In Macdonald Hotels v Bank of Scotland [2025] EWHC 32 (Comm), the Commercial Court has dismissed (with indemnity costs) all claims of bad faith, irrationality, and misrepresentation against the Bank following a 6 week trial and 8 years of litigation. The case is the latest example of borrowers seeking to imply duties of rationality and good faith into banking contracts.
Macdonald Hotels had sought damages of around £120m on the basis that, in bad faith and capriciously, the Bank had forced it to sell certain trophy assets, including the Randolph Hotel in Oxford, by refusing to consent to alternative debt repayment proposals which, it was claimed, would have avoided such sales.
The Bank was both the secured lender to the hotel group and, also, at times, a 50% shareholder (through a subsidiary) in the business. The sale of the Randolph Hotel gave rise to legal issues as to the duties of a bank in this situation, and whether its rights as a secured lender were qualified in any way because of its shareholder interest.
The case also raised the question whether the Bank as mortgagee had an absolute (unqualified) right to refuse to release (or allow the subordination of) its security to permit a borrower to dispose of a hotel asset, in circumstances where (it was alleged) the debtor’s own commercial interests would be advanced by such a disposal, even if the Bank’s interests were not; and where only some of the secured debt would be repaid by the disposal.
The Court accepted the hotel group’s contention that, applying the Supreme Court decision in Braganza v BP Shipping [2015] UKSC 17, it was possible in principle to imply a term of good faith into a secured debtor/creditor relationship, notwithstanding the equitable law of mortgages which already provided for certain duties and rights [154]-[158]; and that it was necessary (on the facts of this case) to imply a term that the Bank would act in good faith, when considering whether to release security in favour of alternative repayment proposals. However, the implied term was a very limited one: the Bank was entitled to act in what it considered to be its commercial interests; was not obliged to balance those interests against those of its customer; and ultimately was entitled to exercise its own commercial judgement [166]-[168]. The case is also notable for its consideration of the Linden Gardens line of authority (contractual bar on assignment of claims) [223]-[234].
In the event, the various claims of breach of duty, misconduct and causation all failed on the facts, with the case meriting the award of indemnity costs. Half the claim (by value) was discontinued following cross-examination of the Claimant’s principal witness, and the case of economic duress was abandoned after the evidence.
Andrew Mitchell KC and Rupert Allen, with Elizabeth Fitzgerald of Falcon Chambers, acted for the Bank, instructed by Herbert Smith Freehills. The Judgment can be found here, with the ruling on indemnity costs here.
