Lender’s duties limited in asset disposal

In a helpful decision for Banks and lenders, the Court of Appeal decision in Morley (trading as Morley Estates) v Royal Bank of Scotland plc [2021] EWCA Civ 338 confirmed the limited extent of the duties a lender owes to a customer in respect of provide banking services with reasonable skill and care in circumstances where the loan has expired and the Bank is taking steps to recover its loan.

The Bank’s duties in this regard arise from section 13 of the Supply of Goods and Services Act 1982 and operated as an implied term of the loan agreement that was in place. Section 13 provides: “In a relevant contract for the supply of a service where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with reasonable care and skill.” The service which the Bank provided by the loan agreement was to make funds available for drawdown by Mr Morley. That service had been provided when funds were initially drawn down in December 2006 and from time to time thereafter. The Court of Appeal would not accept that an implied term in the loan agreement had any part to play in the parties’ relationship once the term of the loan had expired (which occurred in 2009). Rather, their relationship following the expiry of the loan and the default position was governed by the express terms of the mortgage that was in place and by the equitable principles applicable to that relationship.

The Court of Appeal was also tasked with deciding whether the Bank was under a duty to act in good faith, or not to act vexatiously or contrary to its “legitimate commercial interests” pursuant to an implied term in the loan agreement. It was argued that this arose due to the Bank allegedly acting as a buyer of the properties from the customer, rather than acting as a lender. The Court held that the Bank wasn’t under any such duty in its settlement negotiations with Mr Morley. The Court held that even if such a duty existed, the allegation failed on its facts, as all of the Bank’s actions were connected to its commercial interests, i.e. the recovery of its loan.

The Court of Appeal also rejected Mr Morley’s claims that he was coerced into entering into a settlement agreement. It held that any threat made must in fact coerce the claimant to take the action in question. The Bank did “threaten” to appoint receivers over the property portfolio if Mr Morley did not agree to voluntarily transfer the portfolio to the Bank’s subsidiary, as it was entitled to do under the terms of the mortgage. However, Mr Morley did not take the action in question, therefore he was not coerced. The Court commented that he had the benefit of legal advice during the negotiations and he waited 5 years before raising the claim, which was evidence in itself that he had affirmed the settlement agreement. Furthermore, he confirmed to an alternative lender that the deal was consensual and that he had driven it rather than the Bank.

Scott Nodder