15th January 2019
A recent High Court case has shed some light on the extent to which the courts may imply additional duties into mortgage agreements requiring lenders to make decisions by way of processes that would be “lawful and rational in the public law sense”. Banking Litigation specialist explains UBS AG v Rose Capital Ventures Ltd  and the implications for lenders.
The Braganza case  involved a substantial departure by the Supreme Court from precedent in the interpretation of contractual provisions . It effectively implied into a commercial contract, over and above the express terms of the contract, a new ‘duty’ akin to the public law concept of ‘Wednesbury reasonabless’ (that is, the requirement that the decision-making process in relation to the exercise of a contractual discretion be undertaken in good faith and not arbitrarily or capriciously). Whilst the Braganza case was decided on its own particular facts to address the prospect of a substantial injustice, this implication of a higher standard in relation to the exercise of contractual discretions could have the potential to shift the balance of power between parties, and to cause significant uncertainty, in all manner of contracts. In UBS v Rose the issue arose in the context of a mortgage contract.
This case has garnered some media attention as it relates to the London home of Indian former billionaire Dr Vijay Mallya, once owner of Kingfisher Beer and the Force India F1 racing team. The claimant bank had provided an unregulated, on-demand loan to the first defendant company, secured over the property. (The second to fourth defendants, including Dr Mallya, were joined in the proceedings as shareholders in the first defendant.)
The bank had maintained in the mortgage contract an absolute discretion to require payment in full on three months’ notice. The claimant gave such notice and appointed fixed charge receivers who began possession proceedings. The defendant argued, however, that the claimant had breached an implied fetter (akin to a Braganza duty) on the bank’s discretion to call in the loan.
The High Court concluded that the defendant’s argument relating to such an implied duty had no reasonable prospect of success. It held that Braganza duties do not apply to every form of contractual power or discretion, but only to the very limited circumstances considered in the Braganza case. For example:
The High Court was clear in its view that a decision to demand repayment of a loan does not create a conflict of interest as the action is taken solely to the benefit of the mortgagee.
The High Court also considered that the mortgagor-mortgagee relationship already gives rise to a separate duty to act in good faith that requires a different standard of care in mortgagee’s decision-making processes, and which points against the possibility of any Braganza duty.
It was also significant in this case that the bank had amended its standard terms to remove the need for a trigger event before it was entitled to call in the loan and to instead provide for the express absolute discretion to demand full repayment on notice. That amendment and specific drafting supported the bank’s case against implying a Braganza duty.
The case demonstrates that a court is unlikely to imply a Braganza duty in relation to secured lending arrangements because the law relating to a mortgagee’s decision-making obligations within such contracts is clear and is already subject to a good faith requirement. That is especially the case where the express drafting of the contract reflects that clearly and unequivocally. In addition, although UBS v Rose Capital considered the implications of Braganza duties in the context of a secured loan, many of the conclusions reached appear equally applicable to unsecured loans.
  EWHC 3137 (Ch)
  UKSC 17 – see our earlier briefing
 What is the correct approach to contractual interpretation? Since Arnold v Britton  UKSC 36, the courts will strive to uphold the clear wording of the clause wherever possible, applying the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a bad bargain for any party. The court’s task is to ascertain the meaning of the language which the parties have chosen to express in their agreement when read in the context of the factual background known or reasonably available to the parties at the time of the agreement (Wood v Capita Insurance Services Ltd  UKSC 24). However, where a contract term might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense (Rainy Sky SA v Kookmin Bank  UKSC 50). Alternatively, where it is commercially and practically necessary, a court may imply terms into the contract to ensure business efficacy (M&S v BNP Paribas  UKSC 72).
 ‘Relational’ contracts involve trust and confidence that the other party will act with integrity and in a spirit of cooperation. They typically include joint venture agreements, employment contracts, franchise agreements, long-term distributorships, contracts entered into informally between close friends, and the like.