There’s been a flurry of recent court cases concerning finance matters which have caught our attention. Below we highlight just a few which are worth bearing in mind when undertaking a loan transaction. In each case, we’ve highlighted the key takeaway message.
1. Secured lender is not under duty of rationality in enforcing repayment of a loan
UBS AG v Rose Capital Ventures Ltd [2018] EWHC 3137 (Ch) involved a property loan made by UBS with a five-year term subject to early termination by the lender on three months’ notice. Before maturity, UBS demanded repayment.
The defendant borrower argued that UBS was not entitled to call the loan early, because it was unreasonable, irrational, arbitrary and/or capricious to do so. This was an attempt to imply what is known as a “Braganza” term into a loan agreement.
The High Court concluded that so long as the mortgagee exercises its discretion for proper purposes (and not solely to vex the mortgagor), it will not breach its duty of good faith nor any such Braganza term to the extent it is implied.
The court noted that Braganza terms can be most easily implied where contractual provisions affect the rights of both parties and one party has a role in the on-going performance of the contract (e.g. where an assessment has to be made), as opposed to a unilateral right conferred on one party alone (e.g. a right to terminate without cause). The nature of the contract and balance between the parties was also relevant, so that Braganza terms could be implied into say an employment contract more easily than with less ‘relational’ contracts such as mortgages.
The mortgage terms also assisted UBS and the court noted that these could not be starker. The loan was labelled as uncommitted and repayable on demand. UBS’ standard conditions were amended to remove any requirement for a default before the lender could demand repayment. UBS was entitled to call the loan at its absolute discretion and its ability to cancel the facilities was described as a fundamental term. As the court stated, “this language does not obviously provide fertile ground for implying a Braganza term”.
Key takeaway: where a loan is repayable on demand, a lender’s discretion to demand repayment is unlikely to be limited by any kind of duty of good faith or reasonableness unless specific wording to this effect is included.
2. Service on process agent valid despite termination of appointment
In The Bank of New York Mellon, London Branch v Essar Steel India Ltd [2018] EWHC 3177 (Ch), the High Court confirmed that service on a process agent is valid notwithstanding the termination of its appointment provided that the appointing party has agreed with its contractual counterparty that the appointment is irrevocable. The case concerned a trust deed under which the defendant irrevocably appointed Law Debenture Corporate Services Limited as its process agent to receive service of process in any proceedings in England. Law Debenture’s appointment terminated before proceedings were served.
Key takeaway: so long as a contract describes a party’s appointment of a process agent as “irrevocable”, proceedings will still be validly served if served on that agent, even if its appointment has lapsed, been revoked or otherwise terminated.
3. Condition precedent not “futile”
In Astor Management AG v Atalaya Mining Plc and others [2018] EWCA Civ 2407, the Court of Appeal was asked whether a condition which triggered a requirement to pay deferred consideration under a sale agreement for an interest in a copper mine had become “futile” and should therefore be disregarded. The condition required a senior debt facility to be obtained in an amount necessary to enable mining operations to re-start. The respondent acknowledged that circumstances had transpired enabling mining operations to re-start, but following an injection of intra-group funds rather than an external senior debt facility, and accordingly the obligation to pay deferred consideration had not crystallised.
One of the appellant’s grounds of appeal rested on the ‘principle of futility’ in contractual construction: i.e., if the fulfilment of a precondition to the accrual of a contractual right becomes futile or unnecessary, the courts do not insist upon its performance. The Court concluded that in certain circumstances a condition precedent may, as a matter of construction and in light of subsequent events, no longer apply or cease to have effect. An example might be a change of law as a result of which a regulatory approval is no longer required. However the court confirmed that there is no universal “principle of futility” which will dis-apply a precondition simply because it serves no useful purpose. On the facts, the Court agreed with the trial judge that the condition requiring a senior debt facility for the deferred consideration to be triggered had not been satisfied.
Key takeaway: there is no general principle of law which enables contractual preconditions to be dis-applied simply because compliance serves no useful purpose. Review conditions carefully to ensure they do not inadvertently hamstring a contracting party down the line.
4. When sterling means euros
McDonagh v Bank of Scotland Plc [2018] EWHC 3262 (Ch) concerned a loan to fund a property acquisition near Liverpool. The loan was for “Seven Million Five Hundred Pounds (£7,500,000) to be drawn down in Euros” (the missing “thousand” before “pounds” reflected a lack of care in drafting but nothing more).
Although the loan included a repayment provision which provided that “The term loan will be repaid in one lump sum of Seven Million Five Hundred Pounds (£7,500,000)”, the High Court concluded that the loan was for €11,071,500. Reading the loan as a whole, the Court used interpretation to determine that repayment was to be made in euros at the exchange rate prevailing at the time of disbursement. Among the factors supporting the Court’s conclusion were the following: (i) the loan was expressed to be drawn in euros and advanced to a euro account; (ii) the interest rate was appropriate for a loan in euros and interest was to be debited to a euro account; and (iii) there was a clause providing for all sums payable by Mr McDonagh to be in euros (save for certain specified fees).
Key takeaway: Be careful when referring to multiple currencies in your loan to ensure funds move in the expected currency.
Jonathan Porteous
Matthew Padian