May 19, 2022

Default on a secured loan facility: the English High Court considers a lender's right to terminate


In Lombard North Central Plc v European Skyjets Ltd1, the English High Court has found that a loan agreement had been validly terminated by a lender following the default of a borrower, despite the lender having waived (through its conduct) its right to rely on certain other breaches.  Although the dispute arose in the context of a finance transaction, the Court was asked to consider various issues which are likely to be relevant to most English law governed commercial contracts.

In particular, the judgment highlights the dangers of placing too much reliance on contractual "no waiver clauses" or equivalent "reservation of rights" wording to preserve legal rights in response to a breach, in circumstances where a party's purported reliance on such provisions/wording may be found to be inconsistent with their actual conduct and behaviour towards their counterparty following the breach.

The judgment also addressed the importance of strict compliance with contractual notice provisions, the way in which material adverse change clauses are interpreted by the English Court, and the scope of the "Braganza duty" in the context of termination rights.


In October 2008 the lender, Lombard North Central Plc ("Lombard") and the borrower, European Skyjets Limited ("European Skyjets", and together with European Skytime Limited, the "Skyjet Parties") entered into a secured loan agreement in the amount of approximately US$ 8.8 million for the purchase of an aircraft. The loan was to be repaid by European Skyjets in 120 monthly instalments, with Lombard acquiring a first priority legal charge over the aircraft.

European Skyjets subsequently defaulted on several instalments, starting in 2009 and continuing through 2010 and 2011. Despite the missed instalments, European Skyjets did make several payments during this period, such that at times it cleared the payments arrears. Lombard and European Skyjets entered into restructuring related discussions during this time, but these discussions failed to reach an agreement.

In November 2012, European Skyjets was deemed to be insolvent. As a result, the loan agreement was terminated and an acceleration notice served by Lombard, with Lombard demanding that European Skyjets pay the then outstanding sum of US$5.9 million. On 17 December 2012, European Skytime went into administration.

Lombard subsequently bought proceedings against the Skyjet Parties for the outstanding balance on the loan of approximately US$5.9 million. Lombard maintained that it had validly terminated the loan agreement and had therefore validly enforced its security on the aircraft by selling it for US$3.1 million.

The Skyjet Parties brought a counterclaim for £26 million in damages against Lombard, claiming that it had no entitlement to terminate the loan agreement or sell the aircraft. The Skyjet Parties also claimed that Lombard had breached its duties as a mortgagee when selling the aircraft.


The Court found in Lombard's favour, holding that Lombard had been entitled to terminate the loan agreement and accelerate the loan, and that it was entitled to enforce its security by selling the aircraft. The Court also held that Lombard had not breached its duties as a mortgagee when selling the aircraft for the best available price.

The key issues considered by the Court were as follows.

The doctrine of waiver, "no waiver" clauses and reservation of parties' rights – a cautionary tale

The Skyjet Parties argued that Lombard had waived its right to treat the late payments during the 2009-2012 period as events of default and, by extension, was therefore not entitled to terminate the loan agreement. The Skyjet Parties relied on the fact that, during the course of correspondence between the parties, Lombard had given the Skyjet Parties additional time to clear the arrears and had accepted late payment. The Skyjet Parties also argued that, as a matter of fact, they were not in arrears at the time the acceleration notice was served.

Lombard argued that a "no waiver" clause in the loan agreement as well as a general reservation of rights made repeatedly during the course of correspondence overrode its conduct and it was therefore entitled to terminate the loan agreement, notwithstanding its acceptance of late payment.

The Court found that Lombard had waived its right to rely on the event of default through its conduct, despite the inclusion of the no waiver language in loan agreement and the reservation of rights contained in the inter-parties correspondence.

Foxton J noted that clause 9.2 of the loan agreement did not, as a matter of construction, require a default to be continuing when the acceleration notice was served. However, Foxton J noted the risk that such a finding could give rise to unintended consequences, such that a "creditor might sit on the right of termination arising from a late paid instalment, only to exercise its right of termination much later". Foxton J held that this risk is addressed by the doctrine of waiver, such that a lender's conduct after receipt of later payment can be held to have waived any termination right arising out of such late payment.2

Foxton J found that Lombard's conduct in offering the Skyjet Parties additional time to clear the payment arrears and in accepting the late payments themselves (and charging late payment fees for such payments) was sufficient to constitute a waiver of its right to terminate the loan agreement based on an event of default continuing at that date.

"No waiver" clauses

Foxton J also considered the effect of the "no waiver" clause and what Lombard termed the "No Waiver Statement", which appeared repeatedly in email correspondence between the parties and which purported to reserve Lombard's rights in respect of the loan agreement in the event of default.

The wording of the "no waiver" clause in the loan agreement contained language which limited the operation of the "no waiver" clause to actions that constituted "failure […] or delay" on the part of Lombard. Foxton J held that the waiver did not arise from a failure or delay in any event but from positive statements made by Lombard in which they noted that they would not enforce the default provisions in the loan agreement if the Skyjet Parties bought the payments out of arrears.

In relation to the "No Waiver Statement", Foxton J held that the "No Waiver Statement" constituted a general reservation of rights and could not prevent an affirmatory act from having its "objective effect".3 Foxton J held that this was the case here and therefore the "No Waiver Statement" had no effect.

Termination notice requirements

The Skyjet Parties argued that because the acceleration notice referred to the payment default only (which was held by the Court to have been waived), then the notice itself referred to a non-existent event of default and was therefore invalid.

Foxton J considered the validity of the termination and acceleration notice as against the relevant provisions in the loan agreement. The loan agreement provided that any termination notice must: (i) be sent after the occurrence and an event of default, and (ii) cancel the facility and require the borrower to immediately to repay the loan together with accrued interest.

Foxton J noted that Lombard themselves had accepted that any party who wishes to exercise a contractual right of termination by notice must comply with the conditions for the exercise of the right.4 Foxton J held that it was not a condition of the loan agreement that Lombard identify the event of default and that no other authority implied that this was a requirement.

The Court therefore found that, although the termination notice did not specify a valid event of default, the notice was valid as it satisfied the contractual requirements conditions for a termination notice, as prescribed in the loan agreement.

Material adverse change

Foxton J also considered whether there had been a "material adverse change" ("MAC") in relation to the Skyjet Parties such that it gave rise to an event of default. The Court noted that the loan agreement provided that there would be an event of default if "in the opinion of the Lender, a material adverse change occurs in the business, assets, condition, operations or prospects of any Group Company or any Credit Support Provider."

Foxton J noted it was necessary for the Court to be satisfied that Lombard had formed the requisite (honest and rational) opinion that a MAC had occurred, but it was not necessary that the change in question had actually had an objectively adverse effect. It was also a requirement that the relevant individual held such an opinion at the time that the notice was served.5

In his judgment, Foxton J noted that the Skyjet Parties' accounts at the relevant time showed large trading losses below relevant forecasts and that the business was cash flow insolvent. Accordingly Foxton J was satisfied that the relevant account manager at Lombard had formed the view that the position of the Skyjet Parties had "materially worsened" and therefore held that there had been a subjective MAC which gave rise to an event of default. It was this event of default which therefore was held by the Court to be the actual event of default which validated the termination.

Braganza duty

Foxton J also noted that he did not accept that where an event of default gave Lombard a right of termination, that Lombard's decision to exercise that right was subject to the Braganza duty (i.e., the implied duty to exercise a contractual discretion in good faith and not arbitrarily or capriciously).

Foxton J therefore held that Lombard's decision was an "absolute contractual right" for it to "exercise for its own purposes, as it sees fit".


Although this decision concerns the termination of a loan agreement, the issues which arise from the judgement are relevant to commercial contracts more generally.  In particular, the judgment:

  • highlights the dangers of relying on "no waiver" clauses and general "reservation of rights" wording, where a party's purported reliance on such provisions/wording may be found to be inconsistent with their actual conduct and behaviour towards their counterparty. In particular, parties should consider carefully how their rights may be affected by (for example) giving concessions to a counterparty that is in default and not rely too heavily on "no waiver" clauses or "reservation of rights" wording as a means through which to preserve legal rights;
  • provides a useful illustration as regards how MAC clauses are interpreted by the English Courts. In particular the judgment demonstrates the importance placed by the Court on the specific words used in the MAC clause to define whether or not a MAC has occurred. In the present context, all Lombard needed to show in order to demonstrate a MAC was that it had formed an honestly and rationally formed view that there had been a MAC. The interpretation of MAC clauses is often heavily contested in litigation, specifically in relation to how the relevant "change" should be measured and whether or not a MAC has actually occurred, as illustrated in the leading English authority on MAC (Grupo Hotelero Urvasco v Carey Value Added6) - where this firm acted for the Defendant;
  • demonstrates the importance of strict compliance with contractual notice provisions in order to ensure that any notices served are valid. The notice provisions of any contract deserve close scrutiny and parties seeking to serve contractual notices should ensure that any and all requirements stipulated within the notice provision (and the contract generally) are satisfied in full, particularly in the context of termination;
  • serves as a useful reminder that a party's right to exercise a right to terminate a contract is not subject to the Braganza duty – and is an absolute contractual right, rather than a discretionary right.

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