The High Court has dismissed the most recent claim to reach trial arising from the actions taken by a lending bank’s restructuring unit following a borrower’s default under a facility agreement during the global financial crisis. The court rejected all claims that the bank failed to discharge its duty to provide lending services with reasonable skill and care; that it owed a general duty to act in good faith; or that the bank’s actions amounted to intimidation or economic duress: Oliver Morley v The Royal Bank of Scotland plc  EWHC 88 (Ch).
Overall, this decision will provide reassurance for financial institutions seeking to enforce their rights against defaulting borrowers. It is the latest in a helpful trend of recent cases in which the courts have upheld the exercise by financial institutions of their contractual rights and discretions when providing banking and lending services (for example, N v The Royal Bank of Scotland plc  EWHC 1770 – see our previous blog post). The following points decided by the court are likely to be of broader interest to lending banks:
- So-called “relational contracts”. The court found that the loan agreement was not a long term relational contract incorporating an implied obligation of good faith (as per the formulation in Yam Seng Pte Ltd v International Trade Corp Ltd  EWHC 111 (QB)). Rather, the court said it was “an ordinary facility loan agreement”, reflecting a similar approach to UTB LLC v Sheffield United Ltd  EWHC 2322 (Ch) that “not all long term contracts that involve an enduring but undefined, cooperative relationship between the parties…will, as a matter of law, involve an obligation of good faith”. Together with Standish & Ors v The Royal Bank of Scotland plc & Anor  EWHC 1829 (Ch) (see our previous blog post), it suggests that the initial traction which relational contracts gained through judicial statements has been curbed in more recent authorities, which have emphasised the high threshold which must be met before the court is willing to imply the existence of a contract or term.
- Limited fetter on the bank’s contractual discretion. Accordingly, the only fetter on the bank’s exercise of power (in this case, to obtain a revaluation of the assets charged under the loan agreement and to charge a higher, default interest rate) was the requirement to exercise these powers for a proper purpose connected to the bank’s commercial interests and not in order to vex the claimant maliciously (as per Property Alliance Group Ltd v Royal Bank of Scotland plc  EWCA Civ 355). The court found that the bank exercised its discretion appropriately.
- Scope of the duty to provide banking service with reasonable skill and care. The court helpfully confirmed that while compliance with regulatory standards is relevant to whether a bank has satisfied this duty, compliance with the bank’s internal policies and procedures is not to be treated in the same way as compliance with rules setting professional standards across a trade or profession.
- Intimidation and economic duress claims. The court’s approach to these claims is noteworthy. The claims arose from a statement made by the bank at a meeting with the customer that the bank would enforce its security by appointing a receiver to transfer the customer’s secured assets (a property portfolio) to the bank’s subsidiary. Ultimately this did not happen as a matter of fact, but the claimant relied upon the statement itself to found claims in intimidation and economic duress. In particular, the court found:
- There was no suggestion by the customer of bad faith (because the bank believed it had the right to appoint the receiver). In the absence of bad faith, the court confirmed there could be no lawful act duress, approving the approach in Times Travel (UK) Ltd v. Pakistan International Airlines Corporation  3 WLR 445.
- Having established that duress could only be made out if the bank’s threat to appoint a receiver to sell the properties amounted to an unlawful act, the court went on to consider whether the threat to appoint the receiver was indeed unlawful.
- The court was not satisfied that appointing a receiver to transfer the properties to the bank’s subsidiary would have been an unlawful act; rather it was an assertion that the bank would “do an act which might or might not turn out to be unlawful” and was part of “the rough and tumble of the pressures of normal commercial bargaining”.
- In reaching this conclusion, the court considered the outcome of a hypothetical injunction application by the customer to restrain the appointment of a receiver by the bank. The court found that there were various fact-specific reasons why such an application might have been refused.
The decision is considered in further detail below.
The claimant was a commercial property developer with a portfolio in the north of England. In December 2006, he entered into a three year, £75 million loan with RBS (“the Bank”). The Bank took legal charges over all 21 properties in the claimant’s portfolio, but had no recourse to the claimant personally. During 2008 the parties discussed restructuring the loan, after the claimant failed to make interest payments, but did not reach agreement. In January 2009, the Bank obtained an updated valuation valuing the portfolio at approximately £59 million (the “2009 valuation”). On the basis of the 2009 valuation, the Bank: 1) notified the claimant of a breach of a loan to value (“LTV”) covenant; and 2) served a separate notice exercising its right to charge interest at an increased default rate of 3%.
In mid-2009, the Bank’s Global Restructuring Group (the “GRG”) took over the relationship with the claimant. Negotiations continued between the GRG and the claimant into 2010 (primarily focused on a discounted redemption of the loan by the claimant, on the basis that the value of the portfolio had dropped sharply in turbulent times) and the loan expiry date was extended several times, but the claimant was unable to raise sufficient funds.
At a meeting on Thursday 8 July 2010, the GRG sought the claimant’s consent to transfer the entire portfolio voluntarily to the Bank’s subsidiary, West Register (Property Investments) Limited (“West Register”). The GRG’s representative warned that if the claimant refused, the Bank would do a pre-pack insolvency and appoint a receiver on Monday 12 July 2010 (“the statement”). The claimant did not agree to transfer his portfolio, but continued to negotiate. A few weeks later, the claimant’s solicitors wrote to the GRG threatening injunction proceedings if the appointment of a receiver went ahead. In August 2010, the parties executed agreements under which the claimant repurchased five of the properties for £20.5 million and surrendered the rest to West Register and in return the Bank released its security and the claimant was released from his obligations under the loan agreement (the “2010 Agreements”).
The claimant brought proceedings against the Bank alleging that it had acted in breach of the following duties:
- A duty (in tort and in contract) to exercise reasonable skill and care in providing lending services;
- A duty owed in contract to act in good faith and not for an ulterior purpose unrelated to the Bank’s commercial interests.
- A duty as a mortgagee to sell mortgaged assets in good faith and to take reasonable steps to obtain the best price reasonably obtainable.
The claimant also asserted that the 2010 Agreements were procured by threats amounting to the tort of intimidation or were entered into under economic duress.
The claimant sought rescission of the 2010 Agreements (on the ground of economic duress); or damages in lieu of rescission; or alternatively damages for the tort of intimidation or for breach of the various duties, to compensate him for the loss of the properties he surrendered to West Register.
The court dismissed the claim in full, for the reasons set out below.
Duty to exercise reasonable skill and care in providing lending services
The court started by considering the scope of the duty to exercise reasonable skill and care in providing lending services. It held that it was not controversial that compliance with regulatory standards would be relevant to whether the Bank had breached this duty. However, the court rejected the claimant’s suggestion that compliance with the Bank’s internal policies and procedures was to be treated in the same way as rules setting professional standards across a trade or profession
The court considered breach of this duty together with the second duty, discussed below.
Alleged duty to act in good faith and not for an ulterior purpose unrelated to the Bank’s commercial interests
The court paraphrased this duty as a “duty to act honestly and in good faith”.
The court rejected the claimant’s argument that the loan facility agreement was a “relational contract” requiring a high degree of co-operation, communication and confidence between the parties (as per Yam Seng), finding instead that it was “an ordinary facility loan agreement”.
The court agreed with the Bank that it had an absolute right to call in the loan and held that the Bank had two relevant contractual discretions: its power to obtain a revaluation and its power to charge an interest rate of 3% following an event of default. These discretions, the court found, had to be exercised in the manner identified by the court in Property Alliance Group, i.e. “for purposes rationally connected to the bank’s commercial interests and not so as to vex the claimant maliciously”.
The court then considered whether the Bank had breached either of the first and second duties and held that it had not, for the following reasons:
- The Bank was not bound to protect the claimant against the consequences of breaching the LTV covenant by refraining from exercising its contractual rights in response (i.e. its rights to obtain a valuation and to increase the interest rate to the default rate).
- The Bank was not at fault for how it had conducted the restructuring negotiations, particularly given that the claimant “needed no lessons in commercial negotiation”.
- There was no attempt by the Bank to manufacture a breach of the LTV covenant or an event of default so that it could seize the claimant’s property portfolio, as the claimant alleged. In obtaining the 2009 valuation, the Bank had properly exercised one of its contractual discretions in a way that was rationally connected to the Bank’s commercial interests. Furthermore, whilst the 2009 valuation evidenced the breach of the LTV covenant, it did not cause that breach.
- The Bank’s decision to raise the interest rate to the default rate was also rationally connected to its commercial interests.
- The Bank was entitled, as a matter of commercial judgment, to reject various offers made by the claimant during the negotiations in 2010.
Duty as a mortgagee to sell mortgaged assets in good faith and to take reasonable steps to obtain the best price reasonably obtainable
The claimant alleged that the Bank breached or threatened to breach this duty, on the basis of the Bank’s statement that it would do a pre-pack insolvency and appoint a receiver on 12 July 2010 if the claimant refused the offer made by the Bank. The court considered this duty as relevant to the claims based on the tort of intimidation and economic duress, which are considered further below.
Alleged intimidation and economic duress
The question for the court was whether the statement amounted to an actual or threatened breach of the Bank’s duty as mortgagee (as above), amounting to “illegitimate” conduct forming the basis for a claim in the torts of intimidation and/or economic duress. The court rejected both of these claims.
There was no suggestion by the claimant that the GRG representative who made the statement had acted in bad faith. In the absence of bad faith, the court confirmed there could be no lawful act duress, approving the approach in Times Travel.
The statement therefore needed to be an assertion that the Bank would do an unlawful act in order for there to be intimidation or duress and the court was not satisfied that it was; rather it was an assertion that the Bank would “do an act which might or might not turn out to be unlawful”. In reaching this conclusion, the court made the following observations:
- On a conventional analysis, the court noted that there was no real separation or arm’s length negotiation between the Bank and West Register and it was unclear whether or how there would be a transfer of real value to the receiver or the Bank from West Register.
- However, the court considered that there were two reasons why the conventional analysis may not be appropriate, which could be illustrated by looking at the hypothetical situation in which the claimant applied for an injunction, following the meeting at which the statement was made, to restrain the appointment of a receiver:
- West Register could have undertaken to sell the properties onwards on the open market, meaning that the Bank’s duty as mortgagee would be “unperformed, but not yet incapable of lawful performance”.
- More importantly, the claimant might have been found to lack standing to challenge the receivership. The negative equity position was such that, even if the properties were sold on the open market for full market value, the claimant would gain nothing. Also, the claimant, as mortgagor, could not be made to pay back the debt personally. Therefore, any sale at an undervalue would not prejudice or otherwise affect him personally.
- It was difficult to predict what the outcome of a hypothetical injunction application would have been, but in the circumstances, the statement was “not to do an act that was, unequivocally, unlawful” but was what the court in DSND Subsea Ltd v Petroleum Geoservices ASA  BLR 530 at ) called part of “the rough and tumble of the pressures of normal commercial bargaining” (at  of the judgment).
The court also found that the remaining elements of intimidation and economic duress were not made out. The claimant retained a practical choice to resist the statement and he did resist it, obtaining a better outcome than transferring his whole portfolio to the Bank. He also retained the choice to litigate, which he did not, in the end, pursue. Finally, the claimant had also affirmed the 2010 Agreements, since he had acted in accordance with them and had taken no steps to have them set aside until five years later.
Accordingly, the court dismissed the claim in full.