Morley v The Royal Bank of Scotland PLC

A bank providing lending services must exercise reasonable skill and care. Industry-wide regulatory standards may assist in identifying the required standard, whereas internal policies are evidence only of the organisation’s own expectations. Contractual discretions to obtain a revaluation or charge default interest must be exercised honestly, for purposes rationally connected with the bank’s commercial interests, and not to vex the customer maliciously. A threat to exercise an enforcement right is not unlawful merely because it is commercially severe. Lawful-act economic duress requires bad faith; otherwise the pressure must involve a threat to do an unlawful act. The claimant’s claims failed because the bank’s conduct was lawful or commercially justified, the alleged threat was equivocal, and the agreements had been affirmed.

The claimant, a commercial property developer, borrowed up to £75 million from the defendant bank on a non-recourse basis secured by charges over his property portfolio. Following a substantial fall in property values and breaches of loan-to-value covenants, the bank pursued restructuring and enforcement options, including a proposed receivership and pre-pack transfer to its subsidiary, West Register.

The claimant entered into agreements under which he retained five properties for £20.5 million and transferred the remainder to West Register. He alleged breach of duties in the provision of lending services, breach of contractual good faith obligations, intimidation and economic duress. The central issues were whether the bank’s conduct was wrongful, whether the July 2010 threat was unlawful or illegitimate, and whether the agreements could be rescinded or give rise to damages.

1. Duty of skill and care. The bank owed a duty to exercise reasonable skill and care in providing lending services. Relevant regulatory standards could assist in assessing breach, but internal GRG policies were only evidence of the organisation’s own standards and did not themselves define the legal duty. The bank’s restructuring negotiations, use of the January 2009 valuation, charging of default interest, rejection of offers and insistence on £20.5 million for the retained properties did not breach that duty.
2. Good faith and contractual discretions. The loan agreement was an ordinary loan facility, not a relational contract. The bank’s powers to obtain a revaluation and charge default interest were contractual discretions. They had to be exercised honestly, for purposes rationally connected with the bank’s commercial interests, and not to vex the claimant maliciously. Those requirements were satisfied. The right to call in the loan was an absolute contractual right, not a discretion.
3. Intimidation and economic duress. The threat made at the 8 July 2010 meeting was that receivers would be appointed to effect a pre-pack sale to West Register. It was a threat, rather than a mere warning. However, the bank’s employee acted without bad faith. Lawful-act duress therefore could not arise, and the threat would have had to be unequivocally a threat to commit an unlawful act. The proposed sale might have been unlawful under conventional mortgagee principles, but the claimant’s standing and loss were uncertain because the loan was non-recourse and the properties were worth less than the debt. The threat therefore did not unequivocally threaten an unlawful act and fell within the rough and tumble of commercial bargaining.
4. The claimant retained a practical choice, continued negotiating and did not sign the proposed whole-portfolio transfer. He later affirmed the disputed agreements by retaining and managing the List B properties, permitting third-party rights over some List A properties, and delaying his challenge for over five years. Rescission was consequently unavailable. The court dismissed the claims and did not decide whether damages could be awarded in lieu of rescission.