On July 20 2011 the Eastern Caribbean Court of Appeal handed down the latest decision in the long-running Alfa Telecom Turkey Limited v Cukurova Finance International Limited case.

At trial, the judge held decisively in favour of Cukurova, finding that no event of default had occurred, and that accordingly, it was not open to Alfa to enforce its security. Alfa appealed the decision; the appeal court ruled in its favour and set aside the trial judgment.

The case raises several matters of law, but there are two key points of note for commercial lawyers in the British Virgin Islands.

First, Justice Gordon held that the trial judge had erred in concluding that an acceleration letter served on Cukurova by Alfa on April 16 2007 was vitiated because its reliance on invalid acts of default constituted a fundamental breach of contract. Gordon stated:

"Service by a lender of a demand letter relying on acts of default which are disputed by the borrower and subsequently not made out cannot constitute a breach of contract unless there is an express or implied duty to rely on valid acts of default in the relevant lending agreement.(1) While there may have been an implied duty for the appellant to assert acts of default in good faith, there is no justification for construing the Facilities Agreement as containing an implied term that the lender would only assert such acts of default which might, if disputed by the borrower, be either agreed to be valid, or determined by a competent court to be valid."

This finding clearly fits with the common-sense approach that a lender cannot be expected to refrain from instituting enforcement proceedings against a borrower purely on the basis that, despite the fact that it feels that an event of default has taken place under the relevant facility agreement, it has concerns that the borrower or a court may disagree and that the lender may find the tables turned and may itself be deemed to be in breach of contract.

The appeal court found that Cukurova had committed various acts of default under the facilities agreement, and that the English share charges were enforced by a valid appropriation of shares, as referred to in a letter from Alfa's BVI counsel to Cukurova on April 27 2007. This is not to say that a lender can seek to accelerate a loan for breach of contract on the basis of frivolous claims

The second key issue was a lender's obligation to act in good faith and/or not in bad faith. The appeal court upheld the trial judge's findings that Cukurova's extensive submissions to the effect that Alfa had acted for an improper purpose and with ulterior motives (ie, to appropriate the collateral pledged, rather than receive repayment of the loan) from the outset were largely irrelevant, and that the court was less concerned about people's motives than about legal rights. The court stressed that those rights were freely given at arm's length in a negotiated commercial transaction. Gordon stated:

"the appellant and the respondent were large companies playing in a cut-throat world of high finance. It would be naïve for a court to expect, or indeed insist, that sympathy rather than reliance on strict legal rights would or ought to rule the day."

Cukurova had also asserted, along the same bad-faith argument, that despite Alfa being well aware that Cukurova was making efforts to progress a refinancing of its loan, Alfa had not proffered its intention to accelerate the loan as it wished to proceed with the acceleration at a time that suited it, notwithstanding that this might affect Cukurova's opportunity to obtain a refinancing deal. Gordon responded to this assertion by stating that he found:

"no evidence of 'bad faith' where a mortgagee or lender awaits the optimum time to exercise its rights, rights fully negotiated between the parties, who the trial judge found, were well advised by professionals."

A lender is not obliged to take pains to ensure that the timing of an enforcement action suits both parties. Ultimately, a lender is entitled to act in its own best commercial interests and doing so does not automatically amount to the lender acting in bad faith.

A final appeal to the Privy Council is likely.


(1) Concord Trust v The Law Debenture Corpn plc [2005] 1 WLR 1591, quoted.

For further information on this topic please contact Colin Riegels or Louise Graham at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email ([email protected] or [email protected]).