Carlyle v Royal Bank of Scotland Plc

In Scots law, a unilateral undertaking intended to have legal effect is binding without consideration. Whether such an intention exists is determined objectively from all the circumstances.

An anticipated formal contract does not necessarily prevent an earlier agreement or promise from taking immediate legal effect. Once the court finds an intention to be legally bound, it should, where possible, uphold the obligation despite omissions or ambiguities.

An appellate court may interfere with a trial judge’s factual findings only where an identifiable error exists or the decision cannot reasonably be explained or justified. It may not substitute its own assessment merely because it would have reached a different conclusion.

A property developer alleged that the Royal Bank of Scotland had orally promised to fund both his purchase and the development of a plot at Gleneagles. He required a commitment to both stages because the purchase was subject to a buy-back clause if development was not completed.

Following proof, the Lord Ordinary held that the bank had made a binding undertaking to provide development funding of up to £700,000. The Inner House allowed the bank’s reclaiming motion in [2013] CSIH 75. It considered that the bank had communicated only an approval in principle, that later written agreements showed no immediate legal obligation, and that essential loan terms remained unsettled.

The developer appealed. The central issues were whether the Inner House had exceeded the proper appellate role when reversing factual findings and whether the oral statement was capable of creating an enforceable promise under Scots law.

1. Appeal allowed. Lord Hodge, with whom Lord Neuberger, Lord Kerr, Lord Clarke and Lord Reed agreed, held that the Inner House had no adequate basis for overturning the Lord Ordinary’s findings. The Inner House had reassessed factual questions without applying the restraint required of an appellate court. A first-instance decision may be reversed for an identifiable error or where it cannot reasonably be explained or justified. It is insufficient that the appellate court would itself have reached another conclusion.

2. The Lord Ordinary was entitled objectively to construe the bank representative’s statement, viewed with the preceding discussions, as a legally binding promise to provide development funding. The developer had repeatedly insisted that he required funding for both purchase and construction. The bank knew that position and knew of the buy-back clause. Those unusual circumstances reasonably supported the finding that the bank’s approval covered the whole proposal.

3. The parties’ expectation that formal loan documents would later be executed did not prevent an earlier obligation from taking legal effect. That expectation was relevant but not conclusive. The subsequent purchase-funding agreements could supersede the earlier undertaking as regards purchase finance without extinguishing the separate promise of development funding.

4. The undertaking was sufficiently certain. A valid loan need not invariably specify every matter identified by the Inner House, including interest, repayment dates and security. Once the Lord Ordinary found an intention to create a binding promise, he was entitled and required to seek to give it effect. A facility of up to £700,000 was capable of specific implement, although further evidence might be needed to determine terms implied from prior dealings and shared understandings.

5. In Scots law, a unilateral undertaking intended to have legal effect is binding without consideration. The court applies an objective test by asking what a reasonable outside observer would infer from all the circumstances. Calling the obligation a “collateral warranty” or “collateral contract” did not alter the analysis: a collateral contract has no special status and is governed by ordinary contractual rules.

6. The interlocutors of the Second Division dated 12 September and 3 October 2013 were set aside. The case was remitted to a commercial judge in the Court of Session to proceed accordingly.

1. United Kingdom Supreme Court: Allowed the appeal, set aside the Second Division’s interlocutors and remitted the case to a commercial judge in the Court of Session.

2. Inner House of the Court of Session: In [2013] CSIH 75, allowed the bank’s reclaiming motion, recalled the Lord Ordinary’s interlocutor and continued the cause to ascertain the decree for payment in the bank’s favour.

3. Outer House of the Court of Session: Following preliminary proof, the Lord Ordinary declared that the bank had breached a collateral warranty binding it to make development funding of £700,000 available to the developer.