Commercial Court implies duty to act in good faith into consent requirements under a facility agreement
In Macdonald Hotels v Bank of Scotland [2025] EWHC 32 (Comm), the claimant hotel company (“MHL”) claimed it had been forced to dispose of three of its hotels by the defendant, its lender (and at points an equity holder in MHL). Among other allegations1, the claimant alleged that the bank had breached both express and implied duties of good faith in forcing the claimant to dispose of the hotels in circumstances where there were other alternatives which could have led to a better outcome for MHL.
The Commercial Court (His Honour Judge Pelling KC) dismissed MHL’s claim, rejecting that there had been a breach of an express term requiring the bank to act in good faith. Whilst the Court accepted that there was an implied duty that the bank would act in good faith and not arbitrarily, or capriciously or for improper purpose (the so-called “Braganza duty”) in relation to certain consents it had the power to grant under the loans it had advanced to MHL, this did not require the bank to act against its commercial interests, and on the facts, it behaved as any other lender would have done in that position.
Background
The bank had provided long-standing commercial lending services to MHL, governed by a facility agreement from 2014. The bank's relationship with MHL had also included an equity element between 2003 and 2014 whereby one of its subsidiaries had acquired a 50% shareholding in MHL. That relationship was governed by a shareholders' agreement dated 2003.
After the Global Financial Crisis, the bank adopted a strategy of exiting its joint venture relationships and reducing the size of its commercial loan book. In 2014, the bank's subsidiary sold back its shares in MHL and the bank sought ways to reduce MHL's indebtedness and its loan value to EBITDA ratio, including by asset disposals.
To facilitate a reduction in its indebtedness, MHL entered into lengthy negotiations with third parties for investment and further lending. However, these negotiations were ultimately unsuccessful. MHL eventually sold three hotels in 2015 to reduce its indebtedness at a time when hotel values were at a historic low.
The issues in dispute
MHL sought damages for breach of contract on the following grounds:
- the bank had breached its express good faith obligations in the shareholders' agreement by rejecting a proposal from a potential investor that could have reduced the bank's lending to MHL without destroying value in the hotels through a disadvantageous asset disposal; and
- the bank had breached an implied term in the facility agreement to act in good faith, not arbitrarily or capriciously when the bank exercised its right to withhold its consent to an alternative refinancing deal leading to MHL having to dispose of some prime assets.
Decision
As to the breach of the express term in the shareholders’ agreement, the Court found the alternative equity proposal was highly preliminary in nature and that it was a proposal which was not ultimately deliverable, as it involved the consolidation of the mid-range hotel market which would require the bank to transfer other hotels to MHL that were owned by other covenant compliant customers. This was not something the bank could deliver on without the appointment of a receiver or administrator. The construction issues of the good faith obligations in the shareholders' agreement were therefore immaterial since this claim failed at the factual level.
In relation to the breach of the alleged implied term in the facility agreement, the Court applied the orthodox principles of contractual construction2 and implied terms3 to determine whether the Braganza duty could be implied. The defendant argued that the duty could not be implied because:
- the Permitted Disposal and Permitted Security clauses in the facility agreement were expressed as absolute and unqualified rights to withhold consent; they were not exercises of discretion to which the Braganza duty could apply; and
- the “mortgage exception”4 applied, which meant that the Braganza duty could not be implied to a contract where the issue is concerned with a loan secured by a charge over land.
The Court rejected the defendant’s arguments and accepted that a duty to act in good faith, not arbitrarily or capriciously or for an improper purpose should be implied [154-158]. On the facts, the Judge considered that the power to consent, as it applied in the context of the relevant clauses, was a discretionary power (notwithstanding the lack of express wording qualifying the consent) and it was not subject to the mortgage exception (given it arose in the context of a facility agreement, not a contract over land). However, the Judge emphasised the implied term was a “constrained and narrow” qualification to the bank’s power.
The judge found that on the facts the bank had not acted in breach of that implied term by preferring its own commercial best interests over those of the borrower. Its actions were not irrational; no secured lender in the position of the bank would have acted otherwise in relation to the proposal to refinance. It was immaterial whether MHL considered that the proposal was in its own best interests [214].
See the full judgment here.
