Morley (t/a Morley Estates) v The Royal Bank of Scotland Plc  EWCA Civ 338
The English Court of Appeal ("Court of Appeal") recently decided on an appeal brought by a borrower against a bank in relation to the validity of a loan restructuring on the grounds of intimidation, economic duress and breach of duty by the bank. The Court of Appeal discussed the principles to be applied in such cases, eventually upholding the decision of the lower court which decided in favour of the bank.
Oliver Morley ("Morley"), a commercial property developer, entered into a £75 million loan ("Loan Agreement") with The Royal Bank of Scotland Plc ("Bank"). The loan was secured by legal charges over all 21 properties in Morley's portfolio but was made without recourse to Morley. Following a loan default and robust negotiations, an agreement was reached ("Agreement") whereby Morley paid the Bank £20.5 million and retained five of the properties, with the remaining properties being transferred voluntarily to the Bank's subsidiary vehicle for acquiring secured assets, without the appointment of receivers.
Morley argued that he was coerced into concluding the Agreement by unlawful pressure placed upon him by the Bank, that this amounted to the tort of intimidation and consequently the Agreement was voidable for economic duress. He also argued that in concluding the Agreement, the Bank acted in breach of a duty to provide banking services with reasonable care and skill (implied pursuant to section 13 of the Supply of Goods and Services Act 1982) and in breach of a duty of good faith.
The lower court rejected Morley's claims, holding that the Bank had not coerced Morley into concluding the Agreement, nor had it breached any duties to provide banking services with reasonable skill and care, and to act in good faith.
The Court of Appeal was faced with two issues:
- Whether there was intimidation and economic duress in concluding the Agreement; and
- Whether the Bank breached any duties in concluding the Agreement.
Whether there was intimidation and economic duress?
The Court of Appeal recited the essential ingredients of the tort of intimidation as laid out in Berezovsky v Abramovich  EWCA Civ 153:
- A threat by the defendant to do something unlawful or illegitimate;
- The threat must be intended to coerce the claimant to take or refrain from taking some course of action;
- The threat must in fact coerce the claimant to take such action; and
- Loss or damage must be incurred by the claimant as a result.
The Court of Appeal stressed that coercion is a key element of economic duress, regardless of whether the threat is to do an unlawful or a lawful act. The Court of Appeal found that Morley had not been coerced by the Bank's threat and had instead entered into the Agreement with the Bank of his own free will. Even after the threat was made, the parties had continued to negotiate robustly (with the benefit of legal advice) and eventually reached an agreement initially proposed by Morley himself. Specifically, the Court of Appeal found it significant that Morley did not take any step to set aside the Agreement until five years later as it demonstrated Morley's affirmation of the Agreement and also negated any finding of coercion.
Whether the Bank breached any duties?
(a) Duty to provide banking services with reasonable skill and care
Morley had tried to argue that there was an implied contractual duty for the Bank to use reasonable skill and care in the provision of banking services under the Loan Agreement. However, the Court of Appeal held that such an implied duty had no part to play in the parties' relationship, explaining that the service which the Bank provided by the Loan Agreement (which was to make funds available for drawdown by Morley) and any terms which might be implied into providing those services had come to an end upon the expiry of the term of the loan.
After the loan term expired, Morley was in default and the only question was whether the Bank would forbear to enforce its security while the parties negotiated a solution or whether it would exercise its undoubted right to appoint a receiver under the mortgage. The Court of Appeal held that this relationship was governed by the express terms of the mortgage and by the equitable principles applicable to that relationship. Additionally, the Court of Appeal held that it was inappropriate to imply a contractual term into a mortgage (which, in any event, is not a contract for the supply of services), noting that this was consistent with previous decisions.
(b) Duty of a receiver
The Court of Appeal also pointed out that any receiver appointed by the Bank would have been the agent of the mortgagor (that is, Morley) and not the Bank and it would be the receivers who owed duties to Morley accordingly. Consequently, any sale of the properties would have been a decision of the receivers, conducted in accordance with the receiver's duties (owed to Morley) and such sale would not have been, in effect, a sale by the Bank to itself, but would have been a sale by the receivers acting as agent for the mortgagor.
(c) Breach of duty
The Court of Appeal added that even if there were such a duty, the Bank did not breach it. Firstly, although the Bank's dealings had failed to follow its own internal policy guidance (which emphasised the objective of supporting viable businesses), the aspirational language of such a purely internal document provided no secure foundation for any breach of duty. Secondly, the Bank did not simply act as a potential buyer of the property portfolio, rather, the Bank's objective throughout had been to recover as much as possible of the amount which it had loaned to Morley. Even if the Bank had mixed motives, that would not make a difference since it is unnecessary for the Bank to only have one motive of recovering (in whole or in part) the debt secured by the mortgage.
CONCLUSION AND LEARNING POINTS
This case is a welcomed decision for banks, once again confirming the limited scope of duties owed by a bank to a distressed borrower in a loan restructuring and enforcement upon a default. However, it is also a timely reminder of the risk of intimidation or economic duress when negotiating with a distressed borrower especially where the borrower is unsophisticated and unrepresented.
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