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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 164
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A709/04
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OPINION OF LADY
SMITH
in the cause
(FIRST) NIGEL
HENDERSON and
(SECOND) NORMA
HENDERSON
Pursuers;
against
THE ROYAL BANK OF
SCOTLAND plc
Defenders:
________________
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Pursuers: Anderson, Q.C., Kinnear; Semple Fraser
Defenders: Clarke, Advocate; Brodies, W.S.
18 October 2006
Introduction
[1] In
this action, the pursuers each sue the defenders for £251,000 as damages for
the negligent misrepresentation of a named employee. Alternatively, the same sums are sought as
damages for the defenders' material breach of contract. The pursuers were hoteliers at the relevant
time. The defenders, a bank, are a
lending institution and the pursuers were customers of the defenders.
[2] According
to their averments, the essence of the pursuers' case is that having each
borrowed the sum of £400,000 from the defenders in 1997, for business purposes,
an enquiry was made of the defenders' Mr Scanlon in October 1998 as to what the
"breakage" costs would be if they repaid the loans at that stage, he advised
that they would be £240,000 and the pursuers decided not to go ahead and repay
since it would be uneconomic to do so at those breakage costs. The breakage costs would in fact have been
much less, about £36,000 in total, a matter on which the parties are
agreed. The defenders deny that Mr
Scanlon made the representation alleged. The pursuers subsequently defaulted in respect
of the payments due in respect of the loans and, on a petition brought by the
defenders, they were sequestrated in 2002. They assert that their net worth at that time
would have been £502,000 if the loans had been repaid in October 1998.
[3] Separately,
the pursuers advance a case that they instructed the defenders' Mr Scoular
to repay the second pursuer's loan account from funds held on deposit by letter
of 8 November 1999, that he failed to carry out that instruction, that the defenders
were in breach of contract by reason of that failure and that had it not been
for that breach, they would not have been sequestrated but would have had a net
worth of £502,000.
The Pursuers' Claim for Damages
[4] It
was this part of the pursuers' pleadings that was the main focus of the
defenders' attack. Each pursuer
concludes for damages of £251,000.
[5] In
connection with the pursuer's case based on negligent misrepresentation, it is
explained in the pleadings that in October 1998, the pursuers had sufficient
funds to repay the loans since they had received the net free proceeds of sale
of a hotel and those funds were on deposit with the defenders. In article 8 of Condescendence, they aver:
"Had Mr Scanlon
informed the pursuers, as was the case, that the total breakage costs of the
loans in October 1998 was £36,000, the pursuers would have repaid the loans
then with the net free proceeds from the sale of The Park Hotel. The volume of the trade at the Portree Hotel
would in those circumstances have suffered to maintain the solvency of the
business operated by the pursuers there and their estates would not have been
sequestrated. The pursuers' net worth at
the date of their said sequestration would have been £502,000....".
[6] The
pursuers thus assert a case based on a scenario in which, had it not been for
the negligent misrepresentation they would have repaid both loans in October
1998 and carried on running the Portree Hotel.
[7] In
connection with the case based on breach of contract the pursuers explain, in
article 5 of Condescendence, that the cost of servicing the loans became
burdensome and that, by November 1999, they had had to use sums from their
deposit to do so. They enquired again as
to breakage costs, received an indication that they would be £21,580.32 per
loan and instructed the defenders' Mr Scoular to use their deposit to repay the
loan in the name of the second pursuer. There then follow averments to the effect that
Mr Scoular did not do so, insisted that the funds on deposit be used firstly to
repay the pursuers' business overdraft, then indicated a preference that they
should do so and that by that time, 7 December 1999, the deposit was insufficient
to clear the overdraft. In article 10,
they aver:
"As a result of
the defenders' said breach of contract in respect of failing to implement the
instructions given by the first- named pursuer to Mr Scoular by the said letter
of 8 November 1999, the
pursuers have suffered loss and damage. Had
the second pursuer's loan been paid off in November 1999, any losses sustained
by the operation of the business at the Portree Hotel would have been able to
be paid off by the value of the hotel itself, the pursuers would not have been
sequestrated, and they would have had a net worth at the date of their said
sequestration of £502,000. A total loss
of £502,000 has thus been suffered by the pursuers as a result of the breach of
contract by the defenders condescended upon."
[8] In
respect of their case based on breach of contract, the pursuers accordingly
assert a case based on a different scenario, namely one in which only one of
the two loans would have been repaid and not in October 1998 but over a year
later. The same figure is arrived at as
being their loss.
[9] No
other or further explanation is given of how the figure of £502,000 is arrived
at notwithstanding the fact that on the first scenario both loans would have
been repaid and ownership of the Portree Hotel would have been retained but on
the second scenario, the picture is a rather different one, of only one of the
two loans being repaid, a year later and with the Portree Hotel being sold at
some point which is not specified.
Procedural History
[10] The action was raised towards the end of 2004 and sisted on the
pursuer's motion on 8 December 2004.
The sist was recalled on 21 January 2005, defences ordered and
defences lodged timeously. The pursuers
lodged the Open Record late, on 16
February 2005. On motions
of the pursuers, consented to by the defenders, the case was continued four
times on the adjustment roll on 14
April 2005, 3 June 2005,
13 July 2005 and 16 September 2005. The Record closed on 26 October 2005. On 27 October
2005, on the pursuers' motion, consented to by the defenders, the
case was restored to the adjustment roll. On the pursuers' motion, consented to by the
defenders, the case was continued on the adjustment roll on 6 December 2005. The Record closed again on 18 January 2006. On 20
January 2006, the case was once again restored to the adjustment
roll, on the pursuers' motion, consented to by the defenders. On the same date, a Minute of Amendment by the
pursuers was received into process. On 1 March 2006, the Record closed once
again. On 9 March, the pleadings were
amended in terms of the pursuers' Minute of Amendment. On 13 April
2006, the pursuers' lodged the Closed Record late and the cause was
appointed to the procedure roll on the defenders' first plea in law. The defenders were ordered to lodge a note of
argument and they did so, on 10 May
2006, on or about which date it was also intimated to the pursuers.
[11] Thus, by 10 May 2006, the pursuers had had the benefit of a
wealth of continuations on and restorations to the adjustment roll and knew the
nature of the argument that the defenders' proposed to advance at debate. They had, in short, had a long time in which to
get their pleadings in order, if it was possible to do so.
[12] The next step was that the pursuers enrolled to allow a fresh
Minute of Amendment to be received and the diet of debate discharged. That motion came before Lord Menzies on 26 September 2006, the day before the
diet was due to take place. He refused
it.
Motion to Discharge Diet of Debate
[13] At the start of the hearing before me, senior counsel for the
pursuers moved a motion that the diet should be discharged. He did not move that any Minute of Amendment
be received.
[14] The justification advanced in support of the motion was as
follows. Mr Anderson frankly
conceded that the criticisms of the pursuers' pleading to the effect that their
whole averments of loss were irrelevant and lacking in specification were well
founded. He explained that there had
been difficulties in obtaining a report from the forensic accountant instructed
on behalf of the pursuers. In October
2005, a 24 page report which Mr Anderson described as "largely unintelligible"
was provided. There had been a
consultation in November 2005 and pressure had been put on them to produce
another report but they had failed to do so. An effort was made to chase them up in July
2006. After the motion for discharge of
the diet had been refused by Lord Menzies a consultation had taken place in the
afternoon of the previous day. A further
draft report had been considered at that consultation. The figures had been recalculated and could be
explained. It was not yet in final form.
He indicated that the pursuers should be
in a position to produce a Minute of Amendment within a short time. They sought time to do so. No clearer indication of when the report would
be finalised and when the Minute of Amendment could be forthcoming was given. He also suggested that the defenders had been
sympathetic to the pursuers' position in their agreement to continuations on
and restorations to the adjustment roll in the past. This was in the same vein.
[15] The motion was opposed by Mr Clark on behalf of the defenders. Firstly, the defenders sought, at debate, to
attack other aspects of the pursuers' pleadings which were quite fundamental in
addition to their averments of loss. It
was not that the defenders had been sympathetic to the pursuers' position in
the past. They had repeatedly been assured
that they were going to "put their house in order" but that had not happened. They had had ample time to take account of the
arguments that the defenders were proposing to advance at debate, having had
the note of argument since early May. Their motion for discharge the previous day
had been refused. Their options were to
reclaim that interlocutor or to face up to the action being dismissed, in which
event, if there was a relevant case which they could make, they could raise a
fresh action.
[16] Having retired to consider the motion, I refused it. I was satisfied that I could not competently
reverse the view taken by Lord Menzies the previous day as to the
appropriateness of discharging the diet of debate. The question for me was whether circumstances
had changed since then and if so, did any such change mean that it was now
appropriate to grant the discharge.
[17] I noted that no new Minute of Amendment was presented, not even
in any attempt to meet the points raised in the defenders' note of argument
which did not relate to the averments of loss. Mr Anderson had indicated that he took the
view that there was no point in doing so until he could also address the
problems with the averments of loss but it seemed to me that that involved a
leisurely approach to the litigation in circumstances where the pursuers
required to recognise that they had already been extensively indulged so far as
being given time to get their pleading in order was concerned.
[18] I noted that there had, since the previous day's motion, been a
consultation with the forensic accountant instructed for the pursuers but that
was against a background of almost a year having passed since receipt of their
unsatisfactory report and nothing had been done about chasing up the
accountants until July 2006. That was
despite the case having been sent to the procedure roll and the defenders' note
of argument having been intimated on 10
May 2006. No explanation was given of why it was that it was only
after the failure of the previous day's motion that a further consultation with
the accountants had taken place. That,
in particular, seemed inexplicable. The
pursuers and their advisers knew from their own assessment of the advice that
they had received from their forensic accountants and from the terms of the
defenders' note of argument, that their pleadings would not do and that,
furthermore, that if they remained in their present form dismissal was, if not
inevitable, a high risk. They had had
months to address the problem and reach a clear view as to where exactly they
were going with the litigation, if anywhere at all. Further,
although it was indicated that the figures had been reworked, no details were
provided and the only indication of the time that the pursuers required to
finalise their pleadings was that it could be done "shortly". In the whole circumstances, that was not an
indication that could be viewed with any degree of confidence. It was all highly unsatisfactory.
[20] I reached the view that it would have been wrong to exercise
the discretion available to me so as to accede to the pursuers' motion. The stage had clearly been reached where the
defenders were entitled to take the view that "enough is enough" and that was a
view that the court were, in my view, bound to share.
[21] The debate accordingly proceeded.
Submissions for the Defenders
Averments of Loss:
[22] A copy of the loan agreement that was said in Article 2 of
Condescendence to have been lodged and whose terms were adopted brevitatis causa had not in fact been
lodged but I was provided with a copy by the defenders. Clause 6.2 provided:
"6.2 The Borrower may prepay
the Loan or part thereof (this part to be £50,000 (FIFTY THOUSAND POUNDS
STERLING) (a) at any time (if the prepayment is made during a period in which
the Borrower has elected to pay interest at the Base Related Rate) or (b) on
the last day of the Initial Period or any subsequent fixed rate period (if the
prepayment is made while interest is being charged at a fixed rate), subject to
the Borrower making an additional payment to the Bank equivalent to three
months' interest on the sum prepaid at the rate then current for the Loan and
subject also to notice from the Borrower being received by the Bank at the
Branch Office no later than 11 a.m. 5 Business Days before such prepayment."
[23] Clause
6.3 is also relevant. It provided:
"In the event of
any repayment or prepayment of the Loan or part thereof being made other than
as stated in Clauses 6.1 or 6.2 (including any repayment or prepayment
following the occurrence of an Event of Default) the Borrower shall, in
addition to making an additional payment as detailed in Clause 6.2, pay to the
Bank within 3 days of demand the amount certified by the Bank as sufficient to
compensate the Bank for any loss in terms of Clause 4 which the Bank shall
sustain or incur as a consequence of the repayment or prepayment."
[24] The terms of clause 4 are also relevant:
"4 BREAKAGE
CHARGES
4.1 In terms of
Clauses 2.3 and 6.3, any loss will reflect the cost to the Bank of
unwinding funding transactions undertaken in connection with the Loan. Costs will be incurred when there has been a reduction
in the market level of the appropriate interest rate underlying the Loan. The cost will be equivalent to the loss of
interest income (including loss of margin) to the Bank as a result of
re-deploying funds at a lower interest rate than that which prevailed when the
Loan was booked.
The loss referred to above may be substantial in relation to the Loan."
[25] Mr Clark drew attention to the fact that there was no contractual
provision whereby the defenders were required to provide, on enquiry, a figure
for breakage charges in advance. It was
also evident that those charges would only arise if the pursuers decided to
repay the loan other than at its normal termination or in the circumstances set
out in clause 6.2. In that event, the
pursuers would also have become bound to pay an additional three months
interest charges in accordance with the provisions of clauses 6.2 and 6.3. At the relevant time, that would have amounted
to almost £13,000 per loan, a matter which was not accounted for in the pursuers'
pleadings.
[26] Further, the sum due under clause 4 could, potentially, be a
substantial amount and would be the result of relatively complex calculation.
[27] He then reviewed the pursuers' pleadings and noted that there
were two central (disputed) questions of fact, namely whether or not Mr Scanlon
said that the breakage charges would be £240,000 and whether or not Mr Scoular
failed to carry out the first pursuer's instructions to repay one of the loans
from the deposit. Against that
background, the pursuers made averments of both negligent misrepresentation and
failure to take reasonable care regarding Mr Scanlon's alleged failings. However, whichever legal basis they intended
to found on, it was evident that they sought damages for erroneous information
having been given to them. The
principles enunciated in the case of South
Australia Asset Management Corporation v
York Montague [1997] AC 191 applied. In particular, he referred to passages from the
speech of Lord Hoffman at pages 212-214, including the following:
"Rules which
make the wrongdoer liable for all the consequences of his wrongful conduct are
exceptional and need to be justified by some special policy. Normally the law limits liability to those
consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for
providing inaccurate information, this would mean liability for the
consequences of the information being inaccurate." (p.213C-D)
[28] That meant that the defenders could only be held liable for the
foreseeable consequences of the information given about the breakage costs
being wrong. The pleadings did not
address that issue.
[29] Further, the pursuers advanced a case on two separate grounds; one was that the wrong figure for breakage
charges was given and the other was the defenders did not carry out
instructions. In respect of both, the
figure advanced for loss was wholly lacking in specification. There were no averments to support a case that
the loss claimed was a foreseeable consequence of the wrong information about
breakage costs being given. The pursuers
required to explain why it should have been foreseeable that the giving of the
wrong information would result in insolvency and sequestration of the pursuers,
particularly where, on their own averments there had also been a decline in
trade. Further, the coincidence of the
figures as between the two different scenarios advanced called for an
explanation that was absent.
Averments regarding breach of duty:
[30] Mr Clark submitted that the pursuer's averments as to Mr
Scoular's delictual duty were irrelevant in respect that it was averred that it
was his duty to "ensure that the information given was true and accurate". At its highest, Mr Scoular had a duty to take reasonable
care but the averment went beyond that to the imposition of a duty of insurance
which the law of negligence did not require.
[31] Moving on, Mr Clark turned to a section of the averments in
article 7 of Condescendence in which it was averred that:
"Had Mr Scanlon
exercised reasonable care in inquiring of the defenders' Treasury department as
to the breakage cost at that time and in reporting that cost to the pursuers,
he could not have informed the first- named pursuer, as he did, that that cost
was around £240,000."
Apart from the fact that that was a
different duty from the one averred earlier, it was quite unclear what it was
that Mr Scanlon failed to do. Was it
being said that he failed to make the enquiry at all, that he failed to note or
understand what the correct figure was or that he failed in some other way to
communicate the correct figure? The pursuers'
averments were inferential but there was no basis for them. There was, for instance, no averment that the
Treasury department did, as a matter of fact, compute the breakage costs at
£36,000 at that time.
[32] Separately, Mr Clark drew attention to the fact that the
pursuers had an esto case that the
defenders were in breach of an implied term of the contract that they would
provide the pursuers with an accurate breakage cost for repaying the loans when
they requested such information. There
was though no basis for such a term. It
was not necessary and if it existed, it would have imposed very onerous
obligations on the defenders in a market where those charges could change
quickly and quite dramatically. In
support of his submissions regarding the irrelevance of the implied term case,
he referred to Moyarget Developments Ltd v Mathis & Ors 2006 GWD 651 where
Lord Reed accepted that pursuers had not averred a relevant case for the
implication of a term where they provided:
"..no basis for
the leading of evidence from which the court could conclude that the term
contended for (and no other term) went without saying as part of the agreement
made ....; that it was an implication
arising inevitably to give effect to the intention of the parties; that it was a term which, though tacit, formed
part of the contract which parties had made for themselves." (paragraph 40)
[33] Turning to the case based on Mr Scoular's failure to follow
instructions, the averments were irrelevant. At the time the alleged instruction was given,
the pursuers' business overdraft was substantial; it was averred by the pursuers to have been
£213,000 at the relevant time. No
contractual term in the parties' banking contract containing an obligation on
the part of the defenders to repay one of the term loans out of the deposit
before the overdraft was identified by the pursuers.
[34] In summary, Mr Clark submitted that it was evident that there
were fundamental problems with the pursuers' case not only in respect of
causation and specification of loss but also in respect of their averments of
the contractual and delictual duties on which their case was founded.
Submissions for the Pursuers
[35] After the close of the defenders' submissions, Mr Anderson
sought leave to amend. The pursuers
could aver a relevant case of loss and the link between the negligent
misrepresentation and loss could be made. The pursuers should be entitled to do so. He was not, he said, in a position to take
issue with the defenders' arguments anent causation and specification of loss. He also accepted that the daily figure for
breakage costs would fluctuate but the pursuers' submission remained that there
was a duty not to give a figure that was eight times too high and whilst he
could not defend the case on loss as presently pled, he sought leave to amend
to do so. He offered no submissions in
respect of the other matters raised as there was, he said, no point seeking to
defend them in the light of the fact that he accepted the criticisms of his
averments of loss.
[36] In response to the motion for leave to amend, Mr Clark
submitted that nothing had changed. The
test to be applied was whether the averments were relevant and sufficiently
specific, not whether they were capable of being altered. The pursuers had not pled a relevant case in
the eighteen months or more that had passed thus far and he did not accept that
they would be able to do so.
[37] I refused the motion for leave to amend. It appeared to be no more than a "last ditch"
attempt to secure the same effect as would have been have secured by discharge
of the diet of debate in circumstances where no indication was being given of
what the pursuer would or could say that would cure the defects in their
pleadings.
Discussion
[38] I was readily satisfied that, for all the reasons advanced on
behalf of the defenders the pursuers' case was irrelevant. The submissions made in respect of the
averments of causation and loss identified a matter which was of such substance
as to make the whole case irrelevant.
However, the submissions regarding the cases of negligence and breach of
contract were, I also accept, well founded and of similar substance. The pursuers did not seek to challenge the
defenders' submissions. In all the
circumstances, the case falls to be dismissed and I will pronounce an
interlocutor to that effect.
