Supreme Court: telephone promise committed bank to property development funding

The Supreme Court found that the Inner House of the Court of Session had gone beyond its powers as an appeal court when it overturned the Lord Ordinary's decision, because it had disagreed with him on the facts of the case rather than the application of the law. In a unanimous judgment, Lord Hodge said that the court should have been aware of the "well known" limits to the "power of an appellate court to reverse the findings of fact of the judge who has heard the evidence".

In the judgment, Lord Hodge said that he may have agreed with the Inner House that a verbal statement by a member of staff at RBS that funding was "all agreed" was not enough to create a legally binding contract between it and the developer, Derek Carlyle. However, an appeal court could only do so if it was "satisfied that the judge could not reasonably have reached the decision under appeal" he said.

"It is the first instance judge who is assigned the task of determining the facts, not the appeal court," he said.

"The re-opening of all questions of fact for redetermination on appeal would expose parties to great cost and divert judicial resources for what would often be negligible benefit in terms of factual accuracy. It is likely that the judge who has heard the evidence over an extended period will have a greater familiarity with the evidence and a deeper insight in reaching conclusions of fact than an appeal court whose perception may be narrowed or even distorted by the focused challenge to particular parts of the evidence," he said.

"In my view [Carlyle's lawyer] was correct in his submission that the [Inner House] has disagreed with the Lord Ordinary on questions of fact without facing up to the restricted role of the appellate function on such questions," he said.

Carlyle had planned to build two houses on a piece of land near Gleneagles that he had purchased in 2007 with a loan funded by RBS. He claimed that the bank had provided a collateral warranty that it would provide development finance in due course, and he had told his relationship manager at the bank 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. Ultimately, the bank did not provide the development finance and the land was repossessed.

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. In his initial judgment in 2010, Lord Glennie the Lord Ordinary had ruled that the bank had effectively created a "collateral warranty obligation" when it made the verbal promise. In his Supreme Court judgment, Lord Hodge said that the use of the term had become "a distraction" in the case and "was not used as a term of art".

"Whether one views the undertaking as a promise to provide the development funds if he purchased the plot ... or ... as an obligation in a bilateral contract which became binding when Mr Carlyle borrowed the purchase funds and purchased the site does not give rise to a different answer to the question: 'did the bank intend to enter into a binding legal commitment?'," he said.

"In this case Mr Carlyle's proposal to enter into a contract to purchase plot 5 and, because of the buy-back clause, his clearly expressed unwillingness to do so unless the bank provided development funding as well as purchase funding formed important elements of the factual context in which the Lord Ordinary assessed the legal nature of the bank's statement on 14 June 2007 … The statement that the bank would provide the development funding induced him both to contract to purchase the plot and enter into the loan agreements which funded that purchase," he said.