Court of Appeal limits a bank's duty of care where borrowers fail to repay

Oliver Morley, a wealthy property developer, brought an approximately £100 million claim against The Royal Bank of Scotland Plc (RBS) arising from the disposal of part of his commercial property portfolio in 2010. The portfolio was charged to RBS as security for a £75 million loan that was advanced to Mr Morley under a facility agreement with RBS. The loan expired, following various defaults under the facility agreement during its term, and Mr Morley failed to repay his outstanding indebtedness. Negotiations ensued between Mr Morley and RBS, which resulted in Mr Morley agreeing to hand over part of his portfolio to RBS’s property-holding business, West Register (the agreement). RBS suffered a significant loss on the loan.

A few years later, Mr Morley claimed that RBS had acted in breach of its duty to exercise reasonable skill and care in the provision of banking services and that the agreement was brought about by intimidation or economic duress by RBS.

The High Court dismissed Mr Morley’s claims, finding that RBS had acted in good faith throughout its dealings with Mr Morley and that, even if a threat had been made to appoint receivers over the portfolio, Mr Morley was well-versed in commercial negotiations and had ultimately concluded a deal with RBS that he himself had proposed. 

By a unanimous decision, the Court of Appeal upheld the first instance judgment, dismissing Mr Morley’s appeal in its entirety.

On the facts, the court rejected Mr Morley’s argument that RBS was in breach of a duty to provide banking services with reasonable skill and care. It held that RBS was not under any implied contractual duty to exercise skill and care in negotiating with Mr Morley after his default, but rather, the position was governed by the express terms of the mortgage and the equitable duties that RBS owed as a mortgagee.

But even if RBS had owed an implied contractual duty, the court found that there had been no breach. In particular, in relation to Mr Morley’s complaint that RBS had failed to follow its own internal policies when negotiating the restructuring and considering its enforcement options, the court held that the purely internal document contained aspirational language, which did not provide any foundation for a case of breach of duty. Mr Morley also alleged that RBS had improperly taken into account its position as potential buyer of the portfolio, rather than as lender, in its dealings with Mr Morley. The court disagreed and held that RBS’s objective throughout the process was to recover as much as possible of the loan amount.

The court dismissed Mr Morley’s allegations that he was subjected to intimidation or economic duress when negotiating the agreement. It held that Mr Morley had not been coerced to enter into the agreement, and that, on the contrary, it had been concluded consensually and as a result of a robust negotiation between commercial parties, each of which had the benefit of legal advice and was well able to look after itself in that negotiation. In addition, the court found that Mr Morley did not submit to RBS’s demands and RBS did not carry out its threat to appoint receivers. Instead, the parties continued to negotiate and concluded the agreement in terms that Mr Morley had originally proposed. While Mr Morley may now feel a sense of buyer’s remorse, the court found that he entered into the agreement of his own free will.

This decision, confirming that a bank is not under any implied duty to exercise care and skill when negotiating refinance proposals with a borrower who is in default of their facilities, will be welcomed by banks that find themselves in this position. In the usual course, following a default and in considering whether to enforce security, the relationship between a bank and its customer will be governed by the express terms of the mortgage and the relevant equitable principles applicable to the relationship between mortgagee and mortgagor.

The court’s decision that a bank’s internal policy guidance does not provide a basis, whether evidential or otherwise, for assessing the standard of care that a bank owes to its customers also provides helpful clarification. As the High Court found, compliance with internal policies and procedures in internal documents is not to be treated in the same way as compliance with the rules relating to professional standards across a trade or profession. While the latter are evidence of what a trade or profession would expect of its members and, therefore, evidence of what the public should be entitled to expect, the former are only evidence of what an organisation requires of itself.

The court also reiterated that coercion is a critical element of the tort of intimidation and of economic duress: if the threat does not coerce the claimant, there can be no claim for intimidation or duress.

Finally, the decision is a reminder that the English courts will not easily step in to unwind agreements struck between commercial parties on arm’s length terms, particularly those with the benefit of legal advice. However great a claimant’s sense of grievance, buyer’s remorse alone will not see contracts set aside under English law.