By Cat MacLean
Last week we reported on the arguments being run by RBS in an Edinburgh Sheriff Court case which took place on 12th September focusing on the law of Personal Guarantees. In the second of this series of articles, Cat MacLean looks at the arguments put forward on behalf of Mr Wilcox, and sets out the basis on which we say the personal guarantees given by him to the bank should not be enforced.
Mr Wilcox’s Guarantee
Mr Wilcox granted a Personal Guarantee to RBS in 2008 which guaranteed his company’s lending from the bank. He says that a series of failings by RBS meant that his company failed and went into administration with the Guarantee being called up in 2011.
The Defence to the Guarantee
Mr Wilcox’s defence to the bank’s claim focuses on the actings of the bank towards the company prior to placing the company in administration. He says that the bank behaved sufficiently badly that their behaviour constituted bad faith on the part of the bank. He also maintains that the bank failed in its duty to take reasonable care for its customer (the company). Finally he is arguing that in considering whether or not a Guarantee should be enforced, the court should look at the whole circumstances of the case and decide whether or not it is equitable for the Guarantee to be called upon.
Does the Bank owe a duty to take reasonable care for its customers?
Mr Wilcox’s Counsel, Usman Tariq, maintained that as a matter of general principle there is an implied term within all contracts between bank and customer that the bank have a duty to act with reasonable skill and care, and previous case law clearly establishes this. He went on to describe the bank’s position in denying any duty towards a customer as “quite extraordinary and plainly wrong”.
Does the Bank owe its customers a duty to act fairly and in good faith?
Mr Tariq argued that in certain circumstances there can be an implied duty to act fairly and in good faith towards a customer. This can arise in 2 main ways:
1. Where a bank “crosses the line” into a fiduciary relationship with its customer
This is most likely to arise where the bank assumes some responsibility for the customer, assisting it to make decisions about banking and lending, and perhaps providing advice or recommendations as to the appropriate financial product for the customer. This is obviously heavily fact dependent and will depend in each case on the particular facts of the relationship between bank and customer.
It was, said Mr Tariw, clearly not the case in Scotland that an obligation of good faith arises in all contracts. But where a creditor misleads a guarantor, and so acts in bad faith, he may lose the right to enforce the guarantee, and Scots case law confirms that a court may in certain circumstances decline to enforce a guarantee where there has been bad faith on the part of the creditor.
2. Where the connection between the parties is a “long term relational contract”
Recent English caselaw (the case of Yam Seng) demonstrates that there can be an obligation of good faith owed even if there isn’t a fiduciary relationship between the parties. A duty to act in good faith can arise where the parties are in a long term “relational” contract – ie they have been in a contractual relationship for some years with continuing and mutual contractual obligations back and forth between them – as opposed to a one-off transactional contract.
Mr Tariq discussed the “traditional hostility to the doctrine of good faith” that there has been in England, but described the English courts as “swimming against the tide” in this area, contrasting them with the jurisdictions of the US, Canada, Australia, New Zealand and Scotland who all now recognise the doctrine of good faith.
Given that the English court in Yam Seng does now finally seem to be recognising good faith, and given that the Scots courts were always more prepared to recognise the concept of good faith anyway, this suggests that Yam Seng should be followed in the Scottish courts, and good faith should be held to arise where the parties are in a “relational” contract.
Can a guarantor step into the shoes of the principal debtor (ie the company)?
As we reported last week, the bank argued that a guarantor should not be able to “step into the shoes” of the company he or she was guaranteeing. The logical consequence of the bank’s argument is that a bank could behave appallingly to a company safe in the knowledge that so long as the company is put under and cannot sue in its own right for the bank’s wrongdoing, then any guarantor of the company would be unable to use the arguments the company could have used. Effectively a guarantor would have both hands tied behind his back and would be powerless to challenge the bank’s wrongdoing.
On behalf of Mr Wilcox it was argued that Scots law is clear that a guarantor can always avail himself of the arguments which would have been available to the principal obligant ie the company.
Is there an equitable jurisdiction which allows a court to look at the overall equity and fairness in deciding whether or not the guarantee can be enforced?
This question will form one of the lynchpins of the arguments advanced for Mr Wilcox. Unfortunately, due to lack of court time this argument could not be advanced during alst week’s hearing and will be heard when the case reconvenes on 13th November to hear further argument.
If any of these issues sound familiar, and you are being pursued by your bank in relation to a guarantee you have given, please do not hesitate to contact us.