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This article is written by Sankeit Taneja, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Here he discusses “Material Adverse Effect (MAE) Clause in a Loan Agreement: Its Consequences and Different Variations”.


A Loan Agreement is basically a contract entered by and between the Borrower and the Lender which controls the mutual promises made by each party. 

Loan Agreements are generally acknowledged through accumulation of various mutual promises made by the parties involved in the said loan agreement. Facilities Agreements, Revolvers, Term Loans, Working Capital Loans are few forms of Loan Agreements. A simple Loan Agreement includes a written promise to pay, payment terms such as interest rate or collateral, payment schedule and its recourse if the Borrower fails to repay the loaned amount.

A material adverse effect clause is a part of the loan agreement wherein the protection of the Lender is secured from the Borrower in case of non-payment, refund of the loaned amount by the lender owing to various reasons one of them being poor economic background.

Material Adverse Effect (MAE) Clause

The definition of this clause is considered to be one of the most vital and highly negotiated definitions in a financial document.

This clause is also referred to as Material Adverse Change Clause (MAC) and often originates in loan agreements and other financial documents for the purpose of allowing the lender to withhold to refund or continue funding a transaction, deal, business if any alteration, variation, modification, amendment occurs in the agreement.

Also in the field of Mergers & Acquisitions & Corporate Finance, this clause tends to significantly reduce the value of a company. 

Contracts which deal with this particular clause often are dealt with extreme care & caution by the parties while taking the appropriate environment of the parties to a contract involved. The definition of the said clause is unique to each & every contract depending upon the terms & conditions of that particular Contract.

However, it can also be defined as an adverse change or a cloth adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower and its Holdings considered entirely:

  1. a cloth damage to the power of any Loan Party to execute its obligations under any Loan Document to which it’s a party; or 
  2. a cloth adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document to which it’s a celebration.

Purpose of Material Adverse Effect Clause

The purpose of having this clause in a loan agreement is to provide security to the Lender so that in case of a major adverse change which can occur from the date of the loan being taken or anytime thereafter or when other financial documents are engaged and a change happens owing to a numerous factor being for instance:

  • Business, Operations or the Economic Circumstance of the Borrower.
  • Borrower’s ability to perform the Obligations as per the Loan Agreement.
  • Validity, Legitimacy, Effectiveness, Efficiency of the Security provided under the Loan Agreement.
  • International Financial Market.

In the event when default of performance of obligations is activated, the Lender can withdraw from the transaction and claim immediate refund of funds from the Borrower

The other purpose of this Clause is to protect the Lender from any unwarranted gaps in due diligence, unanticipated fluctuations to the monetary situation of the borrower and anything else that can be rendered as “material” change to the borrower’s ability to repay the loan.

This also lays focus over the economic condition and asset of the borrower and the wide-ranging aptitude of the borrower to repay the loaned amount.

At times this clause is relied upon by a party to the agreement in an effort to relinquish transactions without obligation or as dominance against the seller to decrease the purchase price.
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Consequences of a Material Adverse Effect Clause

MAE clauses are necessarily ambiguous, vague, unclear and equivocal. For example, this clause defines a material adverse effect as an adverse change that is, not astonishingly material. Keeping this in purview, how shall a lender be aware as to when the change shall be “material” to engage the said clause in a loan agreement? However, a case from Canada & a case from International Court just show as to how important proper drafting plays a key role in helping the court to interpret the scope & enforceability of the said clause.

The British Columbia Supreme Court in Doman Forest Products Ltd V GMAC Commercial Credit Corp, [2005 BCSC 774] is the only Canadian Case that has been construed in the financial perspective. In this case the British Columbia Supreme Court considered the definition of “materiality” in the perspective of a loan agreement which contained within an event of default upon the happening of a change that would establish a Material Adverse Effect clause. The agreement in this case defined “Material Adverse Effect” to be very broad and to include a material adverse effect on the condition financial, operations, assets, property or other aspects of the Borrower & any right or benefit of the Lender under the said agreement to be determined at Lender’s discretion. The Borrower’s monetary situation was not good. It was contended that Lender’s loans were fully safeguarded by accounts receivable. The Court differed and held that the Material Adverse Effect clause was not restricted, limited to the charge of collateral, but actually stretched to the overall financial condition of the Borrower as a portion of phrasing of the clause itself. The Court also went to support the Lender’s right to exercise the said clause in its sole will, discretion, option so long as the Lender applied its discretion based upon bona fide thoughts, opinions, beliefs & gave proper considerations to the fact supporting its decision to count on the MAE clause. The decision of British Columbia Supreme Court is beneficial, propitious to the Lenders that use wide-ranging expressed MAE clauses in their loan agreements and other financial documents.

In Grupo Hotelero Urvasco SA V Carey Value Added SL & Another, ([2013] 5 Costs LR 669) U.K High Court of Justice was of the opinion that which is less advantageous but not mandatorily prejudicial to the Lenders wherein the Court had applied a high standard of corporeality while understanding a Material Adverse Effect clause.

The Loan agreement in this case mandate the Borrower as a condition to finance. The Lender did not accept advance finance stating this clause occurred with respect to Borrower’s economic circumstances. The Court specified that a Lender shall always verify the economic, financial, data or information available to the Lender by the Borrower before depending on the said clause of the Loan Agreement. 

Different variations

The different variations with respect to Material Adverse Effect clause are as follows:


MAE clause may also take the form of: 

  • A condition of realization, consummation; and
  • A guarantee that no MAE clause has arisen since the pertinent accounting date.

Example: Completion of this agreement is provisional on the Stockholders, Stakeholders mutually completing analysis of the Company and that investigation not revealing any fact or matter that would have a MAE on the Company.

Project Financings

This clause is normally found during a representation and warranty by the borrower on the absence of any material adverse change and as an occasion of default triggered by a cloth adverse change. Where the funding contains numerous drawdowns, the Lender usually involves the MAE representation and warranty to be constant by the borrower during every drawdown. A Lender can also want to insert the said clause in discussion as a separate condition precedent to drawdown.

Example 1- Definition: Material Adverse Event means something which, within the opinion of the power Agent, materially adversely affects:

  • The Company’s ability to suits its obligations under any Transaction Document or to hold on its business as it is being conducted at the time immediately preceding the event;
  • The value of the Secured Property; or
  • The rights of the Financier under a Transaction Document.

Example Economic Circumstances: A Financier is not obliged to provide any drawdown until the Facility Agent is satisfied that there has been no change in:

  • The commercial, operational or economic viability of the Project from that contemplated within the Plan or Feasibility Study.
  • The business, condition (financial or otherwise), operations, performance or assets of the corporate, which is, or is probably going to be, a cloth Adverse Event.

Qualification of COVID-19 as variation of Adverse Effect Clause in Loan Agreement

If a force majeure claim cannot be sustained, many contracts also contain a clause permitting termination, conclusion or alteration of responsibilities in the occurrence of a “material adverse effect” (MAE) on the assessment of performance.

Contracts generally do not stipulate happenings that may give rise to a Material Adverse Effect, but utilize general descriptions of the types of impacts required for relief. For instance, in financial agreements, accounting for a few variations in language used, a MAC is usually defined as “a material adverse change within the business, assets, properties, liabilities operations, condition, of the Borrower, individually, or the Borrower and its Holdings taken as a whole”. Material Adverse Effect requirements generally reject precisely the effects of market situations, Acts of God, and similar events.

Insertion of this clause is challenging. Given that this clause is prone to lack language that recognises a specific occasion or loss as a Material Adverse Effect, the purpose of a claim for MAE Clause relief often involves a comprehensive realistic survey with an ambiguous result. This risk is one purpose why these Clauses are more generally raised to reconcile contract terms rather than as a basis for termination.

Invoking this clause due to COVID-19 issues may be challenging in many recently happened situations. The enduring effects of COVID-19 on financial, monetary, economic and operational characteristics are unidentified. Further, there is always a diversity of features disturbing market performance, such that verifying a Material Adverse Effect attributable to COVID-19 alone, as opposed to general market or business conditions, may be difficult.


The inclusion and importance of Material Adverse Effect Clause is solely ascertained from the facts and circumstances of a particular case as well as the scope and quality of drafting of this clause in a loan agreement or other financial documents. One should look into other remedies available to them apart from the Material Adverse Clause Effect as the Lenders in Grupo Hotel’s case Citation- [2013] 5 Costs LR 669 &. Doman Forest Products Ltd V GMAC Commercial Credit Corp Citation-Canada, 2005 BCSC 774, were still arguing in the court over this clause. This clause shall only come to the aid of the Lender if it is drafted to perfection without any ambiguity or vagueness involved, such a clause shall come to Lender’s aid when the certain types of event are included as a part of the clause. 

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