Freedom of contract is one of the key principles under English law in relation to commercial contracts. Parties are free to negotiate the commercial terms of their arrangement and English courts are generally reluctant to imply terms into contracts and interfere with what the parties have freely negotiated. This means contractual rights are generally enforceable irrespective of whether they are exercised in a reasonable or unreasonable way. However, the recent case of MacDonald Hotels Ltd and another v Bank of Scotland plc [2025] EWHC 32 (Comm) is a useful reminder of when the courts may imply a term into a contract and the impact that this could have on what would otherwise appear to be an unqualified right.

In circumstances where one party can exercise discretion which will affect both parties (creating a conflict of interest), the courts will generally imply that such discretion is exercisable in “good faith”. One aspect of “good faith” is the duty to act rationally and not to exercise the discretion arbitrarily or capriciously. This is referred to as the Braganza duty. 

The rationale behind the Braganza duty is to ensure that the contract is exercised in line with the parties’ presumed intentions and to safeguard against abuse by the party with the decision-making power, particularly where there is a power imbalance. It is important to note, though, that the Braganza duty does not apply to absolute contractual rights (like the right to call in a loan) or variations to the contract agreed by all parties. 

The Braganza duty has been considered by the courts in the context of financial contracts on a number of occasions, most recently in MacDonald Hotels Ltd and another v Bank of Scotland plc. 

This case concerned provisions in two facility agreements between MacDonald (“MHL”) and Bank of Scotland (the “Bank”) under which MHL was prohibited from disposing of its assets without the prior written consent of the Bank. The court implied a Braganza duty into these provisions on the basis that: 

“no reasonable person with all the background knowledge of the parties could have thought that the Bank was entitled simply to refuse to consider the request or to refuse it for the purpose unconnected to with its commercial best interest. Had that been the intention there would have been no purpose in inserting the provision concerning permission, because it is always open to a party to a contract to request a variation to it”.

However, the Bank was not expected to “balance its interests against those of MHL when arriving at a conclusion” and was instead “free to act in what it perceived to be its own best interest”. Therefore the Bank, in refusing to consent to the Borrower’s request to grant security over some of its assets to another lender, was held not to have breached the implied Braganza duty. 

Consent qualifiers are often included in restrictive undertakings in loan agreements. The LMA’s standard form investment facility agreement, for example, includes such proviso in the standard restriction on disposals undertaking. Lenders may mistakenly assume that this still gives them an absolute discretion as to whether to consent or not to a proposal. In practice this may not necessarily be the case. However, it is unlikely that a prudent lender would refuse consent for reasons other than acting in its legitimate best commercial interest and therefore, it would be unlikely for the lender to be in breach of an implied Braganza duty. Nonetheless, the key takeaway from the MacDonald case is this: consider consent requests carefully and rationally and keep records of the reasons for your decision at the relevant time.