Summary

A loan agreement that gave the mortgagee an "absolute discretion" to require repayment on three months' notice was not subject to an implied term that it be exercised rationally in accordance with Braganza v BP Shipping Ltd [2015] UKSC 17. The fact that a duty of good faith arose by reason of the mortgagor/mortgagee relationship pointed against the possibility of a Braganza clause being imported in relation to a core contractual provision.

Facts

The claimant applied to strike out parts of the defendants' amended defence.

The first defendant company owned a property that was being developed and which was subject to a bank charge. The second to fourth defendants were involved in a family trust that owned the shares in the first defendant. The first defendant borrowed £20.4 million from the claimant, which was to be used to discharge the bank charge and then secured on the property. It was stated to be an unregulated, on-demand loan for five years, subject to a condition that the claimant at its "absolute discretion" could give three months' notice requiring repayment in full. The claimant served an early termination notice and appointed fixed charge receivers who began possession proceedings. The defendants disputed the validity of the notice. The claimant agreed with the defendants to stay the receiver's proceedings, waited until the five-year period had expired and began the instant proceedings for repayment of the loan. It sought to strike out the parts of the defence alleging breach of an implied fetter on its discretion to call in the loan, breach of the duty of good faith between mortgagor and mortgagee, breach of an implied term to abide by the Financial Conduct Authority Handbook, wrongful appointment of the receivers, that the claimant was relying on its own wrong, that it had frustrated the defendant's attempts to refinance the loan, that it was bound by its election to call in the loan early, abuse of process, estoppel in relation to the third and fourth defendants and priority of occupiers, and denying that the claimant was entitled to be subrogated to the earlier bank charge.

Held

The strike out test - Under CPR r.3.4(2)(a) an applicant had to establish that the statement of case showed no reasonable grounds for bringing or defending the claim. The focus was on the statement of case that was under attack. That was different to considering whether the claim or defence had a real prospect of success; the test under r.3.4(2)(a) was more stringent than that for summary judgment. The court had to be certain that the claim or defence was bound to fail, Richards (t/a Colin Richards & Co) v Hughes [2004] EWCA Civ 266 applied. In addition, the court had to consider whether the case or issue was part of a developing area of law and would be better resolved at a trial, and whether the respondent should be given an opportunity to amend (see paras 22, 124 of judgment).

Implied term that discretion to call in loan had to be exercised rationally - Not every contractual power or discretion would be subject to a fetter requiring it to be exercised rationally in accordance with Braganza v BP Shipping Ltd [2015] UKSC 17, Braganza followed. The types of contractual decisions amenable to the implication of a Braganza clause were decisions that affected the rights of both parties to the contract where the decision-maker had a clear conflict of interest. The nature of the contractual relationship, including the balance of power between the parties, was a factor to be taken into account. As a general proposition, a Braganza clause would only find its way into a contract by way of an implied term, rather than by construing the words of the contract. The test for implication was one of business necessity and whether, without the term, the contract would lack commercial or practical coherence: whether it was necessary to imply the term to make the contract work. Based on the terms agreed in the instant case, there was no basis for implying a Braganza clause. A duty of good faith arose by reason of the mortgagor/mortgagee relationship, and that pointed against the possibility of a Braganza clause being imported in relation to a core contractual provision. Although the claimant had an "absolute discretion", calling in the loan was not the exercise of a discretionary power of the type described in Braganza. It was difficult to see how a decision to demand repayment of a loan could ever be in the interests of the mortgagor; it was always exercised solely for the mortgagee's benefit. There was, however, a degree of mutuality because it was open to the mortgagor to discharge the loan at any time. Even if a Braganza clause was implied, its scope would be no wider than the duty of good faith. Although the Braganza issue had been the subject of a number of recent decisions, and in that sense the law was developing, the law was not in a state of flux or change so far as mortgage contracts were concerned. The defence based on the Braganza issue was struck out (paras 49, 52-57).

Breach of duty of good faith - It was not sufficient for the defendants merely to assert that the claimant had no legitimate reason for calling in the loan, and they had provided no basis for shifting the burden to the claimant to justify its decision. There was no principle requiring the claimant to give reasons for its decision. The defence based on this issue was struck out (paras 69, 71-72).

Other defences - Other than the defence based on estoppel in relation to the third and fourth defendants, which was capable of amendment, the other defences in issue were bound to fail and were struck out (para.129).

Application granted in part.