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No implied agreement/duties between bank and commercial borrower

The High Court has resisted a commercial borrower’s attempt to imply an over-arching contractual agreement and equitable duties between it and its lender. Walker Morris’ Banking & Finance Litigation partners Louise Power and Richard Sandford comment on the recent case of Standish v Royal Bank of Scotland [1].

Why is Standish of interest to lenders?

Over recent years, financial institutions and the courts have seen increasingly frequent and inventive attempts on the part of borrowers to mitigate their own financial hardship by pursuing allegations against their lenders (often without merit) of some sort of misconduct or mistreatment. The Standish case was one such attempt and it is likely to be of interest and use for lenders, both in respect of the clear and firm message that it sends in respect of attempts to imply contractual and equitable duties on the part of lenders, and in relation to the tactical lessons that can be learned.

What happened in the case?

The claimants were shareholders in a company which had, in 2009, secured lending over its properties in favour of the bank. When the company breached a financial covenant in one of its loan agreements, the facility was restructured to include new terms, one of which was the transfer of a percentage of the company’s share capital to a subsidiary of the bank.  The company’s financial difficulties continued and it was eventually sold in 2015.  The claimants then brought proceedings against the bank, alleging that it had unlawfully conspired to maximise its own shareholding in the company and to minimise that of the claimants by breaching duties of good faith and/or equitable duties which were imposed by an over-arching implied “Customer Agreement”.  The defendant applied to strike out the claim.

Strike out is not an easy option. It is governed by Civil Procedure Rule 3.4 (2) (a), which provides that the court may strike out a claim or defence if it discloses no reasonable grounds for bringing or defending the claim. That is a high bar and means that, for a strike out application to succeed, the court must be certain that the claim or defence respectively is bound to fail.

In this case, the claim was bound to fail, and it was therefore struck out.

What are the legal and tactical lessons for lenders?

The High Court acknowledged that contracts may arise by implication. However, in reliance on various authorities [2], it noted that contacts and terms will not be implied lightly and indeed there is a ‘necessity test’.

In this case, the alleged implied Customer Agreement failed the necessity test. There was no need for such an agreement to be implied because the parties’ relationship was already governed by express detailed loan agreements.  The High Court therefore held that the implied Customer Agreement was a “completely artificial construct that [was] divorced from the commercial realities of the dealings between the parties”.

The claimants alternatively attempted to rely on the case of Medforth v Blake [3], alleging both that a mortgagee owes equitable duties of good faith whether or not it is in possession; and that their claim in that regard should be allowed to proceed on the basis that this was a “developing area of law”.  The court rejected those submissions entirely.  It held that the Medforth case could be distinguished.  It was a case concerned specifically with the equity of redemption and it was impossible to extrapolate from that a wide-ranging proposition as to implied duties on the part of a lender merely because it happened to have a mortgage over land but had not exercised or even threatened to exercise that security.  Furthermore, it could not be said that this was a developing area of law when the Medforth case was a Court of Appeal decision from nearly twenty years ago that had not incited any principle debate or litigation in the intervening period.

Lenders will be reassured that all of the borrower’s various attempts to impose implied liability on its lender were given short shrift. Lenders should therefore be able to rely on Standish to robustly rebut any similar allegations raised against them in future cases.

Lenders should also note that, despite the high bar, going on the offensive with an application for early strike out can be a very efficient and effective means of defending an unmeritorious claim. Whenever a lender is faced with a claim which is legally a stretch, it should seek urgent advice from a specialist litigator as to the various tactical responses (of which strike out is just one) which might be open to it.


[1] [2018] EWHC 1829 (Ch)
[2] Ibid. paras 30 – 34
[3] [1999] EWCA Civ 1482