In project finance, the material adverse change (often referred to as MAC) clause permits the lender to declare an event of default if it ever believes that the borrower has suffered a material adverse change. The judgement about whether a change has occurred and whether that change is materially adverse will, in the context of the MAC event of default, be made by the lender. If the borrower disagrees with the judgement, its recourse is to contest any resulting acceleration of the loan as wrongful. In practice, however, a lender may be persuaded against using the MAC clause as the only ground for triggering an event of default because the failure to use another breach of covenant makes the lender seem aggressive and may damage its reputation in the market. It is much more likely to be used in combination with an allegation that another covenant has been breached.
While there is very limited legal authority on how ‘material adverse effect’ clauses are to be applied in the lending context, a recent decision by the English High Court in Grupo Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm) sheds some light on how the courts may interpret the MAC clause if a lender tried to rely on it to require repayment of the loan. Namely, in this decision, the court helpfully set out guidance on the relevant factors that must be taken into account when interpreting concepts such as ‘financial condition’ and MAC.