McKay (t/a Mckay Law Solicitors And Advocates) v Centurion Credit Resources LLC

A contractual provision stating that a lender’s obligation to make an advance is in its sole discretion may confer a residual discretion to refuse funding, even after contractual conditions for requesting an advance have been satisfied. That discretion must be exercised lawfully and not irrationally, capriciously or arbitrarily. The court will not substitute its commercial judgment for that of the lender. A lender may also require additional documentation under a clause permitting it to request reasonable documents, where the requirement falls within the agreement’s scheme. Waiver requires an unequivocal representation that a party will not insist on its legal rights, together with reliance making it inequitable to resile. A refusal to advance money is not repudiatory where the contract conferred a valid discretion, or where conditions precedent had not been satisfied.

The claimant, a solicitor, entered into a loan agreement with the defendant to fund disbursements in consumer-credit litigation. The agreement provided for advances subject to specified conditions, including ATE and key-man insurance, and stated that the lender’s obligation to make any advance was in its sole discretion.

The claimant requested a first advance of US$130,000. The defendant declined to fund it, principally because acceptable reinsurance had not been provided and the key-man insurance condition had not been satisfied. The claimant alleged breach and repudiation, relying also on waiver. Liability was tried separately from quantum.

1. Construction and discretion. The words stating that the lender’s obligation to make any advance was in its sole discretion were construed as giving the lender a residual discretion whether to advance funds. Satisfaction of the conditions precedent created, at most, a heavily qualified prima facie obligation. The agreement had to be read as a whole, including its provisions protecting the lender and permitting reduction of the maximum facility.
2. Limits on discretion. The discretion was subject to the general law. Intervention was permissible only if the decision was irrational, capricious or arbitrary. The relevant irrationality threshold was equivalent to the public-law test: a decision had to be so outrageous in defiance of reason as to be perverse. The defendant’s concern about the financial strength of the proposed ATE insurer and the absence of reinsurance was a commercial judgment for the lender. It was not for the court to substitute its own view.
3. Conditions precedent. Independently of the residual discretion, the claimant was entitled to request an advance only after satisfying clause 1.7(b). The request was invalid because proof of acceptable reinsurance had not been supplied under clause 1.7(b)(x), and because evidence that key-man insurance had been entered into had not been delivered under clause 1.7(b)(ii). The defendant’s request for evidence of reinsurance was within the scope of the contractual power to request further documents.
4. Waiver. Waiver, in this context, was a form of estoppel. It required an unequivocal representation that the defendant would not insist on its contractual rights and reliance making it inequitable for the defendant to resile. The defendant’s conduct did not establish such a waiver. Nor did the evidence show reliance sufficient to make insistence on proof of insurance inequitable. The court proceeded on the basis that informal waiver could in principle occur despite the written-waiver clause.
5. Repudiation and outcome. A refusal to advance would have been repudiatory if the defendant had been obliged to advance and had made clear that it would not perform unless the claimant complied with non-contractual conditions. That was not the case. The defendant was entitled to refuse the requested advance and had not repudiated the agreement. The claim was dismissed.

This was a first-instance liability judgment. Mr Justice David Richards had ordered that liability be tried separately from quantum. The claim was dismissed.