In Morley (t/a Morley Estates) v Royal Bank of Scotland plc [2021] EWCA Civ 338, the Court of Appeal upheld the decision of Kerr J that, on the facts of the case, the defendant bank had not coerced the claimant into concluding an agreement to restructure a loan, nor had it breached any duties to provide banking services with reasonable skill and care, and to act in good faith. Males LJ, with whom Lewison and Birss LLJ agreed, accepted the Judge’s finding that all of the bank’s actions “were rationally connected to its commercial interests”. Whilst the decision of the Court of Appeal turned principally on the findings of fact made by the Judge at first instance, the case is a useful illustration of the principles to be applied in claims of intimidation, economic duress and breach of duty against a mortgagee.

Mr Morley breached several covenants under a loan and failed to repay the sums advanced when its term expired. In December 2006, Mr Morley, a commercial property developer, borrowed £75 million from the bank, secured on a portfolio of commercial properties in northern England. The loan was made without personal recourse to Mr Morley and the bank’s recourse was therefore limited to the value of its security. Property values declined sharply, leading to several breaches of covenant by Mr Morley in connection with the loan. The loan expired in December 2009 and Mr Morley failed to repay the sums advanced.

The bank sought a consensual restructuring rather than accelerating the loan (before the expiry of its term) or enforcing its security (upon the expiry of its term). The first breaches of covenant occurred in the second half of 2007 and further breaches occurred until the expiry of the term of the loan in December 2009. The bank did not accelerate the loan in response to the covenant breaches, but instead negotiated with Mr Morley to restructure its terms. By January 2009, the value of the secured property was £59.4 million, significantly less than the sums advanced. In December 2009, Mr Morley defaulted on repayment of the loan. The bank did not take steps to enforce its security but continued to negotiate with Mr Morley. In the course of the negotiations, the bank threatened to exercise its right as mortgagee to appoint receivers to sell the secured property portfolio to West Register, a subsidiary of the bank, as part of a “pre-pack” sale unless an agreement was reached voluntarily to transfer the properties to West Register. In August 2010, the parties concluded an agreement (the “August 2010 Agreement”) whereby Mr Morley paid the bank £20.5 million and retained five of the properties, with the remaining properties being transferred voluntarily to West Register without the appointment of receivers.

Mr Morley alleged that, in concluding the August 2010 Agreement, the bank breached duties owed to him and coerced him into entering the agreement by unlawful pressure. Mr Morley made three central allegations against the bank. First, that the bank acted in breach of a duty owed to him pursuant to section 13 of the Supply of Goods and Services Act 1982 to provide banking services with reasonable care and skill. Second, that the bank acted in breach of a duty to act in good faith towards him. Third, that the bank coerced him to conclude the August 2010 Agreement by applying unlawful pressure, specifically the threat to appoint receivers to sell the secured property to West Register unless a voluntary agreement was reached.

The Judge dismissed Mr Morley’s claims, finding that the bank had not coerced Mr Morley and had not committed any breach. Kerr J concluded that the negotiations to restructure the loan were “commercial negotiations carried out at arm’s length and with the benefit of legal advice on both sides”. Whilst it was true that the bank threatened to appoint receivers to sell the property portfolio to West Register, this was not a threat to do an unlawful act. The bank acted in good faith, Mr Morley was not coerced, and, in any event, Mr Morley affirmed the agreement by taking no steps to challenge it for more than five years. Mr Morley appealed the decision.

The Court of Appeal dismissed the appeal against the Judge’s findings in relation to intimidation and economic duress. The Court of Appeal accepted that the Judge was right to decide that Mr Morley was not coerced, by the bank’s threat to appoint receivers, into concluding the August 2010 Agreement. Rather, the agreement was the product of robust negotiations between commercial parties. Actual coercion is a necessary ingredient for both the tort of intimidation and economic duress. Mr Morley did not (in fact) submit to the bank’s demands and the bank did not carry out its threat. The deal which was struck was “materially different from what the bank had demanded” and, indeed, was “the agreement which Mr Morley wanted and had originally proposed”.

The Court of Appeal also dismissed the appeal against the Judge’s findings in relation to alleged breaches of duty. The Court of Appeal found that the bank was not providing lending services at the time of the alleged breaches. Accordingly, the relationship between the parties was governed by the express terms of the mortgage and by the equitable principles applicable to that relationship. It was not appropriate to imply a contractual term into the mortgage (which, in any event, is not a contract for the supply of services). Moreover, any receiver appointed by the bank would have been the agent of the mortgagor (Mr Morley) not the mortgagee (the bank), and would not have been entitled to sell the properties unless they were satisfied that to do so was consistent with their duties to Mr Morley. That fact alone was sufficient to dispose of the appeal on these grounds. However, even if the bank had owed a relevant duty, the Court of Appeal agreed with the Judge’s finding that the bank had not breached it: on the facts, the bank’s only objective had been to “recover as much as possible of the amount which it had loaned to Mr Morley”. Finally, the Court of Appeal did not necessarily accept that the bank was under any duty of good faith in its negotiations with Mr Morley but, even if it had been, concluded that there was also no breach in this respect: all of the bank’s actions were “rationally connected to its commercial interests”.

Luke McCabe, Associate in London (Dispute Resolution)

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