Invoking the MAC Clause to Avoid Lending Commitments: A Double Edged Sword

Originally published August 2010

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...