Grupo Hotelero Urvasco SA v Carey Value Added SL & Anor

Factual and Procedural Background

This case involves a dispute between Plaintiff, a Spanish hotel company, and Defendant, a Spanish hotel investment fund, concerning a loan and share purchase agreement related to the development of a hotel and apartments on a prime site in central London. The site was purchased by a UK subsidiary of Plaintiff in 2004. Defendant entered the transaction in 2007 to provide funding when Plaintiff faced difficulties increasing bank finance. The agreements provided that Defendant would lend funds and eventually acquire the property shares, leasing back the hotel to Plaintiff with an option to repurchase after seven years.

Plaintiff claims damages for Defendant's failure to advance funding under the Loan Agreement, which Defendant ceased in June 2008, allegedly breaching contract and causing the development to fail. Defendant contends it was entitled to withhold advances because Plaintiff was in default under the Loan Agreement, citing financial and development-related defaults. Defendant counterclaims for repayment of sums advanced and also claims against Plaintiff's guarantor entity.

The trial involved complex factual and expert evidence relating to the financial condition of the Plaintiff group, the progress and management of the development, and the interpretation of contractual terms under English and Spanish law. The central issue was whether Plaintiff was in default as at 6 June 2008 when Defendant withheld a loan tranche.

After extensive proceedings and interlocutory disputes, the trial examined the factual matrix, contractual provisions, expert testimony, and the parties’ conduct, including the financial difficulties of Plaintiff’s group amid the 2007-2008 economic downturn and the global financial crisis.

Legal Issues Presented

1. Whether Plaintiff was in default under the Loan Agreement as at 6 June 2008, justifying Defendant’s withholding of loan advances.
2. Whether there was a material adverse change (MAC) in the financial condition of Plaintiff or its guarantor between the date of the Loan Agreement and 6 June 2008.
3. The proper interpretation and application of the Spanish law doctrine of actos propios (previous conduct) in relation to the parties’ letter agreements.
4. Whether Defendant was entitled to rescind the Share Purchase Agreement and avoid repayment of the loan under clause 6.17 of that agreement.
5. The nature and extent of alleged development defaults by Plaintiff, including failure to pay contractors and to provide accurate information.
6. The quantum of Defendant’s claim for repayment of sums advanced under the Loan Agreement.
7. The viability of Plaintiff’s damages claim for loss arising from Defendant’s alleged breach.

Arguments of the Parties

Plaintiff's Arguments

• Defendant breached the Loan Agreement by failing to advance funding, causing the development to fail and resulting in damages.
• There was no default as at 6 June 2008; the financial difficulties were either pre-existing or not material adverse changes.
• Defendant’s withholding of funds was motivated by its own financial difficulties and desire to exit the transaction rather than contractual default by Plaintiff.
• Defendant misrepresented the status of the development and failed to provide accurate and complete information.
• Defendant’s claim for repayment is disputed, and Plaintiff relies on the exculpatory clause in the Share Purchase Agreement relieving repayment if Defendant breaches.
• Plaintiff contends that the development could have been completed and the hotel operated profitably after the initial loss-making period.
• There was a funding gap, but Plaintiff argues it could have been met by additional financing or shareholder support.

Defendant's Arguments

• Plaintiff was in default under the Loan Agreement at 6 June 2008 due to financial and development breaches, justifying withholding of loan advances.
• There was a material adverse change in the financial condition of Plaintiff’s group and guarantor between the date of the Loan Agreement and 6 June 2008.
• Spanish law doctrine of actos propios bars Plaintiff from denying liability given letter agreements acknowledging debt and compensation.
• Defendant was entitled to rescind the Share Purchase Agreement and demand repayment due to Plaintiff’s breach.
• Plaintiff failed to pay contractors and professionals timely, failed to notify breaches, and provided inaccurate certification and information about the development.
• Defendant properly withheld funds and is entitled to recover sums advanced plus interest.
• Plaintiff’s damages claim is speculative and would have failed because the development was unlikely to be completed profitably in any event.

Table of Precedents Cited

Court's Reasoning and Analysis

The court conducted a detailed and structured analysis of the factual and legal issues arising from the loan and share purchase agreements. It first examined the doctrine of actos propios under Spanish law, concluding that the doctrine did not apply because the letter agreements were intended as standstill arrangements to allow Plaintiff to find replacement funding, and did not amount to an inconsistent prior conduct barring Plaintiff’s claims.

On the material adverse change (MAC) issue, the court interpreted the MAC clauses as requiring an assessment of the change in financial condition primarily by reference to the company’s financial statements, with materiality assessed by the impact on the borrower’s ability to repay or perform obligations. It rejected Defendant’s contention that a MAC representation was made by the guarantor on 6 June 2008 due to the agreed interest periods under the BBVA Credit Agreement, finding no such representation was made on that date.

The court considered expert accountancy evidence and contemporaneous financial information, concluding that while there was a material adverse change in the financial condition of the guarantor company by 6 June 2008, Defendant failed to prove a representation was made on that date. It found no MAC in the financial condition of Plaintiff or its special purpose vehicle as at 6 June 2008.

Regarding the event of default for entering into negotiations for debt rescheduling, the court construed the relevant contractual clause as requiring formal negotiations prompted by actual or anticipated financial difficulties. It found that Plaintiff was engaged in such negotiations with individual creditors before 6 June 2008, constituting an event of default under the BBVA Credit Agreement and thus under the Loan Agreement.

The court rejected Defendant’s allegations of further defaults under the BBVA Credit Agreement relating to use of funds, late payments, and breaches of building contracts prior to the Loan Agreement, finding that the main lender BBVA had waived such breaches and was aware of the circumstances.

In relation to development defaults, the court found that Plaintiff was in breach of obligations to pay contractors timely and to provide accurate information, including that the April 2008 certification to Defendant was materially inaccurate due to “forced” (forzado) certification practices. The court accepted that late payments were extensive and material, affecting the likelihood of completing the development by the Long Stop Date, though it found that no breach arose under provisions requiring completion by the Long Stop Date before that date.

The court examined expert evidence on programming and found that completion by the Long Stop Date was achievable as at 6 June 2008 assuming proper funding and management. It rejected Defendant’s contention that completion would likely be delayed beyond that date at that time.

Regarding the use of loan advances, the court concluded that Plaintiff breached the intercreditor agreement by not transferring the full amounts of certain loan tranches to the development vehicle at the time, retaining part for other uses.

The court held that Defendant was entitled to rescind the Share Purchase Agreement and avoid repayment if it failed to advance a tranche due under the Loan Agreement. Since Plaintiff was in default at 6 June 2008, Defendant’s withholding was lawful and clause 6.17 did not apply.

On quantum, the court accepted Defendant’s entitlement to recover the sums advanced plus interest. It noted ongoing appeals concerning an on-demand bond but reserved order on the form of judgment accordingly.

Turning to Plaintiff’s damages claim, the court found that even if Defendant had not breached, the development was unlikely to have been profitably completed due to a funding gap and the onerous leaseback terms. It found that Plaintiff could not have funded the gap and that the project would not have reached completion. The claim for loss of profit was speculative and the claim for increased development loss was academic.

Holding and Implications

DEFENDANT ENTITLED TO JUDGMENT ON COUNTERCLAIM

The court held that Plaintiff was in default under the Loan Agreement as at 6 June 2008, entitling Defendant to withhold loan advances lawfully and to recover the sums advanced with interest. The guarantor entity was also liable. Plaintiff’s claim for damages for breach of contract failed because the development would not have been completed profitably even if Defendant had performed.

The direct effect is that Defendant’s counterclaim succeeds and Plaintiff’s claim is dismissed. No new legal precedent is established beyond the application of established principles of contract interpretation, Spanish law doctrines, and factual findings specific to the case.