Negligence – Bank – Assumption of responsibility – Claimant bank making claim to recover sums lent to defendant to finance development of four houses – Defendant seeking to set off losses sustained by delay in development alleged to be caused by bank – Defendant seeking permission to amend defence and counterclaim to allege that bank undertaking duties in connection with management of development Permission refused – Whether such claims open to defendant – Whether having real prospect of success – Appeal allowed in part
The defendant obtained finance from the claimant bank to fund the building of four new houses, for which she had planning permission, in the large garden of her existing house. The defendant proposed to sell the new houses once built. The contractor that she engaged to carry out the building works initially made substantial progress but then ceased work and left in spring 2006. The defendant believed that the contractor company had been an instrument of fraud used to obtain advance payments before abandoning the work.
The development was eventually completed with the assistance of further loans from the claimant. However, by that time, the property market had collapsed and the defendant was unable to sell the houses at acceptable prices. Thereafter, she rented out both the new houses and her original house, while she and her partner moved into a mobile home.
In October 2010, the claimant brought proceedings to recover the sums that it had lent to the defendant. By her defence and counterclaim, the defendant contended that the claimant had acted in breach of its duties towards her, including by countermanding her instructions relating to the development, making unauthorised payments to the contractor and discussing and planning the development with the contractor without her knowledge or consent. She contended that she had been unable to complete the development to programme or budget as a result of the claimant’s failures and that she was entitled to set off the loss that the claimant had thereby caused to her in extinguishment of the loans.
The claimant applied to strike out the defence and counterclaim as disclosing no reasonable grounds for defending the claim. The defendant sought permission to amend her to assert, inter alia, that the claimant had undertaken duties to her beyond those a mere lender and had assumed responsibility for providing financial and management assistance and advice in relation to the development. At a hearing before a master, permission to amend was refused on the ground that the proposed amendments had no real prospect of success. The defendant’s existing defence and counterclaim were struck out and judgment was given for the claimant in the sum of £1.6115m. The defendant appealed.
Held: The appeal was allowed in part.
The master had been correct to strike out the original defence and counterclaim, which could not stand since it was confused and gave no sufficiently clear statement of the case that the claimant had to meet. He had also properly given the defendant an opportunity to put her case in order by producing a new pleading by way of amendment. However, he had erred in refusing permission for the amendment proposed by the defendant. In order to obtain permission for the amendment, the defendant had to show that it had a real prospect of success. The master had erred in his view that none of the proposed amendments had such a prospect. The master should have given limited permission to amend since some parts of the proposed amended defence had a real chance of success.
Although a bank that lent money for a project or investment did not ordinarily undertake any obligations to the borrower in respect of the project or investment, it might come under additional obligations if it agreed to do so or, in other words, assumed responsibility. Clear evidence was required if a bank was to be subject to obligations outside its ordinary banking role. One way in which it might assume responsibility was by doing acts that took it outside its banking role; if it did, it might owe a duty to its customer to carry out those acts with appropriate skill and care: Woods v Martins Bank Ltd [1959] 1 QB 55 and Lloyd’s Bank plc v Cobb (1991) 12 LBAD 210 applied. If the claimant had agreed with the defendant that it would, in effect, act as project manager of the development, then it would come under a duty to do so with appropriate skill and care. It would come under a similar duty if it had in fact taken over the management of the development.
The defendant’s cross-claim was so closely connected with the claimant’s claim that it would be manifestly unjust to allow the claimant to enforce payment without taking into account the cross-claim: Federal Commerce & Navigation Ltd v Molena Alpha Inc “The Nanfri” [1978] QB 927 applied. It was therefore open to the defendant to set off against the claimant’s claim such losses as she could establish arose from the claimant’s breaches of duty in connection with the development. Any limitation defence that would be open to the claimant in relation to a counterclaim alone would not bar the defendant from raising an equitable set-off: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 4 All ER 890 applied.
There was no authority to bar the defendant from claiming for loss of value arising from delay and a drop in the market. There were situations in which loss of market could be included as part of the recoverable loss: South Australia Asset Management Corporation v York Montagu Ltd [1997] AC 191; [1996] 2 EGLR 93; [1996] 27 EG 125 distinguished. However, it was important that, when the defendant’s claim for loss was reformulated, proper account was taken of reality. If a claim for loss resulting from delay to the development was to be included, it had to be set out so as to show: (i) how it was said that the specified period of delay was caused by the acts and omissions of the claimant relied on in the pleading; and (ii) how the financial loss alleged to result from that delay was calculated.
James Barnard (instructed by Isadore Goldman) appeared for the claimant; Clive Freedman QC (instructed by Boardmans) appeared for the defendant.
Sally Dobson, barrister
