13 March 2019
In UBS AG v Rose Capital, the High Court considered the defence pleadings that a Braganza duty should be implied into the terms of a mortgage contract.
A Braganza clause implies a duty that a discretion enjoyed under the terms of a contract should not be exercised irrationally, arbitrarily, capriciously and/or unreasonably. In rejecting the defence's argument, the Master said "...the law is clear with regard to a mortgagee's entitlement to call for repayment of a loan where the language of the loan agreement is as clear and unequivocal as it is in this case".
By a legal mortgage dated 27 March 2012, Rose Capital Ventures Limited (Rose Capital), owned by Dr Vijay Mallya (the second defendant), mortgaged a property to UBS AG as security for a £20.4 million loan. The loan was subject to UBS's standard mortgage conditions as well as certain special conditions. The following were key special conditions pertaining to the loan:
Four years after the drawdown of the loan, UBS served notice on the Defendant to terminate the contract relying on its right to require repayment in full under the Repayment Condition.Payment was not effected.The bank commenced court proceedings.
Rose Capital filed a defence arguing that, among other things, the Repayment Condition gave the bank a discretion; accordingly, it must be subject to the Braganza duty. UBS applied to strike out parts of the defendant's amended defence, maintaining that certain arguments were bound to fail.
The UK Supreme Court in the case of Braganza v BP Shipping Ltd [2015] UKSC 17 (Braganza) considered the principles of a party exercising a contractual discretion.
In Braganza, the employee's estate was entitled to receive a death in service payment unless the employer found his death had resulted from one of three causes.The employer had an ongoing fact-finding role: a clear "conflict of interest" situation.
In Braganza, the court ruled that not only would the reasonableness of the outcome of the contractual discretion be reviewed, but also the decision-making process. In exercising its discretion, the relevant party must not act irrationally, arbitrarily, capriciously and/or unreasonably.
Chief Master Marsh identified four key principles in his analysis concerning the application of Braganza:
He found in the bank's favour:
Rose Capital also alleged that the bank had breached its duty to act in good faith. As a secured lender, UBS accepted that it had a separate, but far more limited, duty to act in good faith, but denied the breach.
The Court held that there was nothing "prima facie irrational or in breach of duty of good faith" about the decision to terminate: "in the absence of an allegation that UBS' decision to call in the loan was disconnected from a desire to obtain repayment of the loan and to enforce its security, the duty of good faith will not avail the defendants".
UBS was under no obligation to give reasons for calling in the loan. It was for Rose Capital, who alleged mala fides, to prove this – it had failed to do so.
The Court found the language of the loan was clear and unequivocal. The five year term was conditional. It may be likened to the statements in many overdrafts that it is the lender's "present intention" to make the facilities available for a specified period. Such facilities remain on demand (see Lloyds Bank plc v Lampert (CA [1999] 1 All ER (Comm) 161).
The Court has provided a level of comfort for lenders by confirming that the Braganza duty will not be implied by the Court where a party has an absolute discretion under a loan.
The circumstances under which the Braganza principles will apply are very fact-specific and contractual freedom remains of paramount importance in English courts.
Nevertheless, contractual discretion and rights should be drafted carefully and parties should be cautious when taking enforcement steps in exercising their discretion to avoid falling foul of the duty to act in good faith.
by multiple authors
by Charlotte Hill and Daniel Hirschfield