In what may prove to be an important judgment for financial institutions seeking to make recoveries over distressed securities after a borrower has defaulted, the Court of Appeal has highlighted the limited duties owed by a bank after expiry of a loan agreement. This is especially so where commercial negotiations were carried out at arm's length, with the benefit of legal advice on both sides, and the bank's actions are rationally connected to its commercial interests.
In Morley (t/a Morley Estates) v. The Royal Bank of Scotland plc [2021] EWCA Civ 338, the borrower's commercial property business suffered greatly during the global financial crisis. It sought to imply terms into a loan agreement with RBS and also claimed the bank owed a general duty to negotiate a restructuring in good faith. Separately, the borrower also brought claims of intimidation and economic duress against the bank. The Court of Appeal upheld the High Court's decision and rejected the borrower's claims. The unanimous judgment should provide some comfort for banks attempting to enforce over distressed assets in circumstances where a borrower has defaulted and a loan has expired.
The Court of Appeal also provided helpful guidance as to the significance attributed to a bank's internal policy documents when considering the scope of any duties owed to a borrower.
Background
Mr Morley, a commercial property developer, entered into a three year loan facility for £75 million with RBS in December 2006. The loan was secured by legal charges against all 21 properties in Mr Morley's portfolio but, importantly, the bank had no recourse against Mr Morley personally.
On various occasions during the loan period, the value of Mr Morley's portfolio was professionally assessed. In early January 2007, the valuation stood at £98.45 million, however this had dropped to £95.77 million by 10 October 2007. This placed Mr Morley in breach of certain covenants contained within the loan agreement.
Against a backdrop of a volatile and rapidly deteriorating economic climate, throughout 2008, the parties engaged in protracted negotiations in an attempt to agree a restructuring. However, no agreement was reached. By January 2009, a further valuation put the portfolio's value at £59.4 million – this was significantly below the principal loan value, therefore leaving the bank under-secured.
With no agreement reached, the handling of Mr Morley's account was transferred to the bank's Global Restructuring Group. In December 2009, the loan expired and Mr Morley had failed to repay it. Instead of enforcing its securities, the bank extended the loan's maturity date and continued negotiations with Mr Morley.
In July 2010, Mr Morley and the bank met to discuss options in an attempt to finally settle the bank's claims. The bank sought Mr Morley's agreement to transfer the whole property portfolio to West Register, a subsidiary of the bank, on a "consensual basis". The bank cautioned that, if Mr Morley refused, it would proceed with the appointment of a receiver and carry out a pre-packed insolvency.
Eventually an agreement was concluded in August 2010, by which Mr Morley agreed to pay £20.5 million to the bank for five of the properties and the remaining properties were transferred to West Register.
The High Court claim
Mr Morley brought a claim against the bank, alleging that he had entered into the 2010 Agreement as a result of the bank's breach of:
- its duty to exercise reasonable care and skill in providing banking services pursuant to section 13 of the Supply of Goods and Services Act 1982 ; and
- a general duty to act in good faith and not for an ulterior purpose.
Mr Morley also alleged that his agreement was procured by unlawful pressure applied by the bank which amounted to economic duress or the tort of intimidation.
Mr Morley sought rescission of the 2010 Agreement or damages for breach of the various duties to compensate him for the loss of the properties he surrendered to West Register. Kerr J dismissed Mr Morley's claim in full, concluding that the bank was not at fault in the negotiations which led to the 2010 Agreement. He found these were commercial negotiations, carried out at arm's length and with the benefit of legal advice on both sides. Kerr J further concluded that the bank had acted in good faith and that Mr Morley was not coerced.
Mr Morley subsequently appealed to the Court of Appeal.
The Appeal
In a unanimous decision, in which Lord Justice Males gave the leading judgment, the Court of Appeal upheld the decision of Kerr J and dismissed Mr Morley's appeal. The Court of Appeal considered three main issues: (i) the scope of the bank's duties under s13 SGSA 1982; (ii) the bank's duty to act in good faith; and (iii) intimidation and economic duress.
Duty to exercise reasonable skill and care
Mr Morley argued that the bank was under an implied contractual duty to exercise reasonable care and skill in negotiating the 2010 Agreement. He argued it had breached this duty when it negotiated the transfer of the property portfolio to West Register because it acted 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 implied term had any part to play in the parties' relationship. It held that the service the Loan Agreement obliged the bank to make available of funds for drawdown by Mr Morley. That service had been provided and any duty owed came to an end once the loan term had expired in December 2009 and Mr Morley had failed to repay the sums advanced. At that point, Mr Morley was in default of the Loan Agreement and the only question remaining was whether the bank would hold back from enforcing its security and/or exercising its right to appoint receivers whilst the parties negotiated a solution.
The Court of Appeal observed that the bank's objective throughout the relevant period was to recover its loan, or as much of it as possible; acquisition of the portfolio was only ever a second-best means of achieving this objective. In any event, the Court of Appeal noted that it was unnecessary for a mortgagee to have "purity of purpose" (i.e. that its only motive is to recover, in whole or in part, the debt secured by the mortgage). Therefore, even if the bank had mixed motives, that would have made no difference.
Another point to note is that Mr Morley argued that the bank had failed to follow its own internal policy guidance, which emphasised that the bank's objective would in general be to support a viable business (in particular if the default was not due to the fault of the borrower). The Court of Appeal rejected this submission and held that the aspirational language of a purely internal document provides no secure foundation for any case of breach of duty by the bank.
Duty to act in good faith
Mr Morley argued that the bank was under an implied duty to act in good faith, or not to act vexatiously or contrary to its "legitimate commercial interests", and breached such duty by acting as a buyer and not a lender.
The Court of Appeal upheld Kerr J's conclusion that all of the bank's actions were rationally connected to its commercial interests. The bank was simply trying to recover as much of the loan as it could.
Intimidation and economic duress
Mr Morley appealed Kerr J's finding that he was not coerced into concluding the 2010 Agreement.
The Court of Appeal upheld Kerr J's finding, concluding that Mr Morley's challenge was hopeless. The Court of Appeal noted that coercion is a critical ingredient of any case of intimidation or economic duress and that, on the facts, this was plainly missing from Mr Morley's case. Mr Morley entered into the 2010 Agreement with the bank of his own free will and it was concluded as a the result of a robust and protracted negotiation between commercial parties, each of which had legal advice and each of which was well able to look after itself in that negotiation. In fact, Mr Morley did not submit to the bank's demand at the meeting in question and the bank did not carry out its threat. Instead, the parties continued to negotiate for several weeks, just as they had done over the whole period during which Mr Morley had been in default.
The Court of Appeal further noted that Mr Morley: (i) was not above making threats himself; (ii) was prepared to exert political and public relations pressure on the bank; and (iii) was prepared to threaten an emergency application to court for an injunction. The Court of Appeal also found it significant that Mr Morley did not take any steps to have the 2010 Agreement set aside until more than five years later. It held that this not only demonstrated Mr Morley's affirmation of the 2010 Agreement but also negated any finding of coercion.
Unhelpfully for Mr Morley, his arguments were in any event entirely compromised by a document prepared by him (or on his behalf) in August 2010 to another bank from which he was seeking finance, in which the 2010 Agreement is referred to as a "consensual deal and one which was driven by [Mr Morley] rather than RBS".