Where a so-called "Braganza duty" applies to the exercise of a discretion1, a decision maker is obliged to exercise it in a way which is not irrational, arbitrary or capricious.
In 2019, we published an article "How reasonable do lenders need to be?" in which we examined then recent cases in which the court had been asked to consider whether a Braganza duty should be implied into facility agreements.
The recent case of MacDonald Hotels Ltd and another company v Bank of Scotland plc2 has, once again, caused lenders to revisit the applicability of the Braganza duty to common provisions in facility agreements.
How did the issue arise?
The case is a complex one arising out of a long commercial relationship between Bank of Scotland ("BoS") and MacDonald Hotels Limited ("MHL"), during which BoS provided both equity and debt finance to the hotels group. The judgment runs to some 96 pages and covers various claims made by MHL and one of its subsidiaries.
However, for the purposes of this article we will focus on MHL's claim that certain implied terms should be read into a facility agreement it entered into as part of a 2014 refinance.
The facility agreement in question contained standard provisions precluding MHL or its subsidiaries from creating security or disposing of assets, without the prior approval of BoS. MHL made a request for consent to refinance a single secured asset with a third-party lender, which BoS refused.
MHL claimed that the inclusion of the phrase "without the prior approval of" served to confer a discretion on BoS which should be subject to an implied Braganza duty. MHL argued this required BoS to act in good faith and not act arbitrarily or capriciously, to take into account all relevant considerations and not to use its discretion for an improper purpose3.
BoS refuted this claim, maintaining its right to provide approval (or not) was absolute and unqualified.
Should the court imply a term?
A key question for the court was did the facility agreement confer an absolute right on BoS to decide whether or not to provide its consent to a disposal of, or creation of security over, secured assets? If it did, as a matter of law, there could be no implied term which could contradict an express term of a contract.
However, whether consent rights are absolute and unqualified or operate as a discretion which is subject to the Braganza duty remains a question of contractual construction. The judge in this case emphasised that the relevant clause had been made expressly subject to BoS' consent. This meant that it must have been accepted by the parties that MHL may, in fact, make this request. BoS would then have to consider the request and the options available to it and "no reasonable person…could have thought that [BoS] was entitled to simply refuse to consider the request or refuse it for reasons unconnected with its commercial best interests"4.
The judgment stated that had the parties not accepted that MHL may make a request, they could have opted to exclude the express consent right and leave the borrower to request a contractual variation. However, the parties had included an express right and the judge concluded that to not allow an implied term would be tantamount to ignoring the express wording.
What was the scope of the term which was implied?
Whilst the judge accepted MHL's argument to an extent, the term the judge implied is much more limited than MHL had argued for. The judge determined that BoS, in considering whether to give consent, was entitled to act in what it considered to be its own best interests, was not obliged to balance those interests with its customer's interests and was ultimately able to exercise its own judgment.
However, BoS was not entitled to refuse consent for a reason unconnected with what it perceived to be its own commercial best interests or refuse consent when no reasonable entity in the position of BoS could have refused consent5.
MHL's claims on this point (and others) failed. Even assessing BoS' decision making subject to a newly implied term, it did not breach that term. In refusing a request that would have increased the loan-to-EBITDA ratio, BoS acted as any other secured lender would have and did not act in breach of any term (express or implied) by preferring its own commercial interests over those of MHL.
Key takeaways for lenders
- Consent provisions are common in all types of facility agreements: a similar implied term could apply to any consent request made by a borrower.
- If in doubt, consider omitting consent wording altogether: If a lender is particularly concerned about the exercise of certain consent rights, it may be better to exclude express consent wording altogether and leave the borrower to request a contractual variation.
- When drafting consent rights, clarity is key: Lenders may wish to consider whether there should be specific conditions attached to a particular consent, which should be expressly specified in the facility agreement.
- Consider the "reasonable entity" test during negotiations: The "reasonable entity" test (i.e. that BoS could not have refused consent when no reasonable entity in the same position could have refused consent) is one a lender should be mindful of during negotiations with borrowers. In this case, BoS was able to demonstrate it had acted as any other secured lender would in not agreeing to a proposal which would reduce its security and increase leverage. Whilst this isn't a high bar, lenders should be mindful of the possibility that a similar term could be implied, particularly in a stressed situation in which providing consent may be a more nuanced decision.
- Lenders should not consider factors unrelated to their own commercial interests: Whilst a lender does not have to look beyond on its own commercial interests, a lender also should not take into account factors unrelated to its own commercial interests. This point was emphasized in Property Alliance Group Limited v The Royal Bank of Scotland Plc6, in which the judge found a bank had requested a valuation for a "purpose unrelated to its legitimate commercial interests". Clear records of decision-making processes are key. In this case, BoS was able to demonstrate it acted solely in accordance with its internal procedures and its own commercial interests, despite claims from MHL that there had been ulterior, more personally motivated reasons behind BoS' decision making. On which point, this case also serves as a useful reminder that email communication, credit committee minutes and other internal documentation may find their way out into the open and should always be carefully considered in view of that fact.
This case emphasises that whether terms will be implied remains subject to principles of contractual construction by a court, of which there can be no certainty.
Lenders may be surprised that their right to consent may not be absolute. However, it should be reassuring that the implied term established in this case is limited and confirms that a lender need only have regard to its own commercial interests.
1 The "Braganza" duty is so-called after a case of the same name – Braganza v BP Shipping Limited [2015] UKSC 17; [2015] 1 WLR 1661.
3 Para 26 [2025] EWHC 32 (Comm)
4 Para 160 [2025] EWHC 32 (Comm)
5 Para 167 [2025] EWHC 32 (Comm)
