Table of contents

Drafting contracts

(ii) Vague terms: material

Background. The concept of materiality is used to qualify phrases that would otherwise be too strict. It is often used in conditions precedent and warranties. Obviously, it takes out of the scope of the phrase various immaterial elements.
The qualification material balances out the straightforward wording against the potential result if no qualification of materiality was used. Like reasonableness, the scope of a materiality qualification would be determined by the party who carries the benefit of the related contract provision. This is usually the stronger contracting party. For example, if the completion of a transaction is subject to a condition precedent that no material adverse change has taken place in respect of the Target Company, any doubt about the materiality of adverse changes in the Target Company’s business will be used by the strongest party to the transaction. (Often, the fulfilment of a condition precedent triggers renegotiation of the contract terms rather than a mere termination of the transaction as a whole. This is because in reality, the conditionality is often included to allocate risks rather than giving a party a right to walk although this may well be a legitimate effect.)

Not. Materiality qualifications are often inappropriately used:

Borrower has not violated any material laws or regula­tions.
Q: What about persistent traffic speed violations by employees of the Borrower during work time?
Borrower has not violated any laws or regulations in any material respect.
Q: What is material?

Yes. A proper use would be:

Borrower has not violated any laws or regulations in a manner that must reasonably be expected to have a material adverse effect on Borrower’s business or financial condition.

If a party to an agreement defines materiality by reference to an amount, be very keen that all references to material are capable of meeting the threshold.

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Drafting contracts

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