High Court finds lenders' exercise of contractual right to demand loan repayment is not subject to implied Braganza duty

The High Court has dismissed an appeal by two individuals who were loan guarantors, rejecting the implication of a Braganza term into the contractual right of two lenders to demand repayment of their loans at any time without reason: Murfet & Anor v Property Lending LLP & Anor [2024] EWHC 2787 (Ch).

The decision will be of interest to financial institutions as it reaffirms that not all contractual powers or discretions are subject to Braganza limitations, requiring the discretion to be exercised in good faith and not arbitrarily or capriciously (as per Braganza v BP Shipping Ltd [2015] UKSC 17). The court doubted that such an implied term would apply in relation to a power to call in a loan, agreeing with the decision in UBS AG v Rose Capital Ventures Limited [2019] 2 BCLC.

The judgment highlights that banks can rely on a unilateral contractual right, such as “repayable on demand” clauses, without the need to justify their decisions, if this is what the contract provides for. This clarity can provide banks with greater confidence in enforcing their rights under loan and other financial agreements. However, the decision is a reminder that the use of a contractual right or discretion is not completely unconstrained, as it should be exercised in pursuit of legitimate commercial aims (as per Property Alliance Group Limited v The Royal Bank of Scotland Plc [2018] EWCA Civ 355) (see our blog post). This is the latest in a recent line of decisions considering the exercise of contractual discretions in a financial services context (see our previous blog posts here).

The judgment also provides some guidance on the application of Unfair Contract Terms Act 1977 (UCTA). While the court strongly doubted that the repayment demand clause was unreasonable in this case, the decision is a reminder that UCTA will not automatically invalidate a contractual term (even if onerous) if it is clearly stated and agreed upon by parties with equal bargaining power. Further, courts are reluctant to invoke UCTA in commercial disputes unless a term is clearly abusive. 

In the present case, the guarantors challenged the statutory demands made against them after the lenders exercised their rights to demand full repayment. The High Court upheld the decision of the Insolvency and Companies Court (ICC) in refusing to set aside the statutory demands against the guarantors. The court held that the relevant clause providing that the loans were "repayable on demand" was not subject to an implied Braganza term and the power had been exercised in pursuit of legitimate commercial aims. The court also found that UCTA did not apply.

We consider the decision in more detail below.

Background

In 2021, a property development company (the Borrower) entered into two separate loans with two lenders (the Lenders). As security for the Borrower's liabilities under these loans, the Lenders obtained personal guarantees from the sole shareholder and director of the Borrower and his mother (the Guarantors). The loans were made under two facility letters, which specifically stated at clause 7.2 that the loans were "repayable on demand".

The Lenders subsequently formed a commercial view that a development project undertaken by the Borrower was not progressing as they expected. To minimise their potential losses, they decided to call in the loans and issued statutory demands relying on the Guarantors' personal guarantees. In response, the Guarantors applied to the ICC to set aside the statutory demands. However, the ICC dismissed their application, finding that clause 7.2 of the facility letters allowed the Lenders to demand full repayment at any time without providing any reason.

The Guarantors appealed.

Decision

The High Court found in favour of the Lenders and dismissed the appeal.

The key issues which will be of interest to financial institutions are set out below.

Demand for repayment

The court held that the Lenders could demand full repayment at any time without any reason.

Interpretation

The court applied established principles of contract interpretation to determine the meaning of clause 7.2 of the facility letters. Specifically, the court endorsed and applied the court's approach in Arnold v Britton and others [2015] UKSC 36 (see our blog post), which underlined that: (i) reliance on commercial common sense and surrounding circumstances should not be used to undervalue the importance of the language of the provision which is to be construed; and (ii) the exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader and, except in very unusual cases, that meaning is most obviously derived from the language of the provision.

The court concluded that there was no lack of commercial sense in giving clause 7.2 of the facility letters its natural meaning.

Further, the fact that the Lenders' obligation to provide further funding was subject to the Borrower satisfying certain conditions precedent does not mean that the same conditions should be transposed into clause 7.2; the conditions were not expressed to be events of default or prepayment events. There were no other default or repayment provisions which would allow funds already advanced to be demanded ahead of the termination date on the occurrence of insolvency, breach by the Borrower or the Borrower failing to progress the development, in a way that would be usual in a commercial loan. These provisions would be unnecessary if the loans were indeed "on demand" in accordance with the wording of clause 7.2.

It was clear that the Lenders had an advantage in being able to call in the loans when they considered it commercially necessary, without engaging in legal arguments about whether they had a valid reason. This preference for clause 7.2 over a more traditional clause setting out events of default or repayment events was understandable. While clause 7.2 might operate to the disadvantage of the Borrower, it is not the court's role to mend a bad bargain.

Implied terms

The court considered whether there was an implied term requiring the Lenders to use their power to demand loan repayment in a reasonable and proportionate manner. The court referred to the principles established in Braganza to determine the circumstances in which such a term might be implied.

The court acknowledged that in Nash & Ors v Paragon Finance Plc [2001] EWCA Civ 1466 the Court of Appeal implied a term into a consumer mortgage contract that - in exercising its discretion to vary interest rates - the mortgage lender was bound to make its judgment "fairly, honestly and in good faith, and not arbitrarily, capriciously or unreasonably". A similar finding was made in Breeze v TSB Bank Plc [2024] EWHC 2427 (Ch).

However, the court doubted whether a similar implied term would apply in relation to a power to call in a loan. An identical issue was raised in Rose Capital, where the defendant argued that UBS was not entitled to call a loan in early on the basis that it was "unreasonable and/or irrational and/or arbitrary and/or capricious for it do so". However, the Chief Master presiding over the case rejected this contention and found that the mortgagee's duty of good faith was not the same as a duty of good faith existing in commercial contracts generally (and in relational contracts in particular). The Chief Master also underlined that a mortgagee is under no duty to refrain from exercising its rights merely because doing so may cause loss to the mortgagor or its unsecured creditors.

The court endorsed the summary of general Braganza principles articulated in Rose Capital as follows:

• Not every contractual power or discretion is subject to a Braganza limitation; the contract’s language is crucial.
• A Braganza term can be implied to contractual decisions affecting both parties’ rights where the decision-maker has a clear conflict of interest, especially in ongoing performance roles. This can be contrasted with a unilateral right given to one party, such as the right to terminate without cause.
• The nature of the contractual relationship and the balance of power are key factors; Braganza terms are more likely in relational contracts like employment than in less relational ones like mortgages.
• The scope of an implied Braganza term will vary based on the contract’s circumstances and terms.

Considering these principles, the court concluded that the Lenders' exercise of their rights under clause 7.2 was not subject to the sort of term implied in Paragon Finance.

However, the use of this power was not completely unconstrained. It was arguable that the parties intended the power to be exercised (as was the case in PAG) in pursuit of legitimate commercial aims rather than to vex the borrower maliciously. There was no evidence before the court at first instance that the Lenders were calling in the loans otherwise than in pursuit of their legitimate commercial aims. It was clear that the Lenders had formed a commercial view that the project was not progressing as they had expected and in calling the loans were seeking to minimise their potential losses.

Applicability of UCTA

The court noted that section 3 of UCTA addresses liability in contracts where one party uses their standard terms of business. It states that a party cannot (unless the term in question satisfies the "reasonableness" test): (i) exclude or limit their liability for breach of contract; (ii) deliver a performance significantly different from what was expected; or (iii) fail to perform their contractual obligations.

In the court's view, there was no real prospect that the Guarantors would be able to rely on UCTA to invalidate clause 7.2 (or the Lender's use of it), for the following reasons:

• Clause 7.2 was not tucked away in the terms and conditions in a way that disguised its effect and left the reader with the impression that the loans would not be called in until the termination date. It was front and centre in defining the obligations of the parties. It did not modify the position of the parties as regards time for repayment. It was part of the central definition of what those obligations were. A case under s.3(2)(b) UCTA would therefore fail at the first hurdle.
• It would be reluctant to invoke UCTA in a case between two commercial parties except where a term is clearly abusive. In this case, in the absence of any right within the facility agreement allowing termination for cause there was a clear need for some ability to call in the loan.
• It strongly doubted that it would find that clause 7.2 was unreasonable. There was no evidence that there was an imbalance of bargaining position between the parties. The Borrower knew (or ought reasonably to have known) of the existence/extent of clause 7.2.
• There was no evidence before the court that the Lenders were contracting on standard terms in relation to clause 7.2.

Accordingly, the court found in favour of the Lenders and dismissed the appeal.