Refusing consent in finance transactions: Case analysis of MacDonald v Bank of Scotland
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Insight Article lunes, 14 de abril de 2025 lunes, 14 de abril de 2025
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UK & Europe
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Regulatory movement
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Aviation & Aerospace
On 24 January 2025 Judge Pelling KC handed down a judgment determining that a defendant bank, Bank of Scotland Plc (BOS) had not acted in bad faith by refusing consent to a borrower’s request to grant security to another lender. Our finance team frequently advise on facility agreements and in this article we highlight the implications of this case for drafting these agreements and offer guidance on principles of interpretation in other complex commercial agreements between sophisticated parties.
The terms of the facility agreement in question prevented a borrower from disposing of assets or creating any security to another lender. The bank had not breached an implied term by preferring its own commercial best interests over those of the borrower in circumstances where no reasonable entity in the bank’s position could have refused consent.
This case centred on a claim against BOS, which the claimants quantified at the start of the trial at up to about £118m. The first claimant MacDonald Hotels ("MHL") was alleged to have been forced to disposal of three hotels, being:
(a) the Randolph Hotel in Oxford, which the first claimant owned and which it maintained it was forced to sell and lease back in March 2014;
(b) the Old England Hotel on Lake Windermere, which MHL owned and maintained it was forced to sell and enter into a management agreement with the new owners in August 2015; and
(c) the Marine Hotel in North Berwick. The Marine was owned at all material times by a subsidiary of MHL's called Macdonald Marine Limited ("MML"). MHL maintained MML was forced to sell the Marine on the basis that MHL would enter into a management agreement with the new owners. The Marine was also sold in 2015.
MHL alleged that the disposal of the Randolph was forced upon it by BOS in breach of the express terms of a shareholders agreement dated 30 July 2003 between MHL and Uberior Investments Limited, ("Uberior"), a wholly owned subsidiary of the BOS, to which BOS was also a party.
MHL alleged that the disposal of the Old England Hotel was also forced upon it (and on MML in relation to the Marine) by BOS in breach of what were alleged to be the implied terms of a 2014 Facility Agreement.
As a result of the financial crisis of 2008/2009, BOS 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 the borrower and the bank sought to reduce the borrower's indebtedness and its loan value to EBITDA ratio 1, including by asset disposals. Despite lengthy negotiations, whereby the borrower wished to find alternatives to selling its assets, these three properties were sold by 2015.
The borrower claimed that BOS had acted in breach of its express good faith obligations in the shareholders' agreement by rejecting a proposal in the form of a letter from a potential investor that could have reduced the bank's lending to the borrower without destroying value in the business. However, on the facts it was found there had never been a proposal that was capable of being accepted, even in principle. The claim in relation to the shareholders agreement therefore did not succeed.
The facility agreement prevented the borrower from creating any security or selling or disposing of any relevant assets otherwise than with BOS's prior approval. The borrower wished to refinance another of its hotels with a different lender under terms which required it to grant security to that lender. BOS refused to consent to the creation of that security. The borrower argued that in exercising its discretion in refusing consent, BOS had breached an implied term in the facility agreement that obliged the bank to act in good faith (the so called Braganza duty) and not arbitrarily or capriciously and also to take into account all relevant considerations and not take into account any irrelevant considerations 2. The claimant argued it was necessary to imply such a term into the facility agreement. The power of the bank to refuse consent was not an unqualified right of the sort that would have precluded the implication of a Braganza type implied term.
In considering such a request, BOS was:
(a) free to act in what it perceived to be its own best interests;
(b) not obliged to balance its interests against those of the borrower, when arriving at a conclusion, much less defer to the borrower; or
(c) not required to do anything other than exercise its own judgement in arriving at a conclusion.
BOS 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 in the sense that no secured lender in the position of the bank would have acted as it did in relation to the proposal to the refinancing. It had been entirely clear throughout its discussions with the borrower that it sought a reduction in the borrower's total indebtedness and a reduction of the ratio of total debt to EBITDA. The proposal did not achieve those objectives. It was immaterial whether the borrower considered that the proposal was in its own best interests.
The case is a pertinent reminder of principles of interpretation applicable to a detailed commercial agreement:
- Terms are to be implied only if to do so is necessary in order to give the contract business efficacy or if so obvious that “it goes without saying”;
- It is a necessary but not a sufficient requirement that the term that a party seeks to have implied appears fair or is one that the court considered that the parties would have agreed if it had been suggested to them;
- Construing the words that the parties have used in their contract and implying terms into the contract both involve determining the scope and meaning of the contract;
- Construing the words used and implying additional words are different processes governed by different rules;
- In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered because it is only after the construction exercise has been undertaken that the necessity question and the allied question whether the terms sought to be implied contradict the express terms of the contract concerned can be answered.
- Where the express terms of a contract confer on a party an absolute contractual right, then to imply a term that qualifies such a right is not permitted as a matter of law, because to do so would be to permit an implied term that contradicted an express term of the contract.
- The fundamental distinction in this area is between (a) a decision whether or not to exercise what as a matter of construction is an absolute contractual right, such as an unqualified right to terminate without cause, where the Braganza principles are not engaged, and (b) what, as a matter of construction, is a discretion conferred by agreement on one party to a contract, which involves "… making an assessment or choosing from a range of options, taking into account the interests of both parties …" where it would be absurd "… to read the contract as permitting the party in question to exercise its discretion in an arbitrary, irrational or capricious manner… ".
- Finally, particular care is required when considering implying terms into a sophisticated and professionally drawn and negotiated agreement between well-resourced parties. The reason for this is where an issue has been left unresolved, it is much more likely to be the result of choice rather than error.
[1] (earnings before interest, taxes, depreciation and amortization)
[2] Braganza v BP Shipping Limited [2015]
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