Where a lender has a unilateral discretion as to whether to make a loan or not, refusal to make the loan is not a repudiatory breach of the agreement where that discretion is exercised properly.
That was the finding in McKay (T/A McKay Law Solicitors & Advocates) v Centurion Credit Resources LLC. The insolvent claimant had entered into a loan agreement with the lender to fund disbursements for up to 6,000 claims under regulated consumer credit agreements that he was going to act upon under conditional fee agreements backed by after the event (ATE) insurance. It was a term of the loan agreement that the ATE insurance would be in place before any advance was made. Clause 1.1(a) of the agreement also provided that the lender's obligation to make an advance was in its sole discretion.
The ATE insurance that was obtained by the claimant was not backed by reinsurance and on that basis the ATE insurance was inadequate for the lender's purposes and it refused to make the advance. The claimant alleged the lender was in repudiatory breach of contract and brought a claim.
The Court of Appeal, agreeing with the judge at first instance, held that clause 1.1(a) provided the lender with a unilateral discretion as to whether to make the advance. Its decision not to do so was held to be a proper exercise of that discretion. The ATE insurance was to protect the lender. The claimant could not have expected that the lender would have been satisfied with ATE insurance without any reinsurance given the sums involved (potentially up to $7.5 million). The lender was not in breach of the agreement in refusing to make the advance.
Things to consider
Given that the only security the lender would have had here was the ATE insurance cover, the exercise of its discretion not to lend, could not be criticised.