Summary: The recent case Crowther v Arbuthnot Latham & Co Ltd highlights the importance for financiers to carefully consider agreeing to qualify discretions with reasonableness.
The Commercial Court (QBD) (the “Court”) held that an objective test applied to determine if the bank was reasonable in its refusal to grant consent to the sale of property constituting the bank’s security under a facility agreement. Applying the objective test, the Court concluded that the bank was in breach of the requirement not to withhold consent unreasonably.
The relevant provision in the facility agreement provided that a property upon which the loan was secured, may be sold with the prior approval of the bank (such approval not to be unreasonably withheld or delayed). The borrower’s outstanding indebtedness was €5.9m, and this was secured by way of a mortgage over a property of the borrower’s estimated to be worth approximately €4m. The borrower had received an offer for the property exceeding €4m which was in line with valuations at the time. The bank refused consent to the sale, insisting that the borrower provide alternative security for the remaining indebtedness and a repayment plan. The borrower contended that the bank was acting unreasonably and that it was entitled to sell the property at fair market value without provision of additional security.
The Court decided that the test to be applied was one of objective reasonableness and not one of Wednesbury unreasonableness (Wednesbury unreasonableness being applying a test of whether such reasoning or decision is so unreasonable that no reasonable person acting reasonably could have made it) or whether the bank’s decision-making process was rational.
The objective test required the court to consider the background and purpose of the provision i.e. the specific circumstances and whether the decision to refuse consent was a decision which might be reached by a reasonable man in the circumstances.
Examining the background the Court noted that when the provision was agreed, it was known that the property did not provide security for the whole of the indebtedness and that any sale would result in an unsecured shortfall. Applying the objective test, the Court concluded that the purpose of the provision was to preserve the bank’s contractual rights and not to enhance the bank’s powers by allowing them to request additional security for any outstanding indebtedness. The bank were determined by the court to be unreasonable by withholding their consent to the sale on this basis.
Judgment and Conclusions:
The English courts have declined to lay down any hard and fast rules for determining what is “reasonable” and as a result there is conflicting case law on the standard to be applied, particularly where a consent obligation expressly requires the person from whom such consent is sought not to unreasonably withhold their consent.
Another important point to note (from another recent case) is that even where “reasonableness” has not been added to qualify a discretion, it could be implied where there is no drafting to the contrary.
The Court’s judgment in Crowther v Arbuthnot Latham & Co Ltd highlights the importance of carefully considering adding “reasonableness” qualifications to provisions in facility agreements. Financiers should ensure, in particular, that consent requirements which are at the complete discretion of a finance party are clearly drafted so as not to leave such clauses open to interpretative attack by the Courts.