The High Court held that the bank was not under a duty to act reasonably (a Braganza duty) when exercising its absolute discretion to demand repayment of a loan.
This case concerned a five-year term loan for £20.4million. Under the loan agreement, the bank (UBS) had an absolute discretion to demand a full repayment of the loan before the end of the term provided it gave three months’ notice to the borrower (Rose Capital). In the fourth year of the loan, UBS gave the required notice and demanded full repayment. Rose Capital argued that the bank was subject to an implied obligation to exercise its discretion rationally, following the principles in Braganza v BP Shipping (the so-called Braganza duty).
The Braganza duty is an implied obligation to act rationally and in good faith when exercising a contractual discretion. It may arise where one party is entrusted with a contractual decision-making power, the exercise of which would affect the rights of both parties to the contract, and where that party has a clear conflict of interest in making the decision. Following Braganza, where the duty is implied, the substantive decision reached must be rational and the decision-maker must follow a rational process in reaching that decision.
In the UBS case, the court highlighted that, even where a Braganza duty is capable of being implied, successful implication will hinge on two important factors:
- Implication must be necessary
The principles in M&S Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd apply to the implication of a Braganza duty – implication must be necessary to give business efficacy to the contract or must have been so obvious to the parties at the time when they entered into the contract that it “went without saying”. The court will not imply a term simply to improve the contract’s effectiveness or fairness.
- Context is everything
In Braganza, Lady Hale stated that “whatever term may be implied will depend on the terms and the context of the particular contract involved”. Where the contract in question is bespoke and complex and the agreement was reached following extensive negotiations, the implication of a Braganza duty limiting one party’s ability to exercise absolute discretion under the contract is unlikely to be required. A distinction should be drawn between cases such as Braganza (where the agreement before the court was an employment contract and the parties did not have equal bargaining power) and those akin to UBS (where the agreement was entered into in the context of commercial lending and the borrower was a large commercial entity in a strong bargaining position, capable of borrowing elsewhere on more attractive terms).
The UBS case demonstrates that the courts are still reluctant to imply a Braganza duty into a bespoke commercial agreement between parties of (almost) equal bargaining strength. Where the language of the loan agreement is clear and unequivocal, the lender will not be subject to an implied duty of rationality when exercising its absolute discretion to demand repayment as per the terms of the agreement.