Mortgagee – Breach of duty – Economic duress – Appellant seeking damages against respondent bank following partial loss of commercial property portfolio charged to respondent – High Court dismissing claim – Appellant appealing – Whether respondent in breach of duties as bank and mortgagee – Appeal dismissed
The appellant was a commercial property developer who borrowed £75m from the respondent bank, secured on his portfolio of commercial properties. When the appellant failed to repay the loan when its term expired, the parties commenced negotiations with a view to reaching a consensual solution. They eventually concluded an agreement whereby £10m of the loan was written off, certain properties were transferred to the respondent’s subsidiary (WR) at a price above their market value and the remainder were retained by the appellant on payment of £20.5m to the respondent.
The appellant subsequently argued that those agreements should be rescinded on the ground of economic duress. He claimed damages relying on breaches of: a duty to provide banking services with reasonable care and skill; a duty to act in good faith and not for an ulterior purpose unrelated to the respondent’s legitimate commercial interests; and a duty as mortgagee to sell mortgaged assets in good faith and to take reasonable steps to obtain the best price reasonably obtainable. Moreover, the agreements had been procured by the threat to arrange for the entire portfolio to be transferred to WR which amounted to a manifest threat to commit an unlawful act, namely, the respondent’s breach of its duties as a mortgagee.
The High Court dismissed those claims, concluding that the respondent was not at fault in the negotiations which were commercial negotiations carried out at arm’s length and with the benefit of legal advice on both sides. Further, the threat to appoint receivers to sell the portfolio on a pre-packaged basis was not a threat to do an unlawful act, the respondent had acted in good faith and the appellant was not coerced and had affirmed the agreement, taking no step to set it aside for over five years: [2020] EWHC 88 (Ch); [2020] EGLR 12. The appellant appealed.
Held: The appeal was dismissed
(1) The essential ingredients of the tort of intimidation were: a threat to do something unlawful or illegitimate intended to coerce the recipient to take or refrain from taking some course of action; the threat had in fact to coerce the recipient to take such action; and loss or damage had to be incurred as a result. Similarly, coercion was an essential ingredient of economic duress, regardless of whether the threat was to do an unlawful or a lawful act.
In the present case, the judge made no finding that the appellant was coerced into concluding the agreement with the respondent as a result of the threat of appointing receivers and the appellant affirmed the agreements. The fact that he took no steps to have them set aside until over five years later demonstrated his affirmation and negated any finding of coercion. The agreement concluded was the result of robust negotiations between commercial parties, each of which had legal advice and each of which was able to look after itself in that negotiation. Accordingly, a critical ingredient of any case of intimidation or economic duress was missing. The judge was right to conclude that the appellant had not been coerced into making the agreement: Berezovsky v Abramovich [2011] EWCA Civ 153; [2011] 1 WLR 2290 followed.
(2) The respondent was not under any implied contractual duty to exercise skill and care in negotiating with the appellant after his default, the position being governed by the equitable duties which it owed as a mortgagee. The respondent’s objective throughout was to recover its loan. The deal which was eventually concluded was one which the appellant persuaded the respondent to accept despite its reluctance to do so. All of the respondent’s actions were rationally connected to its commercial interests. They were at arm’s length and commercial. The respondent’s duty of skill and care did not require it to negotiate the restructuring any differently.
(3) The duty to provide banking services with reasonable skill and care was derived from section 13 of the Supply of Goods and Services Act 1982, and was therefore said to operate as an implied term of the loan agreement. The service which the respondent provided by the loan agreement was to make funds available for drawdown by the appellant. After the loan term expired and the appellant failed to repay the sums advanced, he was in default and the only question was whether the respondent would forbear to enforce its security while the parties negotiated a solution or whether it would exercise its right to appoint receivers under the mortgage. In those circumstances, an implied term in the loan agreement had no part to play in the parties’ relationship. Rather their relationship was governed by the express terms of the mortgage and by the equitable principles applicable to that relationship: Yorkshire Bank plc v Hall [1999] 1 WLR 1713 and Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116 followed.
(4) Moreover, any receiver appointed by the respondent would have been the agent of the appellant, as mortgagor, and would have owed duties to the appellant accordingly. It would have been for the receivers, exercising their powers in good faith, to decide when and how the properties should be sold. It followed that the decision whether to sell the properties by way of a pre-pack sale to WR would have been a decision for the receivers, not the respondent, in accordance with their duties as receivers. It followed that any sale of the properties to WR would not have been, in effect, a sale by the respondent to itself, but would have been a sale by the receivers acting as agent for the mortgagor. But even if the respondent did owe a relevant duty under section 13 of the 1982 Act, it committed no breach of such a duty.
(5) Any suggestion that the respondent was in breach of a duty to act in good faith, or not to act vexatiously or contrary to its legitimate commercial interests, pursuant to an implied term of the loan agreement, was ruled out by the judge’s finding that all the respondent’s actions were rationally connected to its commercial interests.
Hugh Sims QC and John Virgo (instructed by Cooke Young & Keidan LLP) appeared for the appellant; Paul Sinclair QC and Natasha Bennett (instructed by Addleshaw Goddard LLP) appeared for the respondent
Eileen O’Grady, barrister
Click here to read a transcript of Morley (trading as Morley Estates) v Royal Bank of Scotland plc
