No implied over-arching relationship agreement between bank and commercial customer

Over the last few years, there has been much media and parliamentary scrutiny of the alleged mistreatment by lenders of SME customers who found themselves in a financially distressed position. Much of the focus of this scrutiny fell on RBS, who were the subject of a Section 166 Review carried out by the Financial Conduct Authority, but all lenders with business restructuring units (BRUs) have faced some level of attention.

Hot on the heels of NatWest's recent successful defence of a claim by one such aggrieved customer (Broomhead v Natwest, a case which very much turned on its own facts) Chief Master Marsh has struck out a claim for unlawful means conspiracy brought by the former shareholders of a customer against RBS (as agent for NatWest) and West Register (a subsidiary of RBS) (Tracy Standish & Others v The Royal Bank of Scotland Plc and Another [2018] EWHC 1829 Ch). 


The Claimants were all shareholders in Bowlplex Ltd (the Company), a bowling alley operator. The Company was a family run business with Mr Tracy Standish, the Managing Director, holding 55% of the share capital and the balance held by other family members. The Company's relationship with NatWest commenced in 2004.

The Company struggled financially since 2007, allegedly as a result of the smoking ban and the economic crisis. Following a breach of a financial covenant in April 2010, the Company was referred to RBS's Global Restructuring Group (GRG). Two restructures of the loan facilities subsequently took place, the first in 2011 whereby new terms were agreed (including the appointment of a bank appointed observer at board meetings, who was alleged to be a de facto shadow director) in return for 36.2% of the share capital being transferred to West Register. A second restructure took place in early 2012 alongside a CVA whereby NatWest wrote off £4.45m of Company debt and a further transfer of shares to West Register took place. The Company was eventually sold in 2015.

It was alleged that RBS and a new chairman appointed to the board at their behest, unlawfully conspired to maximise the bank's shareholding whilst minimising that of the Claimants. It was alleged that the unlawful means were a breach of RBS's duty of good faith, a breach of its equitable duties and/or a breach of fiduciary duties of a shadow director.

Inadequate pleadings

The Court struck out the claim as pleaded.

It is apparent from the judgment that the Court was critical of the particulars of claim (despite the claimants having amended the pleading to cure numerous defects) and serves as a reminder to parties that a failure to properly plead their case may prove fatal at an early stage, notwithstanding the high standard required for strike out.

"Customer Agreement"?

Central to the claim was an alleged overarching Customer Agreement, which was said to exist by implication and to which all facility agreements were sub-agreements. A duty of good faith was said to be implied into that Customer Agreement (no doubt in an attempt to get round the clear problems of implying such a duty into the detailed facility agreements themselves). 

Whilst it is well established that contracts may arise by implication, this should only occur where "it is necessary to do so….in order to give business reality to a transaction" (The Elli 2 [1985] 1 Lloyd's Rep 107). If the parties would have acted in the same way regardless of the contract to be implied, that is indicative of such contract not in fact existing (Baird Textile Holdings Ltd v Marks & Spencer [2001] CLC 999).

Referring to the Customer Agreement as a "mysterious creature", the court was particularly critical of the defective pleading which made no attempt to explain when or how such a Customer Agreement could come to exist, nor was any evidence adduced before the Court to substantiate the allegation being made. 

The Court found that there was no reason to conclude that an overarching implied contract existed. The necessity test was not met given that the parties were already dealing with one another on the basis of detailed facility agreements. There was no further need to imply another over-arching agreement to further govern the relationship between the parties. Any allegations of a breach of a contractual duty of good faith did not therefore arise.

Developing area of jurisprudence

Both parties accepted that it would not be appropriate to strike out the claim if it involved an area of developing jurisprudence (which required a decision on facts at trial).

The Claimants sought to argue, based on a 2000 judgment, that equitable duties to act in good faith and not unconscionably arose because NatWest, as a mortgagee, owed such duties whether or not they were in possession of security (it being settled that a mortgagee in possession owes such duties).

The Court concluded that, not only was such argument bound to fail as it lacked a proper legal foundation (not least that the claim as pleaded did not relate to security rights), it could not be said that there was a developing area of law where reliance was placed on a decision from 18 years ago where there had been no clear developments in the interim period.

"Unfairness" and legal rights

Finally, the judgment recognised that public criticisms of GRG (although the sentiment expressed is equally applicable to any target of public criticism and not just BRUs) do not of themselves provide grounds on which to found a claim. As Chief Master Marsh said

"The issue the court has to deal with … is not, however, whether the defendants and the GRG behaved in commercial terms which were unsatisfactory, but whether, as a matter of law, the claim shows reasonable grounds. [Alleged] Unethical business behaviour may, or may not, found a legal claim depending on what it entails. … despite the criticisms that have been directed towards the GRG by [the Section 166 skilled person], and others, the claimants have neither identified a basis for their claim under the current law, or a relevant area of development jurisprudence."

On a similar note, which should give prospective claimants against BRUs pause for thought, the day after the judgment was delivered the FCA published an update on its further investigation into GRG. In concluding that no further action would be taken against senior managers in GRG, the FCA commented that:  

The steps RBS could take under the law, while seeming unfair to many customers, were governed by the terms of the contract and not regulatory rules. … GRG’s business and RBS’s rights, obligations and responsibilities in relation to its customers were governed by the terms and conditions of commercial lending contracts. These agreements give the lender certain legal rights when the customer is in default (as many SME customers already were when they were referred to GRG), which could lead to the sale of a customer’s business and assets, including sometimes their personal assets. In these serious cases, a lender enforcing their rights causes outcomes that seem clearly unfair to customers, although the lender is acting within the terms and conditions of the contracts that govern the relationship.

Date published

01 August 2018



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