In this alert, we consider a recent decision of the English High Court concerning the extent to which the equitable duty applicable to lenders, security agents and receivers in the context of an enforcement sale may be excluded by agreement.

The Equitable Duty

  • Mortgagees have an equitable duty to exercise reasonable skill and care in carrying out their functions, including to act in good faith and achieve the best price reasonably obtainable when selling charged assets (the “Equitable Duty”). The test for whether a mortgagee is liable for failing to exercise reasonable skill and care when discharging its Equitable Duty is similar to the test for negligence.
  • Where a sale is to a party unconnected with the mortgagee, the mortgagor bears the burden of proving that the mortgagee has not complied with its Equitable Duty. Where the sale is to a connected party the burden of proof is reversed and the mortgagee must show that “in all respects he acted fairly to the borrower and used his best endeavours to obtain the best price reasonably obtainable for the mortgaged property” and that its“desire to obtain the best price was given absolute preference over any desire that [the connected party] should obtain a good bargain.”
  • A mortgagee is entitled to consult its own interests alone as to whether and when to exercise its power of sale and is not bound to postpone a sale of charged assets in the hope of obtaining a better price. The Courts have been careful to resist laying down any prescribed procedure which a mortgagee must follow when discharging the Equitable Duty. The steps that should be taken depend on the circumstances prevailing at the time of enforcement.
  • The Equitable Duty is not delegable and the mortgagee does not discharge his duty by appointing an agent to conduct the sale, however it is well established that parties can exclude or limit the Equitable Duty by express agreement.
  • The Equitable Duty and principles set out above apply to receivers selling charged assets on behalf mortgagees and, subject to the contractual structure in which those powers are contained, security trustees.

CNM Estates (Tolworth Tower) Ltd v. VeCREF I Sarl and Others [2020] EWHC 1605 (Comm)


CNM Estates (Tolworth Tower) Ltd (CNM) entered into two loan agreements to finance the acquisition of a property known as the Tolworth Tower. The loans were secured by fixed charges over the development site and documented by a debenture (“Debenture”) and by an Intercreditor Agreement (ICA). CNM defaulted on its payment obligations and the security agent appointed receivers to sell the development site. CNM subsequently brought proceedings against the receivers claiming that they breached their Equitable Duty by negligently failing to achieve the best price obtainable for the development site.

The receivers contended that they had discharged the Equitable Duty and, even if they had not, the market standard terms contained within the Debenture and/or the ICA either excluded or limited its Equitable Duty. The ambit and effect of those exclusion clauses was determined by Mr. Justice Foxton at a trial of the preliminary issues.

The relevant terms of the Debenture and ICA were as follows:

  • Clause 19.1 of the Debenture (Liability of Security Agent and Receiver): “Neither the Security Agent, any Receiver, nor any of their respective Delegates and sub-delegates (whether as mortgagee in possession or otherwise) shall either by reason of: (a) taking possession of or realizing all or part of the Secured Assets; or (b) taking any action permitted by this Deed, be liable to a Chargor or any other person for any costs, losses or liabilities relating to any of the Secured Assets or for any act, default, omission or misconduct of the Security Agent, any Receiver or their respective Delegates and sub-delegates in relation to the Secured Assets or otherwise.”
  • Clause 9.5 of the ICA (Duties owed): “Each of the Secured Parties and the Debtors acknowledges that, in the event the Security Agent enforces or is instructed to enforce the Transaction Security prior to the Senior Discharge Date, the duties of the Security Agent and any Receiver or Delegate owed to the Mezzanine Creditors in respect of the method, type and timing of that enforcement or of the exploitation, management or realization of any of that Transaction Security shall, subject to Clause 11.4 (Fair value), be no different to or greater than the duty that is owed by the Security Agent, Receiver or Delegate to the Debtors under general law.”
  • Clause 16.10(a)(i) of the ICA (Exclusion of Liability): “None of the Security Agent, any Receiver nor any Delegate will be liable for any damages, costs or losses to any person, any diminution in value, or any liability whatsoever arising as a result of taking or not taking any action under or in connection with any Debt Document or the Security Property unless directly caused by its gross negligence or willful misconduct.”


Foxton J referred to the following principles relevant to the construction of exemption clauses:

  1. Clear words must be used to exclude or modify a party’s valuable common law or equitable rights, however the courts will not strain to find ambiguity (the “Gilbert-Ash Principle”).
  2. The approach to construing clauses purporting to exclude claims for negligence, as set out in Canada Steamship v. The King [1952] AC 192 (the “Canada Steamship Guidelines”), is a helpful guide but is not to be applied rigidly in all circumstances in a way which might defeat the parties’ intentions. In short, the Canada Steamship Guidelines consist of the following three limbs:
    1. if the clause clearly and unambiguously exempts a party from liability for negligence, the court should give effect to that provision. In this regard the judge noted that “some contractual provisions which do not expressly refer to negligence or a synonym for negligence may nonetheless make it very clear that negligence is excluded, such that no further enquiry is required.”
    2. if the clause is ambiguous, the court should consider whether the words used are wide enough, given their ordinary meaning, to exclude negligence; and
    3. if the words are wide enough to include negligence, the court should consider whether the words could be construed to exclude claims other than negligence, if those other claims are ones which are reasonably likely to have been within the parties’ contemplation at the time the contract was made. If the clause can only exclude liability for negligence, then it will more readily operate to exempt the beneficiary of the clause.
  3. The court will seek to avoid the construction of an exemption clause that would leave the counterparty with no effective remedy for one party’s breach of an express obligation and, in those circumstances, will lean towards an alternative construction.
  4. Where the exemption clause excludes liability for the negligent discharge of the Equitable Duty, the exclusion must be expressly conferred and will be strictly construed (Bishop v. Bonham [1988] 1 WLR 743).

Decision on Clause 19.1 of the Debenture

Relying on Bonham, Foxton J held that Clause 19.1 of the Debenture did not exclude the receivers’ liability for breach of the Equitable Duty. Although the words “any act or omission” were, in theory, wide enough to exclude acts of negligence (and had been held to exclude acts of negligence in other commercial contexts), in the present context this was not the case. It was more likely that Clause 19.1 concerned actions which the receivers might have to take in “realising” the charged assets or “taking any action permitted under this Deed” that might give rise to some form of complaint (i.e., entering onto someone else’s land or collecting rent or the proceeds of sale), but which did not include actions taken in breach of the Equitable Duty.

Further, the fact that, at the very least, the ICA recognized that the receivers would be liable for breaches of the Equitable Duty arising from gross negligence or willful default was a further factor which weighed against the suggestion that Clause 19.1 of the Debenture excluded that duty all together. In this regard, Foxton J noted that where two contracts are linked, the law will try to read them consistently with each other.

Decision on Clause 9.5 of the ICA

CNM argued that Clause 9.5 of the ICA expressly provided that the receivers owed it a duty of care and that, to the extent Clause 16.10(a) of the ICA was inconsistent with that proposition then: (a) any ambiguity between those two clauses should be resolved in CNM’s favor in line with the Gilbert-Ash Principle; (b) the second stage of the Canada Steamship Guidelines could not be satisfied; and (c) Clause 16.10(a) should not be construed in a way which deprives Clause 9.5 of its substantive effect.

Foxton J held that Clause 9.5 simply described the Equitable Duty owed by the mortgagee to the Mezzanine Creditors under the general law when realising charged assets in the absence of any contractual provision to the contrary. Clause 9.5 was not the source of the Equitable Duty owed to CNM as mortgagor, which remained the general law. In this regard, he held that the purpose of the language of Clause 9.5 was the same as Clause 12.6 of the Loan Market Association’s template intercreditor agreement (the “LMA ICA”), which is in very similar terms to Clause 9.5.

Decision on Clause 16.10(a)(i) of the ICA

CNM’s principal arguments were that Clause 16.10(a)(i) did not expressly refer to negligence and there were other types of liability against which the parties may reasonably have intended the clause to protect; and that Clause 9.5 and Clause 16.10(a)(i) were incompatible with each other.

Foxton J held that Clause 16.10(a)(i) limits the receivers’ liability only to situations where the loss incurred has been caused by the receivers’ gross negligence or willful default. Although Clause 16.10(a)(i) did not expressly exclude liability for negligence, the first limb of the Canada Steamship Guidelines was nonetheless satisfied because it followed as a matter of implication from the express words of the clause that, if the receivers were only liable for loss arising from acts or omissions amounting to gross negligence or willful default, then they had successfully excluded liability for loss arising from less serious breaches, i.e. “ordinary” negligence.

Further, Clause 9.5 and Clause 16.10(a)(i) were compatible with each other and did not operate to leave the mortgagor without a remedy. The Equitable Duty (or Clause 9.5) is owed, but Clause 16.10(i) makes clear that breaches of that duty are only actionable where the facts which give rise to those breaches involve gross negligence or willful misconduct. Foxton J noted that his conclusion was consistent with the effect of Clause 21 of the LMA ICA, which was broadly similar to Clause 16.10(a)(i).


Although this case did not break new ground, it is a helpful example of the judicial application of established principles in the specific context of the Equitable Duty. Amongst other things, the judgment highlights the importance of carefully considering language which may sometimes be considered “mere boilerplate” and, in particular, to ensure that any intended exclusions and limitations are clearly stated, not incompatible with any other express obligations, and consistent across the suite of documents.