The Royal Bank of Scotland Plc v MccArthy

The tort of inducing breach of contract requires an actual breach, knowledge of the contract, an intention to procure the breach, and a sufficient causal connection. Merely preventing or hindering performance, or foreseeing that breach may occur, is insufficient. A lender’s reservation of rights requiring consent before a debtor uses its facilities does not itself procure a breach where the debtor retains the choice to seek consent or use other funds. A third party may enforce a contractual term under the Contracts (Rights of Third Parties) Act 1999 only where the term itself purports to confer a benefit, not merely because performance incidentally benefits that third party.

The claimant bank lent £120,000 to the defendant solicitor to fund his capital contribution to Halliwells LLP. The loan required repayment when he ceased to be a member. The LLP gave the bank a letter of undertaking to apply his capital account towards repayment, and later agreed with him that it would pay the bank on his retirement.

The LLP became financially distressed. The bank issued a reservation of rights letter restricting payments to retiring members and professional practice loan providers without consent. The defendant alleged that the bank thereby procured the LLP’s breach, breached an implied non-prevention term, and was liable under the Contracts (Rights of Third Parties) Act 1999. He also alleged a collateral contract requiring the bank to call on the LLP’s undertaking.

The central issues were whether the bank had induced or prevented breach, whether the undertaking was enforceable by the defendant, and whether any contractual defence displaced his primary repayment obligation.

1. Inducing breach. The claim failed. The applicable principles were those explained in OBG Ltd v Allan [2008] 1 AC 1 and Meretz Investments NV v ACP Ltd [2008] Ch 244. The defendant had to establish an actual breach, knowledge, intention to induce the breach, and causation. Mere prevention of performance was not enough unless the preventative means were independently unlawful.
2. The reservation of rights letter did not itself procure a breach. It required the LLP to obtain consent before using RBS finance, but left the LLP free to seek consent or use other funds. No request for consent concerning the defendant’s loan was made before the contractual deadline. The bank therefore neither refused consent nor caused the non-payment. The LLP’s decision not to pay was not shown to have been caused by the bank.
3. The bank’s alternative justification defence would also have succeeded. Applying Edwin Hill & Partners v First National Finance Corp plc [1989] 1 WLR 255, a secured creditor with an equal or superior right may take reasonable steps to protect that right, even if contractual consequences for another creditor are foreseeable.
4. 1999 Act. The undertaking did benefit the defendant in a general sense, since he relied on it when entering the loan. That was not enough under section 1(1)(b). The relevant term had to purport to confer a benefit on him, rather than merely produce an incidental benefit. The undertaking instead required the LLP to pay RBS and expressly recognised the defendant’s own liability under the loan. In any event, enforcement under the Act would have been against the LLP and would not have provided a defence to RBS’s claim.
5. Implied term. The alleged term preventing interference with performance could not be implied into the loan so as to regulate performance of separate contracts between RBS and the LLP or between the LLP and the defendant. The authorities concerning a three-party agreement, including F&C Alternative Investments v Barthelemy [2011] EWHC 1731 (Ch), did not apply. The defendant’s repayment obligation was freestanding.
6. Collateral contract. Clause 2.1(b) of the loan agreement, requiring an undertaking satisfactory to the bank before drawdown, was not an assurance that the bank would call on the LLP immediately upon retirement. No other assurance was proved. Judgment was therefore entered for RBS for £120,000 with interest.