Right to demand early repayment not a contractual discretion
07 December 2018
In UBS AG v Rose Capital the court held that a bank's entitlement to call for repayment of a loan was an absolute right and not a contractual discretion.
Rose Capital had mortgaged a property to UBS as security for a loan. The agreement stated "...we [UBS] shall be entitled at our absolute discretion to require repayment in full of the mortgage debt by giving you not less than three months’ notice in writing to that effect." UBS demanded early repayment under this provision. Following a failure to repay, UBS appointed receivers for possession of the property. By way of defence, Rose argued that the exercise of this discretion was subject to a Braganza-type duty: it would be exercised in a manner which was not irrational, arbitrary, capricious and/or unreasonable. UBS successfully applied to strike out this defence.
Having reviewed the many authorities the court set out the following principles:
- Not every contractual power or discretion will be subject to a Braganza limitation. The language of the contract will be an important factor.
- The types of contractual decisions that are amenable to the implication of a Braganza term are decisions which affect the rights of both parties to the contract where the decision-maker has a clear conflict of interest. In one sense all decisions made under a contract affect both parties, but it is clear that the court in Braganza had in mind the type of decision where one party is given a role in the on-going performance of the contract; such as where an assessment has to be made. This can be contrasted with a unilateral right given to one party to act in a particular way, such as right to terminate a contract without cause.
- The nature of the contractual relationship, including the balance of power between the parties is a factor to be taken into account. Accordingly, it is more likely for a Braganza term to be implied in, say, a contract of employment than in other less "relational" contracts such as mortgages.
- The scope of the term to be implied will vary according to the circumstances and the terms of the contract.
While acknowledging that the Braganza issue has been the subject of a number of recent decisions, and in that sense the law is developing, the court held that the law was not in a state of flux so far as mortgage contracts are concerned where the language of the agreement was as clear and unequivocal as it was in this case.