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Court of Session: Bank not liable for losses on project it did not fund after promising to do so


The Court of Session in Scotland has ruled that a bank was not liable for a developer's losses on a property it had purchased on the understanding that the bank would provide development finance but did not do so.

Banking litigation expert Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law.com, said that the case would have repercussions for developers both north and south of the border that had purchased property based on assurances from their relationship managers about their banks' willingness to lend.

"There are many of these claims being made because banks did a lot of property lending in 2006 and 2007, but after the financial crisis in 2008 were looking to restrict their lending," he said.

"The Court of Session is the highest court to have decided this kind of claim so far, and its decision will be binding in Scotland. The decision will be influential in England and Wales where very similar arguments are being run in many claims. The English courts will respect the Court of Session's careful reasoning," he said.

The developer in this case, Mr Carlyle, had planned to build two houses on a piece of land he purchased in 2007 with a loan funded by RBS. According to Carlyle, the bank had provided a collateral warranty that it would provide development finance in due course, and he had told his relationship manager that he was not interested in borrowing just to buy the land. In a telephone conversation in June 2007, Carlyle was told that the transaction was "all agreed"; however, a letter sent to him by the bank the following day only referred to "indicative terms" for the loan rather than final ones.

Finding in favour of the bank, the Court of Session ruled that as a "businessman, acting with advice from both an accountant and a solicitor", Carlyle knew or should have known that an oral assurance was not capable of being a commitment to lend. In any event, the reference to "indicative terms" in the letter should have corrected any misapprehensions that he was under following his conversation with the relationship manager.

"It was commercially absurd to suggest that [RBS] had, in the use of three words in a conversation over the telephone, contracted in a manner obliging them to lend [Carlyle] £700,000 (and further moneys to his company) no matter what his (or its) financial position might be at the date of draw down," said Lord Carloway. "What had been said did not come close to satisfying the requirements for a contract of loan, hence the attempt by [Carlyle] to articulate the obligation as something different; namely a collateral warranty."

A collateral warranty is one which relates to matters other than those covered by the contract between the parties - in this case, the contract to provide finance to purchase the property. Lord Carloway said that way in which these agreements were formed was "no different" to the way in which contracts were formed generally: that is, whether what was actually communicated between the parties by words or conduct led to the objective conclusion that they intended to create legal obligations. This was not true in this case, he said.

"[Carlyle] was saying that he had entered into an agreement with [the bank] for all the funding as at 14 June," he said. "That cannot be the case given what happened thereafter. There was a presumption that, if an agreement was to end up in writing, no obligations arose until that was done ... That was the position here and it presented a formidable obstacle to the defender's approach."

"[An objective observer], if informed of the background of dealings between the parties and [Carlyle's] knowledge of how [RBS], like most other banks, operate, would not have regarded what was said as creating [an obligation to lend him and his company several million pounds] ... Standing the parties' prior dealings and what had happened prior to the telephone conversation, such an obligation could arise only in the event of the parties entering into a written contract to that effect," he said.

Banking litigation expert Mike Hawthorne said that, in England, bank customers in similar circumstances had claimed misrepresentation, particularly if they had "a long and trusting relationship" with the relationship manager.

"However, relationship managers have little or no authority to decide which loans the bank will enter into," he said.

"A relationship manager might have said to the customer that the bank would be willing to make a particular loan, but from the bank's perspective that would have been an expression of opinion at best. That opinion might have been honestly held based on years of experience, but banks would not consider themselves bound to lend until the ink was dry on the loan agreement," he said.

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