A duty to act fairly - does a lender have one?

The claimants were former shareholders of Bowlplex Limited (Bowlplex), a family run operator of bowling alleys. The defendants were the Royal Bank of Scotland (RBS) and its subsidiary, which took control of Bowlplex in the wake of the financial crisis. Bowlplex claimed that RBS had breached an equitable duty to act in good faith by taking a disproportionate shareholding in Bowplex as part of a debt restructuring. The High Court considered whether the lender held an equitable duty of this nature and importantly, whether one could be implied in an agreement between mortgagee and mortgagor.

The facts

In 2007, Bowlplex became financially distressed and in breach of its financial covenants under a facility agreement with NatWest. Bowlplex was promptly referred to RBS’s Global Restructuring Group which took control of the struggling business. As part of the restructuring, RBS took the following actions:

• Transferred an initial 36.3% of share capital to RBS’s subsidiary
• Wrote off £4.45 million of debt
• Shadow director appointed (from RBS) to observe at Bowlplex’s board meetings
• Chairman appointed at the request of the defendants.

By the end of the restructuring, RBS and its subsidiary held 80% of equity in Bowlplex. In December 2015, the shares in Bowlplex were sold for £30 million. Over £22 million of profits were fed to the shareholders.

Bowlplex’s claim was for unlawful means conspiracy: that RBS and its subsidiary had unlawfully conspired to maximise their own shareholding and minimise that of the claimants. The claim fell within three categories:

• RBS acted in breach of a duty of good faith
• RBS acted in breach of certain equitable duties; and
• The shadow director acted in breach of his fiduciary duties, his role far exceeding that of an observer.

In July 2018, the defendants applied to strike out the claim under CPR 3.4(2)(a) on the basis that there were no reasonable grounds for bringing it.

The judgment

The defendant’s application was granted and the claim was thrown out by the High Court on the basis that the claim was bound to fail for the following three reasons:

Overarching customer agreement

The claimants alleged an overarching customer agreement existed between Bowlplex and RBS, implying a fiduciary duty on the lender. The court threw out this argument on the basis of necessity. A duty can only be implied when necessary to give business reality to a transaction. Given that comprehensive and extensive contractual agreements existed between the parties, the court found no reason to conclude an implied contract existed. The overarching agreement was branded a ‘mysterious creature’, springing into existence at an entirely unspecified time. To imply a contract would be detached from the commercial realities of the parties' dealings and as such, there was no implied contractual duty to act in good faith.

Medforth v Blake

The court threw out the claimant’s attempt to rely on the principles of Medforth v Blake [1999] EWCA Civ 1482, concerning the duty of a mortgager to act fairly when selling a mortgaged property. The claimants alleged that such duty existed whether or not the mortgagee was in possession and whether or not exercising powers under its security. Chief Master Marsh noted that the facts of Medforth v Blake were specific. It was impossible to extrapolate this to find an all-encompassing duty of good faith on the lender, particularly in a case where the claimant’s complaint was wholly unrelated to security.

Shadow director

Lastly, the claimants could not establish a correlation between the shadow directorship and the conduct complained of (capable amounting to breach of fiduciary duty). The key decisions of Bowlplex were undertaken with little influence from the shadow director. Problematically, the first phases of the restructuring were initiated entirely under the free will of the Bowlplex directors. As such, no fiduciary duty had been breached.

Takeaway

Lenders will welcome this decision. Extension of a lender’s duty in the manner suggested by the borrower would open the floodgates for challenging additional lender protections (for example, the transfer of equity and enhanced pricing). Have lenders been exonerated from a duty to act fairly? Perhaps. It is clear that any duty of good faith on the part of the lender is confined to the written agreement between parties. If a duty of fairness is not instilled by the small print, the court will not imply a duty to act fairly.

Standish & 8 Others v The Royal Bank of Scotland Plc & Another [2018] EWHC 1829 (Ch)