Clifford Chance

Coronavirus: Implications for Material Adverse Effect Clauses in NY Law-Governed Credit Agreements

April 9, 2020

A Material Adverse Effect clause permits the parties to a contract to void it if an event occurs which changes the fundamental underpinning on which the contract was entered. In the lending context, lenders and borrowers will heavily negotiate what constitutes a "material adverse effect" and will qualify certain representations and covenants in a credit agreement by reference to whether or not a breach of such representation or covenant could or would result (or has resulted) in a material adverse effect. Similarly, credit agreements will often include events of default that are triggered if a material adverse effect occurs. The COVID-19 pandemic and the related precautionary measures being taken globally to try to contain the disease have led various borrowers and lenders to question whether an MAE provision has been triggered under existing credit facilities.

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