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Legal Update

Implied Duties of Good Faith in Facility Agreements

6 May 2016
Mayer Brown Legal Update

An interesting judgment on the subject of implied duties of good faith was handed down last week in an application for strike out. The judge determined that whether a duty of good faith could be implied into the facility agreement was a matter for trial; although implication of a term is not dependent on the actual intention of the parties, it is necessary to consider the relevant factual background, which had not been presented in sufficient detail at the hearing.

The facts
In 2008, the defendant banks (the "Bank") extended a £55 million loan facility (the "Facility") to London and West Country Estates Ltd ("LWE"), a company ultimately owned by the first and second Claimants. The parties also entered into a 10-year bank callable interest rate swap (the "Swap"), a hedge having been a pre-condition of the Facility. In around October 2009, LWE was placed into the Bank's Global Restructuring Group ("GRG"). The Facility was later assigned to a third party, Isobel, which placed LWE into administration. LWE (in administration) subsequently assigned various causes of action to the Claimants.

Broadly, there are four claims:

  1. The Advisory Claim: the Bank owed and breached a duty of care to advise LWE properly in relation to the Swap.
  2. The Swap Misrepresentation Claim: the Swap was induced by misrepresentations made to LWE.
  3. The LIBOR Claim: the Bank impliedly made representations to LWE as to LIBOR which were untrue and the Bank either knew they were untrue, were without belief in their truth, or were reckless as to their truth. Alternatively, the Bank breached the LIBOR Implied Terms.
  4. The GRG Claim: the Bank, particularly GRG, acted in breach of an implied term to act in good faith in its performance of the terms of the Facility and specifically, in assigning the facility to Isobel.
    The Claimants allege that, as a result of these breaches, LWE was forced into administration and suffered substantial loss and damage. The Bank denies the claims.

The application
The Bank's application was for a strike out of parts of the Claimants' case relating to the GRG Claim. One of its grounds for strike out (under CPR 3.4(2)(a)) was that the GRG Claim was unarguable in law because no duty of good faith could be implied into the relevant sub-clause of the Facility. Counsel for the Bank argued that a duty of good faith could only be implied into a contractual right which involved exercising an element of discretion. The Bank drew a distinction between:

  • the exercise of a right which involves making an assessment or choosing from a range of options, which the Bank said amounted to discretion; and
  • exercising an absolute right (i.e. a choice limited to either taking an action or not taking it).

In the relevant clause, into which the Claimants sought to imply the duty of good faith, the Bank's right had been limited to choosing either to assign the Facility or not to assign it. The Bank argued that this was an absolute right with no discretion and so no duty of good faith could be implied. In pursuing this argument at an interim stage, the Bank maintained that it placed no reliance on any particular factual matrix and that there was no need to do so because the various tests for implying a term into a contract are concerned with what notional reasonable people would have agreed.

The decision
Ultimately, Mrs Justice Asplin agreed with the Claimants that whether a duty of good faith could be implied into the Facility was a matter for trial. Although the Bank was right that implication of a term is not dependent on the actual intention of the parties, the judge said that it is nonetheless sensitive to the relevant factual matrix. The relevant clause must be construed, and the question of construction and implication considered, against the background of the Facility as a whole and against the relevant facts.

In this case, insufficient evidence was available to the court as to the factual complexity of the relationship between the relevant individuals before the execution of the Facility. Consequently, Mrs Justice Asplin was unwilling to reach a decision as to whether the relevant clause contained an absolute right or a discretion, and therefore an implied duty of good faith owed by the Bank.

Strike out
The decision dealt with a facility agreement described by the judge and accepted by both parties as a "standard lending agreement". In spite of this, Mrs Justice Asplin was unambiguous in saying that both the full factual background and the Facility as a whole needed to be considered to determine whether a duty of good faith should be implied into the agreement. On that basis, it seems unlikely that a situation could arise in which sufficient consideration could be given pre-trial to the facts and the agreement in question for a strike out application such as the one in this case to succeed.

(1) Diane Hockin, (2) Michael Hockin and (3) Lonwest Limited v (1) The Royal Bank of Scotland and (2) National Westminster Bank Plc [2016] EWHC 925 (Ch).


  • Ruth Malone
    Of Counsel
    T +44 20 3130 3207
  • Jeremy Holden
    T +44 20 3130 3501

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