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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 146
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A877/06
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OPINION OF LORD WOOLMAN
in the cause
(FIRST)
NIGEL HENDERSON and
(SECOND)
NORMA HENDERSON
Pursuers;
against
ROYAL BANK OF
SCOTLAND PLC
Defenders:
________________
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Pursuers: A.M. Clark,
Q.C.; Semple Fraser
Defenders: R.W.J.
Anderson, Q.C., Kinnear; Brodies
17 October 2008
Background
[1] In
this action, Mr and Mrs Henderson seek damages for alleged negligent
misrepresentation and breach of contract on the part of the defenders
("RBS"). An earlier action arising out
of the same circumstances was dismissed by Lady Smith on 18 October 2006. That action proceeded on the basis of
different pleadings. RBS argued, however, that
the present formulation of the claim was also irrelevant and should likewise be
dismissed.
[2] The
facts relied on by the pursuers are as follows.
In 1997 they approached RBS to seek funds to purchase the Portree
Hotel in Skye. The hotel was to be
bought in name of the firm of Henderson Hotels, in which the pursuers were
partners. Each pursuer obtained a loan
of £400,000 from RBS ("the Loans").
The Loans were to be repaid over a period of 15 years with an
interest rate of 10.22 per cent per annum.
Under the loan agreements, which were signed in July 1997, the
pursuers could make early repayment of the Loans, subject to paying "Breakage
Charges" to RBS. It was expressly stated
that those charges could be "substantial".
[3] The following year, the pursuers sold another property, the Park Hotel in Montrose. The net free proceeds of sale amounted to
about £850,000. At that date, the
outstanding capital balance on the Loans stood at around £760,000. The pursuers were advised by their accountant
to consider paying off the Loans, having regard to the high fixed interest rate.
[4] Mr Henderson arranged to meet Mr Scanlon,
a Business Relationship Manager at RBS, to discuss matters. At the meeting in early November 1998, Mr Henderson
indicated that he and his wife wished to repay the Loans. Mr Scanlon reminded him of the Breakage
Charges and said he would find out the amount required. On 11 November 1998, he telephoned Mr Henderson and told him that
the Breakage Charge for each Loan would be £120,000. Relying on that information and
acting on the advice of their accountant, the pursuers decided that it would be
uneconomic to repay the Loans. Instead
they placed the free proceeds of sale on deposit with the defenders ("the
deposit monies").
[5] During 1999 the turnover of the
Portree Hotel declined. The high cost of
servicing the Loans placed a significant burden on the business. The pursuers applied some of the deposit
monies for that purpose. In late October 1999, Mr Henderson had a meeting with
the defenders' Specialised Lending Services Department to discuss repayment of
the Loans. At the meeting, it was indicated by the
representative of RBS that it was also keen to
reduce
the pursuers' debt.
[6] By letter dated 3 November 1999, RBS informed the pursuers that the Breakage Charge was
only £21,580.32 for each loan, much less than the figure given the
previous year. On 8 November 1999, Mr Henderson instructed RBS to apply the balance of
the Deposit monies to repay his wife's Loan.
At the same time, he asked them to use the remaining amount to reduce
the overdraft on the current account in name of the Portree Hotel. Those instructions were not implemented. Instead RBS stated in its reply of 11 November 1999 that the Breakage Charges had increased by £12,000 for
each Loan. It also insisted that the
monies be used first to extinguish the overdraft on the Portree Hotel current
account.
[7] No further steps were taken to repay the
Loans. It appears that at the meeting in
late October, RBS had agreed to give the pursuers twelve months to seek to
transform the fortunes of the Portree Hotel.
The continuing decline of its business, however, led to the pursuers'
sequestration at the instance of RBS in June 2002.
[8] The
pursuers contend that if Mr Scanlon had provided the correct figure, they
would have repaid the Loans in about November 1998. In that event, they say that a very different
chain of events would have ensued. The
volume of trade at the Portree Hotel would have been sufficient to maintain the
solvency of the business. As a result,
they would have been able to obtain loans from other sources in order to
finance their various commitments, including their business interests, the
family home and their motor vessel. In
consequence, they would not have been sequestrated.
[9] Apart from negligent misrepresentation,
the pursuers also have a parallel case of breach of contract. They contend that it was an implied term of
the Loan Agreements that RBS would provide them with an accurate figure for the
Breakage Costs. With regard to quantification,
the pursuers each claim £323,229.50, being one half of their alleged
combined loss of £646,459. That
total is arrived at from adding two separate figures: (a) what they require to repay to the
trustee on their sequestrated estates (£341,459); and (b) their net worth on the date of
sequestration if they had not been sequestrated (£305,000).
The Issues at Debate
[10] On behalf of RBS, Mr Clark,
Q.C. challenged the claim on three grounds.
First, he submitted that the loss claimed was outside the scope of the
bank's duty of care. Next he argued that
the pursuers had failed to specify their loss.
Thirdly, he said that there was no warrant to imply a term into the Loan
agreements. Mr Anderson, Q.C., on
behalf of the pursuers, maintained that the claim was sufficiently relevant and
specific to justify a proof before answer.
The Scope of the Duty of Care and Causation
Defenders'
Submissions
[11] Mr Clark's
primary submission related to the scope of the duty of care. He submitted that
RBS only owed a duty to provide information to the pursuers. It did not owe any wider duty to advise them
(South
Australia Asset Management Corporation & Others v York Montague Ltd [1997]
AC 191 'SAAMCO'). In consequence, its liability was a
restricted one. It would only be liable
for loss directly arising from the provision of incorrect information. He instanced the
situation where the pursuers had actually paid the sum of £240,000
in 1998. In that case, RBS would be
under a duty to repay the excess sums. He acknowledged, however, that such an action would be likely to be based upon repetition.
[12] Mr Clark focused on the narrow nature of RBS' conduct. It had only been asked to supply information
connected with the early repayment of a loan.
It could not reasonably expect that if the figure was wrong, the
pursuers would be sequestrated. Mr Clark
submitted that it was a necessary prerequisite for liability that RBS knew or
ought to have known that by giving the wrong figure for Breakage Charges to the
pursuers, it would lead to their inevitable insolvency. As they did not offer to prove such a case,
the claim was irrelevant. He challenged
the proposition that it was clearly in the pursuers' interest to repay the
Loans. Put short, he said that was a
matter for them to determine, not RBS.
Pursuers'
Submissions
[13] Mr Anderson accepted that
RBS only owed a duty to provide information.
He said, however, that there was little guidance regarding the
identification of the loss that can be recovered in a particular case. He contended that it was sufficient if the
loss suffered was of a type that was foreseeable, even if the degree of damage
was unforeseeable (Simmons v British Steel plc 2004 SC
(HL) 94; McGregor on Damages 17th ed.
Paragraphs 6-079 and 6-083). Applying
that approach in the present case, RBS did not require to foresee sequestration. It was enough that it could reasonably
foresee that the pursuers would suffer adverse financial consequences, if the
information was wrong through their negligence.
He argued that it was plainly in the pursuers' interest to repay the
Loans, a proposition he described as "axiomatic". That was to be inferred from the high rate of
interest attached to the Loans. If they
endured for the full term, the total cost to the pursuers would be about £1.5
million. That was significantly more
than the rate of return on the deposit monies.
Discussion
[14] When
someone provides incorrect information, the first question is to consider the
loss for which a person is answerable (SAAMCO
at 211A-B, 211H per Lord Hoffman). The general
principle is that liability is limited:
"... a person under a
duty to take reasonable care to provide information on which someone else will
decide upon a course of action is, if negligent, not generally regarded as
responsible for all the consequences of that course of action. He is responsible only for the consequences
of the information being wrong. A duty
of care which imposes upon the informant responsibility for losses which would
have occurred even if the information which he gave had been correct is not, in
my view, fair and reasonable as between the parties. It is therefore inappropriate either as an
implied term of a contract or as a tortuous duty arising from the relationship
between them." (ibid at 214C-E)
[15] In SAAMCO,
property had been negligently overvalued by surveyors. Lenders advanced significant sums on the
security of those valuations. They would
not have provided the loans, had they known the true figure. After the loans were made, the property
market collapsed and the lenders sued the surveyors. The House of Lords held that the surveyors were
not liable for the whole loss. They were
only liable for the amount by which the valuations exceeded the true value of
the property at the time. Accordingly,
the surveyors were not under a duty to protect the lenders from falls in the
property market.
[16] The pursuers' contention in the present case is that RBS should
not only be liable for any immediate loss, but for all losses incurred by them
from 1998 until 2002. If
correct, that would in my view be a startling result. It would impose a greater duty on bankers
providing information, than on surveyors providing valuations. I would be reluctant to arrive at such a
result unless compelled to do so. In this instance, the circumstances do not
drive me to that conclusion.
[17] The starting point is to consider the
position of Mr Scanlon when he was asked for the information in 1998. He knew that the pursuers were interested in
repaying the Loans and were seeking the figure for Breakage Charges. Apart from knowing the details of the loan
agreements, that was largely the extent of his (and therefore RBS') knowledge. In my view, it was not plain to RBS that it
was in the pursuers' best interests to repay the Loans early. There are many reasons why they might
have chosen to continue with the Loans for the full term. They could have invested their free capital
in the stock market, or in another business or project with the hope of a high
rate of return. They could also have
applied some funds to the Portree Hotel to increase its prospects, or elected
to sell it as a going concern.
[18] In my view, RBS did not assume the risk of all the pursuer's
financial losses when it provided the figure for Breakage Charges in 1998. In effect that would be to convert it into
the role of an insurer. There were too
many imponderables in the equation to hold that the sequestration directly
stemmed from the alleged wrongful act. RBS
could not predict the vicissitudes in the hotel trade. The matter is thrown into sharp relief by the
events in autumn 1999. On the
pursuers' approach RBS remains liable, even though they chose not to repay the
Loans when a much lower figure was given.
[19] It is unclear what would have happened if the correct
information had been provided. The
pursuers might have still been sequestrated.
It depended on a number of factors.
Some of those factors were within their control, such as the financial
decisions they took. Other factors were
outside their control, such as the general market and the rate of return on
deposits. In
such circumstances, it would be inappropriate to hold RBS liable for any long
term financial detriment to the pursuers. It is not necessary to determine the precise
cut off point for liability, but it in my view it did not encompass the loss
sought here. The matter can be
approached from a number of angles. Couched
in the language of duty of care, it can be said that the loss was not
reasonably foreseeable. From the
standpoint of causation, there was not "a sufficient causal connection with the
subject matter of the duty" (SAAMCO
p214B). Alternatively, it can be simply
said that the loss was too remote.
[20] With regard to Simmons,
I agree with senior counsel for the defenders that there is a clear distinction
between economic loss and physical loss.
Lord Rodger noted that the prior question of liability had to be
established and added that although a defender is "not liable for a consequence
of a kind which is not reasonably foreseeable, it does not follow that he is
liable for all damage that was reasonably foreseeable" (paragraph 67).
[21] It follows from the above that I hold that the alleged loss
falls outside the duty of care owed by RBS to the pursuers.
B. Loss
Defenders'
Submissions
[22] Mr Clark said that in
this case, the specification of loss was of particular importance as it had an
impact on the scope of the duty of care.
He submitted that the pursuers had failed to explain the legal basis
upon which they are required to pay any sum to their trustee (£341,000). Secondly, he said that there was a complete
lack of specification in respect of the pursuers' alleged worth as at the date
of their sequestration (£305,000). Thirdly,
he said that in any event there was a fundamental contradiction between those
two figures. One was based on the
hypothesis that there had been a sequestration; the other that there had not.
[23] A forensic accountant's report prepared by Gray Corporate dated
23 October 2007 had
been lodged by the pursuers and incorporated into their pleadings. Mr Clark described it as the
centre-piece of the loss averments, but criticised it in a number of respects. He said that it contained a mass of material
which had not been pled on record. It
also made statements which contradicted parts of the pursuers' case. Crucially, it did not provide fair notice as
to how the alleged loss was truly made up.
For example, there was no material from which the pursuers' notional net
worth as at the date of sequestration can be derived. The report gave an 'actual' figure of £176,000
and a 'notional' figure of £305,000 without further explanation. Accordingly, the report did not buttress the
loss averments, nor make them more specific.
[24] Mr Clark said that the pursuers had failed to spell out in
their pleadings what they took from the report.
He referred to Barton v William Low & Company Ltd 1968
SLT (Notes) 27, where a party sought to incorporate a report which
included passages that had nothing to do with the case. Lord Stott held that "an averment which
seeks to incorporate material into a record on such terms is an irrelevant
averment" on the basis that:
"It seems to me
however that counsel for the third parties was well founded in objecting to be
involved in what was described as a 'constructional exercise' in order to
determine what it was that the pursuer sought to prove." (page 28).
[25] Reference was also made to The
Royal Bank of Scotland plc v Holmes 1999
SLT 563, where Lord Macfadyen stated:
"There is in my view
no need for an incorporated document to be agreed before it can be referred to
at debate. Whether such incorporation is
a satisfactory way of giving specification is another matter. That will depend on the nature of the case
and the nature of the incorporated material.
In some cases in which there is need as a matter of proper specification
to give a large amount of detailed technical information the presentation of
that information in the form of a documentary production referred to and
incorporated in the pleadings brevitatis
causa may be more satisfactory than an attempt to give the information in
narrative form in the pleadings. On the other hand the wholesale incorporation
into the pleadings of a lengthy document only parts of which are in any way
relevant to the issues identified in the pleadings is in general unsatisfactory
and may well be held not to give the specification required." (page 570F)
[26] Mr Anderson accepted that certain expressions of opinion
and statements within the report did not
form part of the pursuers' case. But he
contended that there was sufficient specification to give fair notice to the
defenders regarding the loss. He said
that RBS was well able to construe the report, given its ready access to
financial expertise. He relied on
Appendix D of the report as being the easiest to follow in calculating the
loss figure of £305,000. He said
that he had sympathy for the defenders regarding the basis for some of the
figures, but the correct course in the circumstances of this case was to allow
a proof before answer, so that full inquiry could be made.
[27] In my view, the pursuers' pleadings do involve the "constructional
exercise" that should be avoided. Further,
although I acknowledge that some leeway should be given where detailed
financial information is relied upon, there is a need to crystallise the basis
upon which the claim is based. That is
absent here. The report makes difficult
reading and is impenetrable in parts. It
is not possible to understand how the author arrives at the key figures. Senior counsel for the pursuers was unable to
explain how the figures of £341,000 and £305,000 were derived. He also did not address the apparent tension
between the two measures of loss. In
those circumstances, I hold that the loss averments are irrelevant.
C. The Implied Term
[28] The breach of contract case
rests on the following averment:
"It was an implied
term of the said loan agreements between the parties that the defenders,
through their said representative, would provide the pursuers with an accurate
figure for the breakage costs for repaying the said loans when the pursuers
requested that information. In providing
inaccurate breakage costs for repaying the said loans ... the defenders were
accordingly in material breach of contract." (Condescendence 7).
[29] Counsel for both parties agreed that the relevant principles
relating to implied terms were conveniently restated in two recent decisions of
Lord Reed (Moyarget Developments Ltd
v Rove Mathis & Others 2006
CSOH 145; and Credential Bath Street
Ltd v Venture Investment Placement
Ltd 2007 CSOH 208). It was
agreed that a term could only be implied when it was required to give business efficacy
to the contract. Accordingly,
implication had to be by way of necessity, not reasonableness. A term could not be implied where there were
a number of different terms to which the parties might have agreed. It was also acknowledged that it is difficult
to imply a term when parties have entered into a lengthy and carefully drafted
contract, but have omitted to make provision for the matter in issue.
[30] Counsel differed on how those principles should be applied to
the facts of the present case. Mr Clark
stressed that it was a carefully constructed document and argued that implication
was unnecessary, because the agreement worked without the term proposed. By contrast, Mr Anderson submitted that
the implied term was necessary to make the contract work. Without such a term, the pursuers would not
be able to exercise their contractual right to repay the Loans early.
[31] On this branch of the case, I incline toward the position of
the pursuers. Without the relevant
information from RBS, they cannot exercise their right to make early repayment
of the Loans. They cannot calculate the
figure themselves, as it is evident from the terms of the loan agreement that
only RBS is able to do that:
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.
[32] I differ from Mr Anderson, however, in relation to the
actual content of the implied term. In
my view, RBS is not required to warrant the accuracy of the figure for the
Breakage Charges. I do not think that it
would have accepted such a duty if the matter had been raised at the time the
agreement was made. However, in order to
make the contract workable, in my view it is under an obligation to take
reasonable care when providing a figure.
A similar duty was placed on the valuers in SAAMCO. Accordingly, if I
had preferred the pursuers' arguments on the first two matters, I would only
have allowed this branch of the case to proceed on the basis of a revision to
the pleadings.
Conclusion
[33] For the reasons outlined
above, I shall sustain the defenders' first plea-in-law and dismiss the action.
