High Court considers whether onerous term in standard terms incorporated by reference

The High Court has held that, while a claimant’s standard terms were incorporated by reference into a signed contract, a term that required the defendant to pay cancellation fees was not incorporated as it was onerous and the claimant had not done enough to draw the defendant’s attention to it: Blu-Sky Solutions Ltd v Be Caring Ltd [2021] EWHC 2619 (Comm).

Although set in a non-financial context, the decision will be of interest to financial institutions as it serves as a reminder that clauses within standard terms which impose burdensome obligations should be made obvious to the counter-party prior to contracting. That will be even more important where the standard terms are incorporated by reference, rather than being contained in the signed contract itself.

In the present case, the defendant, by signing a purchase order form, acknowledged that it had accessed and read the standard terms and conditions on the claimant’s website, even though in reality it had done neither. The court commented that the offending clause was “cunningly concealed in the middle of a dense thicket which none but the most dedicated could have been expected to discover and extricate…”. In the circumstances, the court was satisfied that it had not been incorporated into the contract.

For a more detailed discussion of the decision, please see our litigation blog post.

High Court considers implied terms and “failure of basis” in context of COVID-19 pandemic

There have been only a limited number of commercial cases arising solely as a result of the COVID-19 pandemic and so judicial guidance on the legal principles applicable to the disruption of commercial contracts in this specific context is sparse.

However, in a recent decision, the High Court has granted summary judgment to the landlord of commercial premises in a claim for arrears of rent and service charges due since the outbreak of the pandemic: London Trocadero (2015) LP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch).

Although set in a non-financial context, the decision will be of interest to financial institutions as an example of the court’s approach to applying the relevant legal principles in the context of COVID-19. In contrast to previous cases where claims to be excused from contractual performance have been based primarily on force majeure or frustration (see for example herehere and here), the tenant’s arguments were based on alleged implied terms and a total failure of consideration (or “failure of basis” as it is now called).

In the present case, the court found that there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during the periods that it was unlawful to operate the premises due to COVID-19 restrictions. Nor was there any real prospect of establishing that there had, in the circumstances, been a failure of basis. As such, the tenants could not avoid paying rent for the affected period.

For a more detailed discussion of the decision, please see our litigation blog post.

Court of Appeal upholds decision correcting drafting error by interpretation

The Court of Appeal has dismissed an appeal against a High Court decision which went against the unambiguous literal meaning of the clause: MonSolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961.

This is an application of what the court referred to as the Chartbrook principle, by which clear mistakes in the drafting of a document can be corrected as a matter of construction (as exemplified by Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1011). For this principle to apply, the court said, it must be clear both that the drafting contains a mistake and how it should be corrected. If either of these requirements is not satisfied, the contract can only be corrected by a claim for rectification, which was not pleaded in this case.

This decision will be of interest to financial institutions faced with claims relating to contractual construction as it is a relatively rare example of a court finding that a contract should be interpreted against its clear literal meaning. Perhaps surprisingly, the judgment does not refer to what is now the leading Supreme Court authority on contractual interpretation, Wood v Capita Insurance Services Limited [2017] UKSC 24 (considered here). The suggestion in the present judgment that the court cannot depart from the clear literal meaning of the words used, unless that interpretation produces an absurd or irrational result, may be thought to sit uncomfortably with the message in Wood v Capita that interpretation is a unitary exercise, in which the court must strike a balance between considering the language used (textualism) and its commercial implications (contextualism) – and that it does not matter which tool is deployed first, so long as the court balances the indications given by each.

For a more detailed discussion of the decision, please see our litigation blog post.

 

Court of Appeal determines that a fiduciary relationship is not a necessary pre-condition to relief in respect of an undisclosed commission paid to an agent

The Court of Appeal has found that a fiduciary relationship is not a necessary pre-condition to relief in respect of an undisclosed commission paid to an agent. Instead, the court should determine whether the agent was obliged to provide information, advice or recommendation on an impartial or disinterested basis, saying that “it is the duty to be honest and impartial that matters”. Where there is such a duty, both the payer and recipient of the undisclosed commission will be liable: Frances Elizabeth Wood v Commercial First Business Limited [2021] EWCA Civ 471.

The Court of Appeal further held that the cases before it involved undisclosed commissions (which give rise to a right to rescind the contract), rather than “half-secret” commissions (where the principal was aware of the payment to its agent, but did not have sufficient information to give informed consent to that payment, with the result that rescission may, but will not necessarily, be available). In the two cases before the court a mortgage broker’s terms provided that they may take a commission from lenders, but that if they did so, it would be disclosed to the borrowers. The court held that in circumstances where no commission was disclosed, the borrowers were not on notice that commission was being paid, and the commissions were therefore secret commissions.

This decision will be of interest to financial institutions as it provides a helpful clarification of the position in relation to secret commissions and indicates that the court will not be required to strain to find a fiduciary duty in order to grant relief in such cases. It further indicates that a general disclosure of potential commissions, of the kind provided to the borrowers in this case, may be insufficient to take cases out of the realm of secret commissions.

For a more detailed discussion of the decision, please see our Civil Fraud and Asset Tracing Notes blog post.

High Court considers operation of force majeure clause in context of COVID-19 pandemic

The High Court has found that, when exercising its discretion as to whether to designate a force majeure event under a franchise agreement due to the COVID-19 pandemic, the franchisor was in breach of duty in failing to consider the franchisee’s need to self-isolate: Dwyer (UK) Franchising Ltd v Fredbar Ltd & Bartlett [2021] EWHC 1218 (Ch).

Although set in a non-financial context, the decision will be of interest to financial institutions as one of the very few cases to date which has considered the operation of a force majeure clause in the context of the COVID-19 pandemic.

The relevant clause in this case was somewhat unusual in providing that the agreement would be suspended during any period that either of the parties was prevented or hindered from complying with their obligations “by any cause which the Franchisor designates as force majeure”. The question for the court was whether the franchisor was in breach of the so-called Braganza duty, derived from the Supreme Court’s decision in Braganza v BP Shipping Ltd [2015] UKSC 17, which meant that this unilateral power to call a force majeure event had to be exercised honestly, in good faith and genuinely.

While it is highly fact-specific and involved consideration of an atypical force majeure clause, this case nevertheless demonstrates that English courts are willing in principle to recognise that the COVID-19 pandemic, or related factors, could amount to a force majeure event. As ever with force majeure, however, each case will depend on, and require close examination of, the specific circumstances and the precise wording of the force majeure clause in question.

For a more detailed discussion of the decision, please see our litigation blog post.

For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

High Court considers doctrine of frustration in COVID-19 context and confirms there is no such thing as “temporary frustration”

A High Court Master has considered the doctrine of frustration in the context of a claim by the landlords of commercial premises for payment of rent due since the outbreak of the COVID-19 pandemic and imposition of consequent restrictions in March 2020: Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB).

Although set in a non-financial context, this decision will be of interest to financial institutions considering the ongoing impact of the COVID-19 pandemic, particularly as it is one of the few cases to date in which the courts have considered arguments of frustration in this context.

Frustration occurs where performance of a contract has become so “radically different” to what was contemplated at the time of contracting that it would be unjust for the contract to continue. The effect of frustration is to bring the contract to an end, so that it cannot then be revived.

In this case, the Master rejected a contention by the tenants that the leases had been “temporarily frustrated” during the periods in which the premises were forced to close, finding that there is no such thing as temporary frustration as a matter of law. While this conclusion is not surprising, the decision is also of interest for the Master’s comments as to why it was clear that the leases had not been frustrated altogether.

The decision demonstrates that the limits of frustration are narrow and the courts are consistent in their message that, while a lease can be frustrated, the bar has been set very high to establish frustration.

Of course, where parties wish to avoid the strictures of the doctrine of frustration, they can include a force majeure clause in their contract setting out what is to happen if unexpected events intervene – providing, for example, for obligations to be temporarily suspended if performance is prevented by specified types of occurrence.

For a more detailed discussion of the decision, please see our litigation blog post.

For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub.

Court of Appeal decision in Adams v Options: the meaning of “advice” and potential implications for financial product mis-selling claims

In the context of an investor’s claim against the provider of his self-invested personal pension (SIPP) under s.27 of the Financial Services and Markets Act 2000 (FSMA), the Court of Appeal has provided guidance on the question of what constitutes “advice” on investments for the purpose of article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), which will be of broader interest to the financial services sector, beyond pensions-related disputes: Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474.

The underlying claim involved a pensions scheme operated by an unregulated intermediary (CLP), which persuaded the investor, Mr Adams, to cash out his existing pension fund and invest in “storepods” via a SIPP operated by Options UK Personal Pensions LLP (formerly Carey Pensions UK LLP). The Court of Appeal found that Mr Adams only agreed to transfer his pension fund into the Carey SIPP in consequence of things said and done by CLP in contravention of the general prohibition imposed by s.19 FSMA (which bars anyone except an authorised/exempt person from carrying on a regulated activity in the United Kingdom). Despite the fact that Carey had no knowledge that CLP was carrying out regulated activities, the Court of Appeal held that Mr Adams was entitled to recover his investment from Carey pursuant to s.27 FSMA.

The decision provides some interesting commentary on the meaning of “advice” in a financial services context, and the operation of the “no advice” clause in the pension contract between Carey and Mr Adams. These issues are considered below, although for a more detailed analysis of the decision, please see our Pensions Notes blog post.

Carey has applied to the Supreme Court for permission to appeal.

Meaning of “advice” in a financial services context

Central to the Court of Appeal’s decision on the s.27 FSMA claim, was its conclusion that CLP carried on a regulated activity by providing “advice” on investments to Mr Adams within the meaning of article 53 of the RAO. The Court of Appeal cited with approval the key authorities considering what constitutes “advice” in this context: Walker v Inter-Alliance Group plc [2007] EWHC 1858 (Ch) and Rubenstein v HSBC Bank plc [2011] EWHC 2304 (QB) and confirmed the following general principles:

  • The simple giving of information without any comment will not normally amount to “advice”.
  • However, the provision of information which is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient is capable of constituting “advice”.
  • Any element of comparison or evaluation or persuasion is likely to cross the dividing line.
  • “Advice on the merits” need not include or be accompanied by information about the relevant transaction. A communication to the effect that the recipient ought, say, to buy a specific investment can amount to “advice on the merits” without elaboration on the features or advantages of the investment.

It is important to recognise the different contexts in which the meaning of “advice” has been considered in the cases cited:

  1. As explained above, in Adams v Options, the court looked at this question to determine whether or not the activity of an unregulated entity was a specified type of regulated activity under the RAO.
  2. In Rubenstein (and more recently in Ramesh Parmar & Anor v Barclays Bank plc [2018] EWHC 1027 (Ch), see our blog post), the court considered whether a sale was advised or non-advised for the purpose of the Conduct of Business Rules (COB) (since replaced by the Conduct of Business Sourcebook (COBS)). In these cases, the question of whether the sale was advised/non-advised underpinned the relevant claimant’s case that the bank was liable under s.138D (formerly s.150) FSMA for breach of COB/COBS rules.
  3. The court has also been asked to consider whether a sale was advised or non-advised for the purpose of establishing whether a bank owed a duty to use reasonable skill and care in giving advice and/or making recommendations about the suitability of a financial product. These questions formed part of the claim in Rubenstein, which included claims for breach of contract and in negligence, and were also considered in Crestsign Ltd v National Westminster Bank Plc & Anor [2014] EWHC 3043 (Ch).

It is unclear whether the general principles confirmed in Adams v Options as to the meaning of “advice” will apply to all of the scenarios identified above, or if they will be confined to the court’s interpretation of the RAO. The court appears to have cited the authorities interchangeably between these cases, but there may be a tension between the ordinary English meaning of the word “advice” (e.g. for the purpose of considering a breach of contract or tortious claim) and “advice” for the purpose of the regulatory regime.

Impact of “no advice” clause in pension contract

Given its conclusion in respect of s.27 FSMA that Mr Adams had been advised, the court held that Mr Adams was entitled to recover money and other property transferred under his pension contract with Carey, unless the court was prepared to exercise its powers under s.28(3) FSMA to enforce the contractual agreement between the parties. Section 28 FSMA empowers the court to allow an agreement to which s.27 applies to be enforced or money/property transferred under the agreement to be retained, if it is just and equitable to do so. In considering whether to take such a course in a case arising under s.27, the court must have regard to “whether the provider knew that the third party was (in carrying on the regulated activity) contravening the general prohibition”.

Although Carey was not aware that the introducer (CLP) was carrying on unauthorised activities, the Court of Appeal rejected Carey’s argument that the pension contract should be enforced.

This outcome raises an interesting issue as to the contractual allocation of risk in the pension contract between Mr Adams and Carey, which expressly provided that Carey was instructed on an execution-only basis. As summarised by Lady Justice Andrews:

“There is nothing to prevent a regulated SIPP provider such as Carey from accepting instructions from clients recommended to it by an unregulated person, and from doing so on an “execution only” basis. But the basis on which they contract with their clients will only go so far to protect them from liability. If they accept business from the likes of CLP, they run the risk of being exposed to liability under s.27 of the FSMA.”

Accordingly, the practical effect of the Court of Appeal’s decision was to sidestep the provisions of the pension contract that defined the relationship as “non-advisory“ and expose Carey to specific risks associated with CLP’s (unauthorised) business model. It is clear that the court’s approach was driven by the very specific exercise of its discretion under s.28 FSMA, in particular to promote the key aim of FSMA to protect consumers, and to reflect the appropriate allocation of risk to authorised persons who have accepted introductions from unregulated sources.

This can be contrasted with the approach adopted by the court to no advice clauses in the context of civil mis-selling claims for breach of contractual and/or tortious duty in advising a customer as to the suitability of a particular financial product. The court has recently confirmed in Fine Care Homes Limited v National Westminster Bank plc & Anor [2020] EWHC 3233 (Ch) (see our blog post) that clauses stating that a bank is providing general dealing services on an execution-only basis and not providing advice on the merits of a particular transaction, are enforceable and are not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 (UCTA) when relied upon in the context of a breach of advisory duty claim.

John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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Ian Thomas
Ian Thomas
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Nic Patmore
Nic Patmore
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Hong Kong court refuses to expand scope of Quincecare duty

The Hong Kong Court of First Instance has dismissed a claim for breach of the so-called Quincecare duty of care on the basis that the duty could only arise in circumstances where misappropriation of a customer’s funds occurred by an authorised or trusted agent of the customer, rather than where the customer itself instructed payment as a result of being tricked or defrauded by a third party: Luk Wing Yan v CMB Wing Lung Bank Ltd [2021] HKCFI 279.

As discussed in our previous blog posts, the Quincecare duty of care is a key risk area for financial institutions handling client payments, given the proliferation of claims relying on the duty and an expansion in the scope of the duty in recent judgments. As a reminder, the duty arises where a bank has received a payment mandate from an authorised signatory of its customer, and executed the order, in circumstances where (allegedly) there were red flags to suggest that the order was an attempt to misappropriate the funds of the customer.

The recent decision of the Hong Kong court highlights the global nature of the Quincecare duty risk and illustrates the strict parameters of who the duty can be owed to. In summary, the Hong Kong court reached the same conclusion as the English High Court in Philipp v Barclays Bank UK plc [2021] EWHC 10 (Comm) (see our banking litigation blog post) and refused to broaden the scope of the duty to protect an individual customer who had instructed the bank to make the relevant payment directly, confirming that existing authorities limit the Quincecare duty to protect corporate customers or unincorporated associations such as partnerships.

For further information, please see our Asia Disputes blog post.

High Court finds alleged frustration of contract due to COVID-19 pandemic is not sufficiently arguable to grant injunction restraining demand under letter of credit  

The High Court has dismissed an application for an injunction to prevent an airline group from making demands under bank-confirmed standby letters of credit (SBLCs), securing aircraft leases granted to the claimant (a budget passenger airline), on the basis that it was not sufficiently arguable that the leases were frustrated due to the effects of the COVID-19 pandemic: Salam Air SAOC v Latam Airlines Group SA [2020] EWHC 2414 (Comm).

The court’s decision confirms the established position on the law of frustration, which requires a multi-factorial approach as per Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel) [2007] 1 CLC 876. The decision highlights the importance that the nature of the contract and its terms may play when applying the multi-factorial approach. Here, the claimant had agreed to provide the SBLCs as an alternative to paying a cash deposit for the aircraft, and the SBLCs were commercially and legally intended to be equivalent to cash. The terms of the leases also expressly placed on the claimant the full risk of any disruption whatsoever to their airline business; they had been drafted to make it clear that the claimant’s obligation to pay continued in almost any conceivable circumstances. Taking these factors into account, the court found that the claimant’s frustration case was “far too weak” to justify the step of interfering with the operation of the SBLCs.

It is a noteworthy decision for financial institutions because of the obvious increased risk of frustration arguments relating to the ongoing COVID-19 pandemic. There have been relatively few decisions on frustration in recent years, most notably: Canary Wharf (BP4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch) (see our litigation blog post). While decisions applying the doctrine will depend on their precise facts, it is helpful to see recent authority confirming the established principles, in particular when considering the specific context of the COVID-19 pandemic. For further legal analysis and insights in relation to COVID-19, and how we expect the crisis to operate as a catalyst for change, please visit our Catalyst Hub. Please also see our COVID-19 Contract Disputes Guide.

In addition, the decision will be a reassuring one for financial institutions as credit-providers under letters of credit and other similar instruments, providing certainty and clarity as to the high bar for any interference with their operation. In particular, it confirms that the enhanced merits standard for obtaining interim relief against the credit-provider applies equally to any injunction applications seeking to restrain the beneficiary from making a demand, i.e. that in either scenario, the claimant must establish that the case is “seriously arguable”.

Background

In 2017, the claimant budget passenger airline entered into three aircraft leases with the defendant airline group. The claimant leased the aircrafts with a view to operating domestic flights within Oman initially. The leases included an obligation on the claimant to: (a) pay rent and make other payments, which was “absolute and unconditional irrespective of any contingency whatsoever”; and (b) as an alternative to paying a deposit of three months’ rent, provide irrevocable and bank-confirmed SBLCs, under which the defendant would be entitled to withdraw all or part of the amount of the SBLCs and apply this in the same way as it would apply the deposit.

In March 2020, in response to the COVID-19 pandemic, the Oman Civil Aviation Authority introduced strict travel restrictions, notably the prohibition of all flights to or from Oman airports (with few exceptions such as cargo flights). The claimant stopped paying rent under the leases in March 2020, redelivered the aircrafts to the defendant in June 2020 and subsequently gave notice to terminate the leases.

The claimant made a without notice application to the court for an injunction to restrain the defendant from making a demand under the SBLCs, on the basis that the purpose of the leases was frustrated by the effects of the COVID-19 pandemic, in particular the strict travel restrictions introduced by the Omani authorities.

Decision

The court said that the application raised two threshold issues:

  • Whether it would be appropriate for the court to interfere with the operation of the SBLCs by injuncting the defendant (the beneficiary of the SBLCs) from making a demand under them.
  • If so, whether the claimant could demonstrate a sufficiently arguable case that the leases were frustrated by the effects of the COVID-19 pandemic.

The court found that the claimant failed to satisfy either of the threshold issues with the result that it was not entitled to the injunction it sought. The two issues are considered in further detail below.

Issue 1: Injunction against the credit-provider or beneficiary

The court considered whether it would be appropriate to interfere with the operation of the SBLC via injunctive relief, noting that the court will only intervene by injunctive relief in the operation of irrevocable letters of credit and similar instruments in “exceptional circumstances” because they are intended to be “the equivalent of cash”.

The court noted that for these reasons, the circumstances in which an applicant can obtain an injunction restraining the credit-provider from paying out under the instrument are limited to where the instrument itself is invalid or where the bank knows the demand for payment is fraudulent. The strength of case which the applicant is required to establish for the purpose of an injunction is an enhanced one (as per Alternative Power Solution Ltd v Central Electricity Board [2015] 1 WLR 697). The case must be “seriously arguable” and the American Cyanamid Co v Ethicon Ltd [1975] AC 396 principles on the granting of interim injunctions do not apply.

The claimant did not challenge the validity of the SBLCs, or suggest that any demand made by the defendant under them would be fraudulent. Rather, it alleged that the substantive and evidential obstacles which apply to an application for an injunction restraining a credit-provider (as set out above) do not apply to an applicant seeking an injunction restraining a beneficiary from making a demand (as in the present case).

The court accepted that it was bound by the decision in Themehelpe v West [1996] WB 84, in which the court found that in some circumstances an injunction to prevent the beneficiary from making a demand under an irrevocable letter of credit (and similar instruments) can be obtained even though the applicant is unable to satisfy the requirements of the fraud exception. However, given the criticism of that case in subsequent authorities and legal commentary, the court was not willing to give the decision any broader application than it strictly required. In the court’s view, that involved at least the following limitations:

  1. The applicant’s underlying claim against the beneficiary must include an allegation of fraud;
  2. The injunction must be sought “well before” the right to call on the instrument has arisen (although the court noted some hesitation in respect of this limitation); and
  3. The enhanced merits standard for obtaining interim relief against the credit-provider apply equally to any injunctions to restrain the beneficiary from making a demand.

Considering these limitations, the court repeated that the claimant did not contend that there was any fraud by the defendant in relation to the aircraft leases (nor did it argue that any term of the aircraft leases meant that the defendant was not permitted to make a demand). Further, the court stated that this was not a case in which the claimant sought an injunction “well before” the right to claim under the SBLCs arose.

Accordingly, the court concluded that the claimant was not entitled to the injunction sought.

Issue 2: Frustration

Notwithstanding its conclusions on the first issue, the court proceeded to consider whether the claimant was able to make out its frustration case to the requisite degree of arguability. As noted above, this required the claimant to establish a strong rather than merely arguable case. The court found that the claimant’s frustration case was “far too weak” and not sufficiently arguable to justify the step of interfering with the operation of the SBLCs.

Test for frustration

The court noted that the authorities on frustration had recently been reviewed in detail in Canary Wharf v EMA and pointed to the formulation of the test for frustration set out in National Carriers v Panalpina [1981] AC 675:

“Would outstanding performance in accordance with the literal terms of the contract differ so significantly from what the parties reasonably contemplated at the time of execution that it would be unjust to insist on compliance with those literal terms.”

On the application of that test, the court cited the leading authority of The Sea Angel, which confirms that the doctrine of frustration requires a multi-factorial approach, with the factors to be considered being:

“…the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”

The Sea Angel also confirms that the doctrine is not to be lightly invoked (mere expense, delay or a more onerous obligation are not sufficient) and the purpose of the doctrine is to do justice (and so considerations of justice are important factors to bear in mind). Part of that calculation is the consideration that the frustration of a contract may well mean that the contractual allocation of risk is reversed.

The parties agreed that the question for the court to consider was whether there had been “frustration of purpose” (i.e. that the frustrating event had transformed performance of the contract into something so radically different from the intended purpose that it would be unfair to hold the parties to their obligation), as opposed to the event of frustration making the contract physically or commercially impossible or illegal to perform.

Application of the test for frustration

In considering whether there was, in fact, frustration of the purpose of the contract, the court considered the nature of the contract and its terms, making the following observations:

  • Shared purpose. The court noted that the “frustration of purpose” doctrine had seldom been applied since it first emerged in the Coronation cases at the start of the last century, and in particular in Krell v Henry [1903] 2 KB 740. The Court of Appeal in that case emphasised that viewing the coronation procession was a “state of things assumed by both contracting parties as the foundation of the contract”, in finding that a contract to hire a flat in Pall Mall was frustrated when the coronation was postponed. In contrast, on the facts of the present case, there was nothing in the leases to suggest that the claimant’s use of the aircrafts was a shared purpose of both parties to the leases as opposed to a matter with which the claimant was alone concerned.
  • Allocation of risk. The leases expressly placed on the claimant the full risk of any disruption whatsoever to their business. The leases were drafted to make it clear that the claimant’s obligation to pay rent continued in almost any conceivable circumstances (i.e. a “hell or highwater” basis as per Bitumen Invest AS v Richmond Mercantile Ltd FZC [2016] EWHC 2957). The obligation to pay rent was expressed to be “absolute and unconditional irrespective of any contingency whatsoever”. In the court’s view, such clauses were fundamentally inconsistent with any suggestion that the existing Omani travel restrictions (for so long as they remained in force) or any other long-term suppression of air travel preventing the claimant from using the aircrafts to earn revenue through passenger flights with an Omani terminus had the effect of terminating the leases and freeing the claimant of its obligation to pay rent.
  • Right to terminate. The claimant had the option of terminating the leases on six months’ notice from a date on or after 4 years of the delivery date of the aircrafts if it ceased to carry on the business of air transport. But in the court’s view there was nothing on the facts to suggest that this contingency had arisen. The leases still had 3 years left to run on them at the time that it was alleged the inability to operate passenger flights frustrated them.

For these reasons, the court refused the claimant’s application.

Julian Copeman
Julian Copeman
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Natasha Johnson
Natasha Johnson
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Jahnavi Ramachandran
Jahnavi Ramachandran
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+44 20 7466 2408
Maura McIntosh
Maura McIntosh
Professional Support Consultant
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Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Court of Appeal rejects all claims relating to transfer of property portfolio to lender’s restructuring unit following borrower default

The Court of Appeal has upheld the High Court’s decision to reject all claims arising from the transfer of a defaulting borrower’s property portfolio to his lending bank’s restructuring unit during the global financial crisis. Dismissing the appeal in full, the Court of Appeal refused to imply any contractual terms into the mortgage, and did not accept claims that the bank owed a general duty to act in good faith in relation to the negotiation of the restructuring, or that the bank’s actions amounted to intimidation or economic duress: Morley (t/a Morley Estates) v The Royal Bank of Scotland plc [2021] EWCA Civ 338.

This decision is a reassuring one for financial institutions where borrower default has led to a restructuring and the bank is faced with attempts to rescind, especially where there has been significant market turmoil (such as the global financial crisis or the current COVID-19 pandemic). It highlights the difficulties for claimants bringing claims of this nature in circumstances where the bank’s exercise of its powers under a facility agreement are in line with its commercial interests and the negotiation of the relevant restructuring is between commercial parties with the benefit of legal advice.

The key points decided by the Court of Appeal that are likely to be of broader interest are as follows:

  • Duty to provide services with reasonable skill and care. The Court of Appeal rejected the implication of a contractual term into the original loan agreement under section 13 of the Supply of Goods and Services Act 1982 (the Act). It did not accept that the bank was under any implied contractual duty to exercise reasonable skill and care in negotiating the restructuring with the claimant after his default on the original loan; by then the parties’ relationship was governed by the express terms of the loan and the equitable principles applicable to that relationship. Even if owed, the Court of Appeal commented that this duty was not breached on the facts.
  • Duty to act in good faith. The Court of Appeal did not accept that the bank was subject to an implied contractual duty under the loan to act in good faith in its negotiations with the claimant. All the bank’s actions in any case, in the court’s view, were rationally connected to its commercial interests.  
  • Intimidation and economic duress. The Court of Appeal underlined that the bank had not committed the tort of intimidation and that the restructuring agreement between the bank and claimant was therefore not voidable for economic duress. In its view, the restructuring agreement concluded was the result of a robust negotiation between commercial parties, each of which had legal advice and was well able to look after itself in that negotiation. Also, it was notable that the restructuring agreement concluded was one that the claimant had wanted and had originally proposed.

The decision is considered in further detail below.

Background

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 (the Loan Agreement) with the defendant bank (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. On the basis of the valuation, the Bank: 1) notified the claimant of a breach of a loan to value ratio 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 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 an agreement  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 (the Restructuring Agreement).

The claimant brought proceedings against the Bank on the basis that in concluding this Restructuring Agreement, the Bank acted in breach of a duty owed to him pursuant to section 13 of the Act to provide banking services with reasonable care and skill and in breach of a duty of good faith, and seeking damages for breach of these duties. The claimant also contended that he was coerced into concluding the Restructuring Agreement by unlawful pressure placed upon him by the Bank, and that as a result of this coercion, the Bank committed the tort of intimidation and the Restructuring Agreement was voidable for economic duress.

High Court decision

The High Court dismissed the claim in full. The High Court’s reasoning is summarised in our previous blog post here. The claimant appealed.

Court of Appeal decision

The Court of Appeal found in favour of the Bank and upheld the High Court’s decision to dismiss the claimant’s claim. We consider below some of key issues considered by the court.

Issue 1: Duty to exercise reasonable skill and care in providing lending services

The claimant argued that the Bank was: (i) subject to a duty under the Act to provide lending services with reasonable care and skill (such a duty operated as an implied term of the original Loan Agreement); and (ii) in breach of duty because, in negotiating for the transfer of the properties to West Register, the Bank was acting as a buyer (i.e. seeking to obtain the properties with a view to medium or long term capital gain) rather than as a lender (i.e. seeking to recover the money which it had lent).

The Court of Appeal did not accept that the Bank was under any implied contractual duty to exercise reasonable skill and care in negotiating the Restructuring Agreement with the claimant after his default on the original Loan Agreement in December 2009. The Court of Appeal underlined that by then the parties’ relationship was governed by the express terms of the Loan Agreement and the equitable principles applicable to that relationship; an implied term in the original Loan Agreement therefore did not have any part to play in the parties’ relationship in the circumstances.

The Court of Appeal commented that even if the Bank did owe a relevant duty under the Act, it had committed no breach of duty; throughout the Bank’s only objective was to recover as much as possible of the amount which it had loaned to the claimant, but even if the Bank had mixed motives that would have made no difference – it was unnecessary that a mortgagee should have “purity of purpose”, i.e. that its only motive is to recover in whole or part the debt secured by the mortgage.

Issue 2: Duty to act in good faith

The claimant argued that the Bank was under an implied contractual duty under the original Loan Agreement to act in good faith, or not to act vexatiously or contrary to its “legitimate commercial interests”.

The Court of Appeal did not accept that the Bank was subject to such a duty in its negotiations with the claimant and noted that all the Bank’s actions in any case were rationally connected to its commercial interests.

The Court of Appeal highlighted that the High Court had already made a factual finding rejecting that the manner in which the negotiations were conducted were acts done in order to vex the claimant maliciously.

Issue 3: Intimidation and economic duress

The claimant argued that the High Court’s finding that he had not been coerced was wrong.

The Court of Appeal disagreed and highlighted that, on the facts of the case, there had been no coercion. The Court of Appeal said that the Restructuring Agreement concluded was the result of a robust negotiation between commercial parties, each of which had legal advice and was well able to look after itself in that negotiation. The Court of Appeal noted that the claimant: (a) was not above making threats (such as walking away from the properties to cause serious damage to the Bank’s security); (b) was prepared to exert political and public relations pressure on the Bank (by enlisting his MP and by engaging public relations consultations); and (c) was prepared to threaten an emergency application to a court for an injunction.

The Court of Appeal also commented that the claimant did not submit to the Bank’s demand and that the Restructuring Agreement concluded was one that the claimant had wanted and had originally proposed; it was the claimant’s successful persistence in the negotiations (e.g. in not being coerced) which enabled him to achieve his object and he therefore had entered into the Restructuring Agreement with the Bank of his own free will. The Court of Appeal said the fact that claimant did not take any steps to set the Restructuring Agreement aside until 5 years later was significant, as it not only demonstrated his affirmation of the Restructuring Agreement but also negated any finding of coercion. The Court of Appeal underlined that any doubt was dispelled by a submission document prepared by the claimant or on his behalf in August 2010 for a separate bank, in which the virtues of the deal with the Bank was extolled and described as a consensual deal which was driven by the claimant.

Accordingly, the Court of Appeal dismissed the appeal in full.

Natasha Johnson
Natasha Johnson
Partner
+44 20 7466 2981
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000