Which way to turn? Lender discretion under the spotlight

What is the Braganza duty?

Originating from the 2015 Supreme Court case Braganza v BP Shipping Ltd, this legal principle limits how discretion can be used in contracts — particularly where one party’s decision materially affects the other.

Unless explicitly excluded, discretion must be exercised:

• Honestly
• Reasonably
• In good faith
• Without arbitrariness or caprice

Where it commonly applies in real estate finance:

• Asset management consents
• Financial covenant waivers
• Change of control clauses
• Events of default and enforcement decisions
  (Note: Enforcement may fall under the “mortgage exception”)

Recent case law: How courts are applying Braganza

Here’s how the courts have handled lender discretion in recent years:

UBS AG v Rose Capital Ventures Ltd (2018)

UBS enforced early repayment. The borrower argued for Braganza. The High Court disagreed: UBS’s discretion was clearly stated as absolute.

Lombard North Central v European Skyjets (2022)

Lombard enforced security over a jet. The borrower challenged the action, but the court upheld it as lawful and within contractual rights.

Macdonald Hotels Ltd v Bank of Scotland (2025)

Allegations of asset sales at undervalue. Court agreed Braganza applied but found the bank’s decisions commercially sound and justified.

Standard Chartered plc v Guaranty Nominees Ltd (2024)

During a LIBOR transition, the court emphasised the need for clear drafting and reasonable, commercially defensible conduct.

Morley v RBS (2020)

A distressed asset transfer was challenged on grounds of duress. The court found no misconduct but reiterated the duty of good faith.

Crowther v Arbuthnot Latham & Co Ltd (2018)

The bank refused to consent to a sale without further security. The refusal was deemed unreasonable, it aimed to reduce the lender’s shortfall, not assess the sale's merits.

Key lessons for lenders

1. Act in Good Faith and Be Reasonable

Avoid arbitrary, overly self-serving decisions. Reasonableness is the benchmark.

2. Maintain a commercial justification

Courts respect lenders’ commercial interests, but those interests must align with the contract’s purpose and be proportionate.

3. Communicate and document

Be transparent and keep a paper trail. In Macdonald, internal documentation helped defeat the claim.

4. Draft contracts clearly

Phrases like “sole” or “absolute” discretion help but may not eliminate scrutiny entirely. Clarity in drafting is your best defence.

Can you draft around Braganza?

Yes, but tread carefully. Attempts to exclude the duty entirely can create legal and reputational risk.

• Sole/Unfettered discretion: Might not be enough if decisions appear unfair.
• Excluding good faith/reasonableness: Legally risky and commercially unattractive.
• Removing consent mechanisms: May help avoid Braganza, but impractical for syndicated loans. Instead, consider “Majority Lender” provisions.

Final Word: Discretion with direction

Lenders aren’t prohibited from acting in their own interests, but courts expect those actions to be fair, rational, and in line with the contract.

If challenged, you’ll want to show that you:

• Acted in good faith
• Had a clear, commercial rationale
• Followed the agreed contract terms
• Documented your decision-making

That’s not just good law — it’s good business.

Stay ahead

To ensure your team is navigating discretion effectively, revisit your templates, train your decision-makers, and watch how case law evolves.

Need a second opinion on your contract terms or enforcement strategy? Get in touch with our legal team.