminder to and opportunity for lenders to reconsider their financial documentation to ensure that they will have greater clarity and comfort in the future in the event that they may need to rely on a MAC provision to avoid funding.