The UK Supreme Court decision in RBS v Carlyle is the first at appeal level to recognise a pre-crash lending commitment by a bank that was not given in writing. Is it unique to its facts?
On 11 March 2015, the UK Supreme Court announced its long-awaited decision in the Scottish appeal Royal Bank of Scotland v Carlyle  UKSC 13. In 2007, Derek Carlyle had sought funding from RBS to buy and develop plots at Gleneagles. Due to a buyback clause imposed by Gleneagles, Carlyle was going to make a loss on the land unless he developed it. He told RBS that it was essential, if lending him the money to buy the land, that the bank also lent him the money to develop it.
RBS confirmed during telephone discussions that it understood this, and verbally advised Carlyle that funding was “all agreed”. However, no development funding was ever provided by RBS, which raised proceedings against Carlyle in 2008 seeking recovery of the sums loaned by them for the land acquisition.
All five UK Supreme Court Justices found in Carlyle’s favour. The decision marks the end of a longrunning legal battle on the question whether RBS had made a legally binding promise to provide Carlyle with the development funding for the project, although Mr Carlyle now faces the prospect of going back to first instance – the Commercial Court of the Court of Session – to quantify his losses.
The decision serves at one and the same time as affirmation for Carlyle after a long and punishing seven years, and as another rebuke to the Scottish appeal court, following the cases of McGraddie v McGraddie 2014 SC (UKSC) 12 and Henderson v Foxworth Investments Ltd 2014 SC (UKSC) 203. The Supreme Court commented that: “deciding the case as if at first instance is not the task assigned to this court or to the Inner House... [we are] satisfied that the Second Division did not have an adequate basis for overturning the Lord Ordinary’s findings of fact”.
Beyond this, however, will the Supreme Court’s decision have wider implications?
Some legal commentators are already assessing the Carlyle case as wholly fact-specific, suggesting that the decision has clearly been driven by a very specific set of facts and circumstances. To a certain extent, that is true. The prospects of any other Carlyle-type claims will have to be assessed on their facts. In particular, it is important to draw a clear distinction between cases where the promise was uncaveated and those where the promise was subject to one or more caveats or conditions. In Carlyle, the Supreme Court upheld Lord Glennie’s decision that RBS had made an outright, uncaveated promise to provide both purchase and development funding.
The situation where promises to provide development funding were made by a bank to a would-be developer as an inducement to take out funding was a common one pre-recession. Many such “promises” were unfulfilled when the recession hit. However, many Carlyle-type cases did not in fact involve outright promises: instead, the “promises” were often subject to credit approval, fulfilment of certain conditions precedent, or in some cases they were not promises at all but simply expressions of future intent. In such scenarios, it is unlikely that a court would hold that a legally binding promise was made. It is therefore important to assess each case on its own facts in order to determine whether it is indeed on all fours with Carlyle.
Even if the case appears to involve a similar outright promise to that which RBS made to Carlyle, there is still the hurdle of convincing the judge hearing the case that they should reach a similar conclusion to that of Lord Glennie. The Supreme Court Justices did comment that were they deciding the matter at first instance, they might have shared the views of the Inner House that no legally binding commitment had been made by RBS to Carlyle.
Look behind the label
There are, however, some wider significances to the Carlyle decision, for contract lawyers and for banking litigation more generally.
The first lies in the approval by the Supreme Court of the New Zealand Court of Appeal decision in Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd  2 NZLR 433, in which the Court of Appeal of New Zealand held that: “The court has an entirely neutral approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the court’s attitude will change. It will then do its best to uphold the contract despite any omissions or ambiguities.”
Essentially, if a claim passes the “objective test” hurdle, the court must then strive to do everything in its power to make the contract work by filling in the gaps: the court must not be the destroyer of bargains.
When it came down to it, the case turned on the narrow issue of whether the oral discussion between Carlyle and his bank was sufficient to demonstrate a contractual promise on the part of the bank. While the issue was a narrow one, considerable discussion took place about the label to be given to that promise. At first instance, the trial judge had applied an English concept, that of collateral warranty. As he put it: “There is no magic in a collateral warranty or contract. It is simply a contract, usually oral, which is collateral or ancillary to another contract (the principal contract) between the same parties... Classically, a collateral contract is derived from a representation or promise made by one party to the other in the course of negotiations for the principal contract.”
In this case, it was the contractual promise to provide development funding, in the course of negotiations for the principal contract of loan for the purchase of land, that induced Carlyle to enter into the loan to buy the plots. At first instance, it was held that this created a “collateral warranty”. In the appeal court, there had been significant resistance to the importation of the English concept of collateral warranty, with the judges suggesting that Scots law does not recognise a collateral warranty as something which exists as a freestanding legal entity.
In the end, the Supreme Court agreed with counsel for Carlyle that whatever label was attached, applying the objective test described above, the bank had indeed made a legally binding promise. They agreed that it mattered not what label was given to the promise. The answer to the central question, “Did the bank intend to enter into a binding legal commitment?” was in the end the same: it did. The pleading of a “collateral warranty” became a distraction in the case; either “promise” or “unilateral undertaking” would have been a suitable choice of words to describe the obligation created by the bank. The court said, looking at it objectively, from the perspective of a reasonable outside observer, that it was obvious that a legally binding promise had been given, and a legally binding obligation had been undertaken. It was then the court’s duty to give effect to that contract, by filling in the gaps.
The second point of significance lies in the fact that, for the first time, judges have affirmed the commercial reality known to all those working in the property sector in the years leading up to the crash: deals were done on a handshake, paperwork was scant, and it was common for promises that were intended to be honoured to be made verbally.
Since the recession first hit, it has, of course, been an uphill battle for property developers and SMEs to pursue legitimate claims against their banks: they have faced the double hurdle of the inequity in funding, together with the fact that the courts appear to have taken a very conservative, and indeed at times somewhat unrealistic, approach to claims against banks, seeming not to understand the reality of the way in which lending was undertaken before 2008.
In Carlyle, we see a rare judicial acknowledgment of the reality which was the relaxed approach the industry enjoyed pre-recession. The Inner House had suggested that the evidence did not demonstrate a concluded agreement capable of enforcement, not least because the agreement or promise was not in writing and they considered it highly improbable that a bank would commit itself to lend without setting out terms and conditions in writing. However, the Supreme Court thought otherwise, suggesting that: “the prudence which historically has been attributed to Scottish bankers was not always in evidence in commercial and mortgage lending in the years leading up to financial crisis in 2008”.
In the final analysis, although it may be that RBS v Carlyle adds little to previously established “black letter” law, its significance lies in the acceptance by the judiciary of the commercial reality, known to all those working in the property sector, of the way in which banks did business pre-crash.
Cat MacLean is a partner and head of dispute resolution with MBM Commercial LLP
Liina Tulk is a solicitor with MBM Commercial LLP
Support for the “little guy”
Derek Carlyle’s appeal to the Supreme Court was one of the first in Scotland tobe supported by third-party funding, relating to that part of his costs which were not contingent.
The funder was Restitution Ltd, founded in 2012 by two high net worth individuals who recognised that inequality of resources was restricting access to justice, particularly when individuals were pitted against large institutions. In this case, the funding covered the very considerable court fees, and other associated outlays such as travel, accommodation and printing. Without this support, the appeal would probably not have proceeded.
David Calder, director of Restitution, told the Journal that the company’s funding model is flexible. Typically, it covers outlays and a proportion of legal fees, in return for a share of sums recovered. However, details are negotiated in each case, and are designed to fit individual circumstances. In Carlyle’s case, because Restitution was only involved at the appeal stage, and his legal team had agreed to work contingently, it agreed to fund outlays only, and recover them from expenses in the event of success, with a success fee accruing to Restitution if there is ultimately a recovery from RBS.
He added that if there had only been a simple defence with no counterclaim, the recoverable expenses in the event of success would not have covered the company’s investment, so it would probably not have felt able to support the case.