UBS v Rose Capital Ventures Limited and others

Is there a duty to act rationally and in good faith when exercising a contractual right without cause?

The facts

UBS granted a mortgage for £20.4m to Rose Capital on a term of five years.  The mortgage contained a number of special conditions which included that UBS could demand early repayment of the loan with three months’ notice.  This demand could be effected without the need for a triggering event (the Special Condition).

Four years after the drawdown of the loan, UBS requested early termination and served a notice demanding repayment. 

Rose Capital contended that the Special Condition was ineffective because it gave UBS a discretion to call the loan in early and that discretion was subject to a duty of good faith, following Braganza v BP Shipping Ltd & Anr [2015] UKSC 17. 

UBS argued that the duty of good faith as between a mortgagor and a mortgagee does not arise by contractual implication but by virtue of the creation of a mortgage.  Since the ability to enforce the Special Condition was one of absolute discretion, there could be no allegation of bad faith in UBS’s decision to do so. 

The decision

Chief Master Marsh held that the circumstances in Braganza did not apply.  If one party is charged with making decisions which affect the rights of both parties to the contract, then there is a clear conflict of interest and the duty to act rationally would apply.  Since UBS’ right to terminate the contract without cause was unilateral, there was no conflict of interest. 

The Chief Master noted that the contract in Braganza was an employment contract, which by its nature, was created by an inequality of bargaining power.  Baroness Hale held that alongside the nature of the contractual relationship, this was an important factor to be taken into account.  Such inequality did not exist in the relationship between UBS and Rose Capital.

The Chief Master concluded that as long as the mortgagee exercises the power for proper purposes and not for the sole purpose of vexing the mortgagor, it will neither be in breach of its duty of good faith nor a Braganza term, if one is capable of being implied on the basis of business necessity. 

Why is this important?

This case confirms its limits of the Braganza duty, and highlights the importance of not only considering the contractual rights of each party within an agreement, but also the duties the parties may have to each other when exercising those rights. 

For example, in contracts where the parties are on unequal footing, the dominant party may have to use its discretion as to whether a contractual right may trigger a Braganza situation where the party cannot make decisions based on the substance of the contract alone. 

Practical tips

Parties should be mindful that a stronger duty of good faith may apply where the contracting parties are subject to an inequality of bargaining power.  This duty could prevent a party from exercising rights which they would otherwise be entitled to enforce without consideration for the affected party.