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 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...