Judge entitled to find bank in breach of loan promise: Supreme Court
A property developer who claimed the Royal Bank of Scotland had gone back on a commitment to make funding available for a development, even though there was no written agreement, has won an appeal to the UK Supreme Court.
Five judges unanimously allowed an appeal by William Carlyle, who counterclaimed for loss of profit on a development near the Gleneagles Hotel in Perthshire, after the bank called in a loan and then sued for payment.
The loan had been made to enable Mr Carlyle to purchase the plot. The purchase contract bound him to complete the construction of a new house on the plot by a certain date, ahead of the Ryder Cup being staged at Gleneagles golf course, or the vendor would be entitled to buy the plot back for the original price. Mr Carlyle's case was that he made it clear to the bank that he would need further borrowing to build the house, and that the bank should not lend him the purchase money unless it was also committed to providing him with development funding. On 14 June 2007 the bank’s representative told him by phone that his proposal was “all approved” and he accordingly paid a deposit to secure the purchase.
In August 2008, during the financial crash, the bank informed Mr Carlyle that it would not provide funding for construction, called in the loan and raised an action for payment of £1,449,660 plus interest. Mr Carlyle defended the action and counterclaimed for his loss of profit on the development.
After proof the Lord Ordinary, Lord Glennie, held the bank in breach of a collateral warranty to make development funding of £700,000 available to Mr Carlyle, as the phone conversation of 14 June 2007, in the context of the previous discussions, represented a commitment by the bank both to advance the purchase price and to provide a facility for the build cost. The Second Division allowed the bank’s reclaiming motion, on the basis that the phone conversation simply informed Mr Carlyle of an internal decision to approve funding in principle, the bank was under no legal obligation until there was a written loan agreement, and the alleged promise was legally ineffective in any event because essential terms, including the maximum drawdown, had not been agreed. Mr Carlyle appealed to the Supreme Court.
Allowing the appeal, Lord Hodge, with whom Lord Neuberger, Lord Kerr, Lord Clarke and Lord Reed agreed, commented that had he been deciding the matter at first instance, on the findings of fact he might have agreed with the Inner House that the bank had not entered into a legally binding obligation to provide the development funding. But an appeal court could not interfere unless satisfied that the judge who heard the proof had gone “plainly wrong”, and the Second Division had disagreed with the Lord Ordinary on questions of fact without facing up to its restricted role on such questions.
The Lord Ordinary had had a reasonable evidential basis for finding on an objective analysis that the bank made a legally binding promise in the phone call of 14 June 2007 to provide development funding. The fact that parties envisaged that their agreement would be set out in a formal contract in the future did not, by itself, prevent that agreement from taking legal effect. The fact that a previous loan transaction between Mr Carlyle and the bank had been conducted differently was not relevant, because in the earlier transaction there had been no buyback clause.
Despite the relatively ill-defined nature of the obligation to provide the development funding, the parties had proceeded on the basis that Mr Carlyle would need up to £700,000 for the development of the plot. They were aware of the rates of interest applied to other loans, and the time constraints in this case. Once the Lord Ordinary was satisfied that the bank had the intention to make a legally binding promise, he was entitled and indeed required to look for ways to give effect to that promise.
Lord Hodge said that pleading Mr Carlyle's case as a “collateral warranty” had become a distraction. It was not used as a term of art. “Promise” or “unilateral undertaking” would be a suitable description for the independent legal obligation under consideration. In Scots law such an undertaking that was intended to have legal effect was binding without consideration passing from the recipient. It might may be, but did not need to be, collateral to another contract. The issue was simply whether a legally binding obligation had been undertaken.
The court remitted the case to the commercial court of the Court of Session for further procedure.