Scottish Court of Session Decisions

The first pursuers in this action are a partnership - "the Firm" - and the two partners thereof Mr Crocket and Mr Duffy. The Firm carries on business as a property developer. It has borrowed money from the defenders, the Clydesdale Bank, for the purposes of its business, the borrowings being repayable on demand. The second pursuers are Mr Crocket and his wife. The third pursuers are Mr Duffy and his wife. In security of the debts owed by the Firm to the Bank, the second pursuers granted a Standard Security over the house owned by them in which they live. The third pursuers similarly granted a standard security to the Bank over a flat in Carmunnock Road, Glasgow, but are designed in the Summons as residing at a different address. In addition to the two Standard Securities granted by the second and third pursuers respectively, the Bank holds Standard Securities granted by the Firm over subjects in Manse Road, Glasgow and in Carmunnock Road, Glasgow where the Firm has been carrying out its activity as a property developer. The Bank has served calling-up notices as respects all of those Standard Securities. Three of the calling-up notices which were served, namely those referred to in the second conclusion in the Summons, contained a misdescription of the title and are accepted by the defenders to be inept in that respect. Substitute, correctly drafted, calling-up notices were served on 21 December 1999 and by Minute of Amendment No.9 of process that issue has been taken care of in terms of the written pleadings so that there is no longer any continuing question concerning the formal validity of the calling-up notices.

The first conclusion of the Summons seeks payment by the Bank to the Firm of £x. The second conclusion relates to the misdescription in certain of the calling-up notices to which reference has just been made and is no longer pertinent. Conclusion 3 (as amended) seeks suspension and interim suspension of all the calling-up notices and conclusions 4 and 5, put shortly, seek interdict against the Bank from enforcing any of the remedies available to them as holders of the Standard Securities or doing diligence in respect of the personal bonds contained within those deeds. No challenge is made to the validity of the Standard Securities or to the contracts of loan whereby money was advanced by the Bank to the Firm.

The action was signetted on 21 December 1999 and the pursuers have moved for interim suspension and interim interdict in terms of conclusions 3 - 5. Defences have been lodged by the Bank and the motion for interim orders is opposed.

Before turning to the submissions of counsel in respect of the motion for interim orders, it is convenient to set out some of the salient circumstances which from the submissions, the documents referred to, and the pleadings, appear not to be disputed.

It is apparent that the Bank provided lending facilities, repayable on demand, to the Firm prior to 2 September 1998 but by way of review of the lending facilities a contract of loan - described in the Summons as "contract No.2" was concluded between the Firm and the Bank on that date. That document, of which No.7/3 of process is a copy, provided inter alia as one of the conditions of the loans -

A similar condition had been included in earlier facility letters.

The Bank subsequently decided to appoint a firm of surveyors, Euan Wallace Commercial Limited - "EWC" - to provide such an overview. The terms of the engagement of EWC were set out in a letter of 2 November 1998 addressed to the firm and the acceptance by the Firm of those terms is docquetted at the end of that letter. Among other things it was stated in the letter that although a copy of the report would be made available to the firm "it should clearly be understood that Euan Wallace Commercial owe a duty of care only to the Clydesdale Bank in respect of the advice and content of our report". On 4 November 1998 EWC provided an initial report on the residential properties then being constructed and marketed by the firm. The report offered a number of criticisms of the projects, including criticism of the marketing arrangements. The recommendations made by EWC to the Bank in that report included the following:

That recommendation was accepted by the Bank and fresh terms of appointment were set out in a letter dated 7 December 1998 whereby EWC took on the rôle of development advisers to the Bank, their professional responsibility being expressly restricted to a duty of care to the Bank alone. In addition, an associated company, Euan Wallace Residential Limited - "EWR" - was appointed to act as selling agents for the Firm. The acceptance by the Firm of those arrangements was also docquetted on the letter by docquet dated 17 December 1998. The terms of the Firm's borrowing facilities were reviewed and set out in a facility letter of 21 December 1998, referred to in the Summons as "loan agreement No.3". The terms of loan agreement No.3 included provisions reflecting and confirming the appointments of EWC and EWR to which reference has just been made.

It appears that thereafter EWC and EWR gave advice and recommendations on the conduct of the property development operations, with some of which the Firm disagreed. For example, it appears that there was a difference of view as to the appropriate price at which the houses should be offered for sale and the methods which should be employed in attracting potential purchasers. Put shortly, it is evident that the relationship between the Firm and the Bank and its advisers deteriorated.

By September 1999 the Bank wished repayment of the funds lent by it to the Firm and following negotiations conducted through the parties' respective solicitors a further agreement was reached between the Firm and the Bank. The terms of that agreement are set out in a letter dated 17 September 1999 from the Bank's solicitors, Dorman Jeffrey, to the solicitors acting for the Firm (No.7/13 of process). That agreement recorded inter alia that the Bank had demanded repayment of the outstanding borrowings amounting to £y and that the Firm was unable to comply with that demand at that time. The Firm also acknowledged receipt of the calling-up notices served in respect of the Standard Securities over its properties and waived the statutory period of notice. The Bank, for its part, undertook not to proceed with the calling-up process until Friday 5 November 1999 and agreed, subject to various conditions, to provide a further loan facility until that date.

Friday 5 November 1999 having passed, and the Bank's demand for repayment not having been satisfied, it appears that the Bank now wishes to realise its securities.

The plea-in-law put forward by the pursuers in relation to their claim that the calling-up notices should now be suspended, is in these terms:

The nature of the breach of contract alleged against the Bank to which the plea refers is set out thus in Article 9 of the Condescendence:

In submitting that the pursuers had a prima facie case warranting the grant of interim orders, Sir Crispin Agnew of Lochnaw, who appeared for the pursuers, stated that the defenders were under a duty not to do anything which prejudiced the ability of their debtor to make repayment of the loan. Further, the partners of the Firm were effectively cautioners for the Firm (Mair v Wood 1948 SC 83, 86) and they and their wives were effectively cautioners by virtue of granting a Standard Security. A creditor had a duty to the cautioners not to prejudice the debtors' ability to pay. As was averred, EWC and EWR and Mr Euan Wallace (EW) had prejudiced the project by acting "improperly" in relation to the development. The Bank was liable for the actings of EWC and EWR because the Bank had put them in to act as a manager or supervisor. It was evident from certain of the documentary productions, that the Bank and EWC had a strategy for the pricing of some of the flats. Counsel then referred to Cuckmere Brick Company Limited and Another v Mutual Finance Limited [1971] 1 Ch. 949, which showed that a mortgagee realising his security could be liable for failings of estate agents engaged to sell the mortgaged property if the estate agents failed to get the best price. Referring next to National Bank of Greece SA v Pinios Shipping Co No.1 [1990] 1 A.C. 637, counsel said that what was contained in the judgment of Lloyd L.J. in the Court of Appeal, reported at 647, showed that where a lender was directing or interfering with the management of the security subjects a duty of care arose on the part of the lender. The opinion delivered in Lord Advocate v Maritime Fruit Company 1983 S.L.T. 357, 359 - 360 was consistent with that approach. By developing a marketing strategy the Bank had directed and interfered.

Sir Crispin then stated that there was an inference to be drawn that by its appointment of EWR the Bank was acting in its own interest in the respect that EWR were customers of the Bank with an unsecured overdraft. The fee income obtained by EWR from acting as selling agents would go to the reduction of that overdraft. Therefore, said counsel, there was an onus on the Bank to show that both EWC and EWR had acted "properly". In support of that proposition Sir Crispin referred to Davidson v Scott 1915 S.C. 924 and Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349, 1355. Both cases involved sale by or on behalf of the holder of a heritable (or equivalent) security, as part of the process of the realisation of the security, to an associated person. However, said counsel, the principle was that in circumstances where the creditor acts in any regard respecting the security subjects in a manner which might be construed as being for his own benefit, even if unconnected with the realisation of the security, the onus thereupon shifts to the creditor to show that all that was done by his agents was entirely appropriate.

Counsel for the pursuers then turned to the appointment of EWC in November 1998 to carry out the overview of the project. This appointment was a breach of contract. Counsel referred extensively to the terms of a report by a Mr Mason of Knight Frank (No. 6/18 of process) which was critical of EWC's report of 4 November 1998 as being biased against the projects. Since EWC's report was biased, EWC therefore could not be an impartial surveyor. They were thus not independent. It was arguable therefore that the Bank was in breach of the earlier contracts of 14 April or 2 September 1998. Further, EWC was not an independent surveyor since it was associated with EWR. By not obtaining an impartial view the Bank had thus set off on the course of appointing EWC and EWR whose actings had prejudiced the development. Having by that means prejudiced the debtors' ability to repay the debt, the Bank were accordingly precluded from claiming repayment of any of the sums lent or from enforcing the Standard Security. There was accordingly a relevant prima facie case.

Sir Crispin's submission that the pursuers had a prima facie case warranting the Bank's being prevented from enforcing its Standard Securities was strongly disputed by Lord Mackay of Drumadoon who appeared for the Bank. In presenting his submissions he noted in limine that no attempt had been made to reduce the Standard Securities, the bonds or any of the loan agreements or to contend that there were any other grounds whereupon the loan contract was unenforceable. What appeared to be advanced as grounds for denying the Bank their right to enforce the Standard Securities were (a) allegations of breach of contract on the part of the Bank and (b) an assertion of liability for actings of EWC and EWR simpliciter.

In relation to the breach of contract branch there appeared to be two principal contentions. The first related to the appointment of EWC as being not "independent". The short answer to that submission was that the Firm had agreed to the appointment of EWC. Further, it was a condition of the contract of loan entered into on 21 December 1998 that both EWC and EWR be involved in the rôles described in that contract. Accordingly, the supposed breach of contract point never got off the ground. Further, none of the matters mentioned by counsel for the pursuer showed EWC not to be an independent surveyor in the current context. The fact that the associated company, EWR, had a banking relationship with the defenders did not mean that they were not "independent" and was in any event disclosed in the letter of 7 December 1998 when EWR were first engaged. Further, even if the banking relationship gave rise to an onus point (which was disputed), it could apply only to a particular obligation to act in a particular way. It could not mean that the borrower might simply allege prejudice and say that it was up to the lender to prove that neither he nor anyone engaged by him had acted negligently or, to use Sir Crispin's terminology, "improperly".

Adverting to the contention that there was an implied term that a lender would do nothing to prejudice the ability of a borrower to repay the loan, Lord Mackay of Drumadoon submitted that it did not begin to be vouched by any of the authorities to which counsel for the pursuers had referred. There was no basis for the implication of such a term. The implied term contended for by the pursuers would, for example, prevent a bank from lending to a business in competition with an existing borrower. It would be inconsistent with the Bank's raising its base rate for lending purposes.

Turning to the proposition advanced, in particular in Article 9 of the Condescendence, that the Bank bore responsibility for the actings of EWR, or EWC or even Mr Euan Wallace, counsel pointed out that at no point in the Summons was it averred in any way that there had been any act of negligence or breach of duty on the part of EWC, EWR or Mr Wallace. There was nothing to suggest any liability by EWC or EWR or Mr Wallace directly to the pursuers. If none of them were liable to the pursuers in any way it was impossible to see how the Bank might have any liability for their actions.

Accordingly, it was submitted that there was no prima facie case at all and the motions for interim orders should be refused on that ground.

Although both counsel made submissions respecting the balance of convenience, I find it expedient first to express my decision on the competing arguments on the issue whether the pursuers have advanced any prima facie case justifying the grant of interim orders.

I take first the contention for the pursuers that the defenders were in breach of contract by appointing EWC as their advisers, on the basis that EWC were allegedly not "independent". In my view this point is misconceived. The contractual term founded on is contained in "contract No.2" of 2 September 1998. However, that contract was evidently superseded by loan agreement No.3. In that contract, which thereafter governed the lending relationship, express provision was made for the appointment of both EWC and EWR in the rôles described in that contract. It accordingly appears to me to be impossible to contend that the continued appointment of either company constituted a breach of contract. Moreover, I am very far from persuaded that the appointment of EWC in November 1998 was on any view a breach of contract. The contractual term in question envisages the employment by the Bank of a surveyor to advise it of the soundness of the customer's development activity, the expenses of that advice being an additional charge to the customer. In that context I consider that the word "independent" plainly means no more than a surveyor other than the customer's own professional adviser. None of the grounds put forward by Sir Crispin for saying that EWC was not an "independent" surveyor have, in my view, any substance. However, more fundamentally, even if EWC were not technically "independent" I do not see how that breach of contract as such deprives the Bank of its right to take steps to enforce its security. All that counsel for the pursuers was able to suggest was that the selection of EWC started a process which eventually led to actual actings by either or both of EWR and EWC which allegedly prejudiced the development - by which I understand the financial viability of the development. The alleged breach of contract having thus been tied in to the contention that there was a prejudice to the debtors' ability to pay, it appears to me that what is being said by the pursuers is irrelevant. In my opinion, if there be any causal link at all, then, employing the traditional terminology, it is at best only a remote causa sine qua non and not a causa causans of the prejudice alleged by the pursuers.

It is also contended on the pursuers' behalf that the agreements or contracts of loan contained the implied term that -

According to counsel for the pursuers the implication of that contractual term did not depend on any speciality effeiring to the particular terms of the loan in this particular case. It was, he said, to be implied in every contract for the loan of money. That proposition is not vouched by any of the cases cited by counsel for the pursuers and, in his response to what had been said by counsel for the defenders, Sir Crispin made clear that he was not in fact submitting that the proposition was vouched by those cases. He was not able to give any direct authority for the proposition but suggested that it might be implied as ancillary to a general duty of good faith or might be akin to the principle that a man may not derogate from his grant.

I do not see any basis upon which it may rightly be contended that such a term is implied. It is to be observed that the term proponed by the pursuers is without qualification. It is not suggested, for example, that the prejudice would require to be a prejudice inflicted intentionally or even negligently. The point arose not simply as a matter of written pleading since, as I understood him, counsel for the pursuers adopted the position that it was sufficient to constitute a breach of a contract of loan that actions taken by the lender or anyone acting on his behalf had, in fact, produced the result of reducing or removing the borrower's ability to repay his indebtedness. Counsel for the pursuers disclaimed any case of bad faith and the Summons does not allege any acts of negligence or breach of duty of care on the part of EWC or EWR. As I understood Sir Crispin's submissions, his proposition went further in respect that any breach of the implied term not to prejudice the ability of the debtor to repay his loan had the consequence in law of wholly preventing the lender from recovering his loan. Perhaps consistently therewith Sir Crispin did not suggest that he was claiming any right of retention - though I have to say that there appear to me to be some other sound reasons wherefor that position would not be open to the pursuers. As I have indicated, no authority was provided for the propositions involved in this branch of the pursuers' argument and I myself am unaware of any authorities to that effect. I regard this argument as being unsound.

For completeness I should say that at some points in the submissions for the pursuers, and perhaps more readily from the employment in the summons of the phrase "et separatim" liability for the actions of EWC and EWR", there is a hint of a claim that the defenders are vicariously liable in damages for negligence on the part of EWC or EWR - that is to say, a breach of duty of care owed to the firm. However, no averments are offered of any such breach of duty and ultimately I did not understand Sir Crispin to be suggesting that any such case was being made.

I would further add that, while at the outset of his submission, Sir Crispin referred to the partners of the firm being effectively cautioners for the Firm and while reference is made to that as part of the averments in condescendence 13 concerning the balance of convenience, and in plea-in-law 6 the point was not further advanced in argument. In my view, rightly. The action is not concerned with a contract of caution. Apart from its pecuniary conclusions, the action is solely concerned with the rights of the Bank in its capacity as the holder of Standard Security to enforce its rights under that deed. No question arises in that context as to the discharge of a cautioner by indulgence granted to the principal debtor, indulgence to the principal debtor being the basis of prejudice to the cautioner.

I accordingly consider that the pursuers have failed to put forward any prima facie case for preventing the Bank from exercising its rights under the Standard Security. The fumus boni juris is simply lacking.

In light of that conclusion I deal only briefly with the issues of balance of convenience.

Counsel for the pursuers initially stressed a desire to maintain what he described as the status quo and submitted that since these proceedings had been brought as a commercial action, the continuance of any order for interim suspension of the calling-up notices could readily be reviewed at any convenient date. The implication of this appeared to be that in actions presented procedurally as commercial causes, the substantive merits of the grant or refusal of interim orders might be treated quite differently from what might apply in ordinary actions. I do not agree.

That suggestion apart, Sir Crispin said that if the call-up of the Standard Securities proceeded re-financing of the development proposal might be precluded. The partners of the first named pursuers would be at risk of sequestration, which would inhibit their ability to act as company directors. As individuals they and their wives would lose their current homes. Sir Crispin then stated, perhaps not entirely consistently with his previous submission that enforcement of the Standard Securities would involve the risk of sequestration of the partners, that recent valuations showed the security subjects to be worth more than the outstanding debt to the Bank.

For his part, counsel for the Bank pointed out that interest on the outstanding debt was accruing; there was no obligation on the pursuers to get alternative finance; they had been given the opportunity to do so by virtue of the agreement reached between their respective solicitors on 17 September 1999; the risk of sequestration was evident to any partner of a firm taking on borrowings for a development project and the partners of the first pursuers had been willing to grant securities over their houses for the purposes of the rewards involved in the Firm's project. Counsel for the Bank further observed that the matters now founded on or complained of were all evident prior to the September re-negotiation of the lending facilities and no mention or suggestion was made in that documentation of any claim against the Bank or any ground whereupon it might be suggested that the Bank was not entitled to enforce its securities. If there were some successful claim for damages against the Bank - and nothing had been set forth in the pleadings which suggested the existence of such a claim - it could not seriously be suggested that the Bank could not be able to meet such a claim. Any diligence against the Bank on the dependence of such a claim would inevitably be recalled as oppressive.

In my view, if one looks at matters simply in terms of the balance of convenience, there is not a marked difference to be struck in the ponderation of pure questions of convenience. For the Bank there is the real problem of accruing interest and the possibility, or probability, that (if that position has not already been achieved) the debt owed to the Bank would not be covered by the realisable value of the Standard Securities. In that event, given the growing accumulation of interest, the Bank suffers increasing financial loss. On the other hand, one recognises that the realisation by the Bank of its security may have the effect of displacing one of the partners and his spouse from his matrimonial home (which of course does not apply to the other Standard Securities). That said, while counsel for the pursuers prayed in aid the loss of the matrimonial home, the risk of sequestration, he on the other hand suggested that the security subjects were sufficient to meet the debt due to the Bank.

In these circumstances I consider that, at best for the pursuers, the balance of convenience might be said to be evenly balanced. The ponderation of convenience therefore cannot outweigh the clear weakness of their position on the merits of the action.

I therefore refuse the motion for interim orders sought by counsel for the pursuers.