This case review was co-authored by Jonathan Marion, Trainee Solicitor, London.
The Court of Appeal decision in Morley (t/x Morley Estates) v Royal Bank of Scotland Plc [11.03.21] considered whether a borrower had been subjected to economic duress or intimidation during negotiations with Royal Bank of Scotland (RBS) to restructure a loan.
In 2006, the Appellant, Mr Morley (trading as Morley estates), executed a loan facility with the respondent, RBS, for £75 million primarily to refinance his property portfolio and add new properties. The loan was made on the basis that the portfolio was worth £98.45 million. However, as a result of the 2008 financial crisis, the portfolio was valued at £59.4 million in January 2009. The bank was therefore in an uncomfortable position as its security was worth significantly less than its loan, whilst the loan facility prevented recourse against Mr Morley personally.
Events of default occurred under the loan by the end of 2007 and acrimonious negotiations began in 2008, including Mr Morley’s solicitors threatening injunctive proceedings against RBS and RBS threatening to call in the loan. Negotiations continued after the loan period expired culminating in RBS’s representative threatening to appoint a receiver, under the Bank’s mortgages, to sell the portfolio on a pre-pack basis to a subsidiary of RBS known as ‘West Register’, unless a consensual deal was made by the following Monday. Negotiations continued the following day and the Monday deadline passed, without RBS fulfilling its threat. Mr Morley shortly after agreed to a deal to buy several properties whilst transferring certain properties to West Register voluntarily.
Mr Morley contended that RBS breached Section 13 of the Supply of Goods and Services Act 1982 (the 1982 Act) to provide banking services with reasonable care and skill and also breached its duty of good faith. Additionally he claimed he was coerced into agreeing to the deal by unlawful pressure from the bank. He argued RBS committed the tort of intimidation and he was placed under economic duress, which meant that the deal was voidable.
Kerr J, at first instance, rejected all of Mr Morley’s primary arguments. The Court of Appeal (CA) unanimously concurred with Kerr J’s findings in dismissing the appeal. The most notable determinations by the CA are as follows:
- Confirmation that a mortgage is not a contract for the supply of services under the 1982 Act. As such, implied terms created by the 1982 Act will not be applicable to a mortgage. The relationship is governed by the express terms of the mortgage and by the equitable principles applicable to that relationship.
- The court cast doubt on whether a bank’s internal policy guidance could ever be relevant in assessing whether a bank acted with reasonable care and skill. The aspirational language of such documents provides no secure foundation for breach of duty claims.
- Where a mortgagee (the bank) represents that it will exercise its right to force a sale (under the mortgage) to a subsidiary by way of a pre-pack sale, it will ultimately be a decision for the receivers, not the bank, whether to accept the bank’s instructions to sell it in this way. The receivers, once appointed, will be agents of the borrower and will owe a duty to the borrower (not the bank) to exercise their powers in good faith and to decide when and how the properties should be sold (Downsview Nominees Ltd v First City Corp Ltd  applied).
- “Aggressive and unpleasant” negotiating by bank employees will not, as a standalone factor, amount to bad faith from a bank.
- For a bank to be liable in the tort of intimidation, a claimant would have to establish not only that the threat was unlawful or illegitimate but that the bank (a) intended to coerce the claimant to take or refrain from taking some course of action (b) the threat must in fact coerce the claimant to take such action and (c) loss or damage must be incurred by the claimant as a result. On the facts of the case there was no finding of coercion.
- RBS had not acted vexatiously against its customer or contrary to its legitimate commercial interests.
Once the moratorium on lenders enforcing their security is lifted, borrowers may seek to challenge the actions of the lender and raise arguments that the bank’s actions are somehow impugned due to intimidation and economic duress on the part of the lender. The CA judgment demonstrates that, whilst all cases are fact specific, it will be very difficult for a debtor borrower to challenge a lender’s actions in enforcing its security with a view to recovering its long outstanding indebtedness.