Silence is golden
A survey of recent cases between banks and loan customers involving allegations of representations by the banks capable of affecting enforcement of the written loan agreement
Oral representations by banks to their customers have come under increasing scrutiny in recent years. This article considers some decisions in this area.
The Royal Bank of Scotland plc v Carlyle  CSIH 75
RBS v Carlyle has ignited debate in this area. The case involved an action brought by RBS in the Court of Session for repayment of loans provided to the defender in connection with his property development business. Carlyle counterclaimed, arguing that he had entered into the loan agreements on the basis that he had been given an assurance of further funding in the future, which was not forthcoming, and that this amounted to a breach of a collateral warranty, which entitled him to claim damages.
At first instance ( CSOH 3), the Lord Ordinary found that there had been a collateral warranty given by RBS and that Carlyle’s counterclaim should be allowed to proceed, with a further hearing being allowed to consider the issue of any loss resulting from breach of that collateral warranty.
On appeal, however, the Inner House decided that there had been no concluded agreement between RBS and Carlyle in relation to further funding; that his counterclaim should be dismissed; and that decree in favour of the bank, for repayment of the loans, should be granted. In reaching its decision, the Inner House considered a number of factors, including the nature of the legal obligation claimed, confirming: “One thing is clear, this is not a case of ‘collateral warranty’.” (para 59).
The court considered it not possible to make out the essential elements of an agreement, and that had not been made out: “Without specification of the essential elements… (including the maximum draw down, interest rates, time of draw down, method and time of repayment and securities), there could be no concluded agreement capable of enforcement” (para 58).
It also took into account the wider context, including Carlyle’s business experience and his prior dealings with RBS, concluding that what was said by the bank employee was merely a statement of future intention and that the informed observer would understand the written agreements provided to and signed by Carlyle after the discussions with RBS staff to cover all matters agreed to date: “major banks do not normally lend private individuals (or companies) millions of pounds... without setting out the terms and conditions of such a facility in writing” (para 60).
Many banks and financial institutions will be heartened by the common sense and commercial approach taken by the Inner House, and will be closely following the case, which has been appealed to the Supreme Court.
Kipling v Dunbar Bank plc  CSOH 40
Though the commercial reality of the situation will be considered, the courts also recognise that there may be other factors at play. In Kipling v Dunbar Bank plc, Dunbar Bank served a charge for payment under a personal guarantee on Kipling, who sought suspension of the charge and interdict against the bank to prevent diligence against him, claiming a collateral warranty had been entered into.
The guarantee related to a loan from the bank to a company to finance a housing development. Facility agreements were granted annually, each replacing a previous agreement. In March 2010, the bank sent a new facility agreement to Kipling. He claimed he was concerned about the terms, and had sought assurances from the bank that the guarantee would not be enforced if the company entered into the facility agreement in these terms; in a telephone conversation, a bank employee had agreed to seek the assurance sought and he had followed this up by email. He also claimed that, on returning the signed facility agreement, he wrote on the envelope: “Only to be used on the basis the Personal Guarantee is released.”
Kipling claimed he was entitled to believe, and did believe, that the bank had committed not to enforce the personal guarantee.The bank denied Kipling’s account of events and pointed out that, if the 2010 facility agreement had not been entered into, the bank would have called up the debt due by the company and enforced the personal guarantee which was already in place. Further, Kipling had been repeatedly advised that the proposed lending facilities were the best terms available and that the credit committee would not sanction any better deal, such as releasing him from the personal guarantee.
Lord Drummond Young held that it was necessary for evidence to be led on Kipling’s detailed averments on collateral warranty. He noted the forceful criticisms of Kipling’s case made on behalf of the bank: “In particular, the petitioner asks the court to hold that the respondent gave up a guarantee in its favour for no obvious return; the debt due by the company to the respondent was payable on demand and could have been called up at any time, and in the event the petitioner’s guarantee could also have been called up.” However, he opined: “It cannot be said that that is impossible; apparently gratuitous benefits are not unknown in the world of business” (para 15).
The Lord Ordinary also placed reliance on the balance of convenience, which favoured maintaining the interim orders for suspension and interdict. Recall of the orders would allow the bank to proceed with diligence and sequestration against Kipling, and the court had to weigh that consideration heavily. In contrast, there would be limited prejudice to the bank.
It is clear from this case that the court will not be guided by commercial considerations alone.
McLaughlin, Petitioner  CSIH 24
A similar issue arose in McLaughlin, Petitioner. Anglo Irish Asset Finance plc sought repayment of a loan to a company by way of a personal guarantee. A charge for payment was served on McLaughlin and a petition presented for her sequestration. McLaughlin asked the court to suspend the charge and warrant and to interdict further diligence or steps in the sequestration.
She argued that, among other things, the bank was unable to enforce its guarantee due to waiver and personal bar. She claimed a bank employee had stated at a meeting that the guarantee would not be called up if she agreed to the company going into administration, and that she had acted on that statement.
The bank referred to the clause in the guarantee, which stated that the guarantors’ liability would “not be reduced, discharged or mitigated by… any grant of time, indulgence, waiver or concession to the Principal or any other person”, arguing that McLaughlin fell within the meaning of “any other person”.In addition, the bank argued that the statement made at the meeting constituted an indication of future intention, rather than an assertion of facts.
The Lord Ordinary dismissed the petition as irrelevant, but this was overturned on appeal. The Inner House found McLaughlin’s averments in relation to waiver and personal bar to be relevant and that the court should hear evidence before any final answer was given. This case serves as a warning to those seeking personal guarantees that such protective clauses may not be an adequate safeguard against oral representations.
Barclays Bank plc v Morris  EWHC 194 (QB)
It is worth considering how the courts in England are approaching these issues. In Barclays Bank plc v Morris, the defender claimed that he had taken on business debts in his own name as a result of various oral assurances given to him at a lunch meeting with a bank employee. He counterclaimed for the losses he claimed to have suffered as a result.
Judge Keyser QC found that the meeting had been an informal lunch between a bank manager and a major customer and was entirely typical of such a meeting. The generality of the discussion was a good indication that whatever the manager had said was not in the nature of, or susceptible to, becoming a contractual promise. The documentation clearly showed what was agreed and there was no justification for using the conversation as a basis for ignoring or rewriting those clear terms for repayment. Judge Keyser QC also found that the manager had no authority to commit the bank to provide finance to Morris or his companies, and that Morris was aware of this. Other arguments of bad faith and duty of disclosure were rejected.
This case demonstrates a similar commercial approach being taken by the English courts to that of the Inner House in RBS v Carlyle.
Silence is golden?
As these cases demonstrate, even something as innocuous as a chat over lunch can be liable to misinterpretation.
It is hoped that the courts will continue to take a commonsense, commercial approach to these situations. In the meantime, employees of banks and other financial institutions will no doubt need to bear in mind how their words and deeds may be interpreted, ensuring that customers are aware that, in accordance with normal business practice, the terms of agreements will be reduced to writing.
Laura Borland is a senior solicitor in the Business Disputes & Asset Recovery team at Brodies LLP