Deutsche Bank (Suisse) SA v Khan & Ors

A contractual condition precedent may suspend a lender’s obligation to advance funds even though the underlying facility agreement is immediately binding. Where satisfaction depends on whether documents are satisfactory to the lender, the lender’s decision is subject to an implied requirement of honesty, good faith and rationality. The lender may consider the substance and risk underlying a valuation, including speculative hope value, rather than merely the valuation figure. A no-set-off clause in a loan agreement may prevent a borrower relying on cross-claims to withhold sums due. Default interest calculated by reference to a percentage above the lender’s cost of funding means a percentage rate above that funding rate. The statutory unfairness regimes were not engaged on the facts.

The Bank claimed repayment of more than £50 million lent to the Khan family and related offshore companies, together with possession of charged London properties. The defendants relied on alleged misrepresentations, breaches of the facility agreement, mistake, statutory unfairness, set-off, breach of confidence and other counterclaims.

The principal dispute concerned the Bank’s refusal to advance the whole of a tranche after its credit-risk department considered that a valuation of Dryades included speculative hope value. Further issues concerned supplemental agreements, default interest, security shortfall, guarantees, statutory relief and the sale of investment products.

1. Facility Agreement. The Bank’s obligation to make the facility available was subject to the condition precedent in clause 12 and Appendix 3. The condition was of the type which suspends contractual obligations pending fulfilment. The Bank made a decision under clause 12, despite not expressly referring to the clause. Its dissatisfaction concerned the risk and uncertainty associated with £9 million of hope value in the Dryades valuation. That was a rational and permissible ground. The decision was therefore not capricious, perverse, irrational or arbitrary, applying the principles in Socimer Bank v Standard Bank [2008] Bus LR 1304.
2. The Bank was entitled to consider whether the substance of the valuation report was satisfactory, including the elements contributing to the valuation and the security risk. The clause 12 condition precedent was not fulfilled, so the Bank was not obliged to advance the retained £10 million. The Bank was nevertheless entitled to permit partial drawdown on agreed terms. It waived the requirements for simultaneous and complete drawdown under clauses 4(a) and 4(c), without waiving its other rights.
3. The alleged pre-contractual and post-contractual misrepresentations were not proved. There was no oral agreement on 17 August 2007, and the Undertaking was a proposal pending formal documentation rather than a binding agreement. The First and Second Supplemental Agreements were effective. There was sufficient consideration, and unilateral mistake was not established.
4. Default interest under clause 9(d) was payable at three percentage points above the interest rate paid by the Bank as its cost of funding, rather than three per cent above the monetary cost itself. Following an event of default, the amount unpaid could include the whole outstanding principal and accrued interest.
5. Under clause 15 the Bank could obtain a valuation itself. Alternatively, it could rely on the “any other valuation” wording in clause 15(b). The November 2008 and December 2010 valuations could therefore be relied upon.
6. The no-set-off clause applied to all payments due under the facility, including sums required to cure a security shortfall. An unliquidated damages claim was no defence to possession proceedings: National Westminster Bank Plc v Skelton (Note) [1983] 1 WLR 72 and Ashley Guarantee Plc v Zacaria [1993] 1 WLR 62.
7. The personal guarantee remained effective. The claims of breach, set-off, misrepresentation and unenforceability of the supplemental agreements did not discharge it.
8. The relationship under the Consumer Credit Act 1974 was not unfair. The terms had legitimate commercial purposes, were commonplace in loan agreements, were negotiated with legal assistance and were not imposed through unfair pressure. The Unfair Contract Terms Act 1977 did not apply because the contract was not most closely connected with the United Kingdom; in any event, the terms were reasonable. The Unfair Terms in Consumer Contracts Regulations 1999 did not render the terms unfair.
9. The Bank owed a duty of confidence, subject to the exception recognised in Tournier v National Provincial and Union Bank of England [1924] 1 KB 461. It was entitled to disclose information to protect its security, and no actionable disclosure was proved.
10. The defendants’ defences and counterclaims failed. The debt and possession claims were enforceable under the written contracts. Financial consequences were left for agreement or a subsequent hearing.