The case concerned a dispute over the Bank of Scotland’s (the Bank) refusal to consent to Macdonald Hotels (Macdonald) – the UK’s largest privately owned hotel group – granting a charge over one of their hotels to a third-party lender. Macdonald claimed the Bank’s actions had cost Macdonald approximately £118 million.
Background
The Bank and Macdonald had a long-standing relationship and the Bank held security from Macdonald including security over various hotels.
Following the financial crisis of 2008 there were several years of discussions between the Macdonald and the Bank culminating in a refinancing with the Bank during 2014. The facility agreement entered into between Macdonald and the Bank included a negative pledge and a no disposals undertaking that prevented Macdonald – or any of its subsidiaries – from creating additional security interests or disposing of certain assets without the Bank’s approval.
The dispute
In order to allow a partial refinance to a third party bank to proceed Macdonald sought such an approval, and the Bank refused to provide it.
The Bank argued that it had an unqualified right to withhold its approval.
Macdonald argued that the Bank was subject to what it referred to as a ‘Disposal Implied Term’ to the effect that, when considering whether to exercise its discretion to grant, or withhold, approval, the Bank was obliged:
- to act in good faith and not arbitrarily or capriciously in exercising that discretion, including exercising its discretion consistently with its contractual purpose;
- to take into account all relevant considerations and not take into account any irrelevant considerations, and
- not to use the discretion for an improper purpose.
Macdonald argued that the ‘Disposal Implied Term’ should be implied into the facility agreements on the basis of the Supreme Court judgment in Braganza v BP Shipping Ltd [2015].
Braganza duty
In Braganza, the Court outlined a good faith principle to the effect that a party to a contract must exercise a discretion given to it under the contract ‘in good faith and not arbitrarily or capriciously’ and ‘reach a conclusion [that a] reasonable decision maker could have reached’
Judgment
Whilst the court agreed with Macdonald that a Braganza duty would apply, it held that the duty was a limited one, namely that the Bank was not entitled to refuse consent for a reason or reasons unconnected with what it perceived to be its own commercial best interests or to refuse consent when no reasonable entity in the position of the Bank could have refused consent.
In particular the court said that the Bank
- was free to act in what it perceived to be its own best interests;
- was not obliged to balance its interests against those of Macdonald, when arriving at a conclusion; and
- did not have do anything other than exercise its own judgment (necessarily arrived at by its officials and subject to its own internal management controls) in arriving at a conclusion.
The court noted that Macdonald’s proposal of third-party refinancing would not repay their debt to the bank or reduce the ratio of total debt to EBITDA, and the Bank’s security would be subordinated, which justified refusal. Hence, the court ruled in favour of the Bank.
Implications
So, what does this case tell us?
From a borrower's perspective, it is not sufficient for to rely on implied terms. Borrowers should ensure that circumstances for banks to withhold consent are clearly defined in facility agreements as the Braganza duty doesn’t prevent lenders from acting in their own interests.
From a lender's perspective the case is re-assuring as it makes it clear that lenders are entitled to act in their own commercial interests, and do not have to balance their commercial interests with those of a borrower.
Our specialist finance team at DWF can provide advice in these situations, so please do not hesitate to contact our team.
Authored by Tasha Walker and Beth O'Shea
