Introduction
This case is an example of borrowers seeking to imply duties of good faith and rationality into banking contracts, one of a number of recent cases which have considered contractual discretion in the context of financial services.
Background
The Bank of Scotland (‘BOS‘) had a longstanding commercial relationship with Macdonald Hotels Ltd (‘MHL‘) and had been lending money to them since the 1990s.
This case begins with a facility agreement from 2010, which prohibited MHL from disposing of any of its assets unless it was a “Permitted Disposal” under the terms of the agreement, which required the written consent of “Majority Lenders“, most notably BOS.
Nothing is more difficult, and therefore more precious, than to be able to decide.”
Napoleon Bonaparte
In 2014, this facility became repayable, but MHL were unable to do so. Negotiations ensued and consequently MHL agreed to the sale and leaseback of one of its flagship properties, the Randolph Hotel in Oxford, in order to finance the debt.
The parties then entered into a further facility agreement in 2014, with the same provisions around a Permitted Disposal.
In 2015, MHL wanted to repay the debt owed under the 2014 facility, and suggested refinancing one of their hotels in Manchester with another lender. This would have required BOS to release its first ranking charge over this property in exchange for a second ranking charge and partial repayment of the debt. BOS declined this proposal, and this resulted in MHL having to sell a further two hotels from their portfolio, the Marine Hotel in North Berwick and the Old England Hotel on Lake Windermere.
The Claim
MHL sought damages of around £120 million. They claimed that they had been forced to sell the Randolph Hotel by BOS during a period of unprecedented low prices in the hotel property sector. They claimed this was a breach of an express duty of good faith, contained in the facility agreement. Further they alleged that BOS’s rejection of their proposal to repay the debt, leading to the sale of the two further hotels, was a breach of a Braganza-type duty implied into the terms of the facility agreement.
Braganza duty
The Braganza duty applies where a decision maker must exercise its discretion in a manner which is not irrational, arbitrary or capricious, as established in the decision of Braganza v BP Shipping Ltd [2015] UKSC 17 Comm. It also established that it was possible to imply a term of good faith into a secured debtor and creditor relationship.
If the terms of an agreement, permit the decision maker an absolute contractual right, such as an unqualified right of refusal, then the Braganza duty will not apply. However, here the court held that no reasonable person, with all the background knowledge of the parties, would think that BOS possessed such an unqualified prohibition on disposal, and therefore a Braganza-type duty could apply in theory.
Application
Even if a Braganza-type duty did apply in the present case, this did not in itself preclude BOS from acting in its own best interests. BOS was not required to balance the best interests of MHL against their own best interests and was able to exercise their own commercial judgement in rejecting MHL’s proposal.
Outcome
MHL’s claims were dismissed and BOS awarded indemnity costs. It was held that the sale of the Randolph Hotel did not breach any duty of good faith contained in the facility agreement. Other claims advanced by MHL, including misconduct and causation, all failed on the facts presented.
During the negotiations in 2015, BOS were clear that they wanted to reduce MHL’s indebtedness to them, but the proposals put forward by MHL would not have achieved this. It was held that their actions in rejecting this proposal could not be said to be ‘irrational’ and that any secured lender in their position would have acted in the same way.
Further, whilst a limited Braganza-type duty could be found to apply to BOS, their actions in pursuing their own commercial best interests over those of the borrower, did not constitute a breach of this. Therefore, the rejection of MHL’s proposals and the subsequent sale of the two further hotels were not in breach of the limited Braganza-type duty.
In February 2025 MHL unsuccessfully applied to the Court of Appeal for permission to appeal.
Commentary
Lenders party to contracts with similar terms will be very interested in how this case has played out, particularly as it confirms the principle that a Braganza-type duty could apply wherever there is contractual discretion. However, this decision shows that in the context of commercial dealings between a lender and borrower, the scope of that duty may be kept narrow, to allow the bank to act in its own commercial interests.
Link: Macdonald Hotels Ltd & Anor v Bank of Scotland plc [2025] EWHC 32 (Comm)
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