By Cat MacLean
Last week we reported on a Hearing in Edinburgh Sheriff Court which focuses on the law of Personal Guarantees. In Royal Bank v Wilcox, which was heard yesterday, the court heard argument on the issues of whether:
- a bank owes a duty to take reasonable care for its customers;
- a bank can ever owe a duty of good faith to its customers; and
- a court should be permitted to look at the whole equities of the circumstances of a dispute between bank and guarantor in deciding whether or not to enforce a Personal Guarantee.
In the first of two blogs, I'll take a look initially at the arguments put forward by the Bank. Our next blog will outline the arguments advanced by MBM on behalf of Mr Wilcox, the guarantor. Further argument in the case is anticipated in November before the Sheriff is in a position to make his decision.
In 2008 Mr Wilcox signed a Personal Guarantee in favour of RBS, guaranteeing the debts of his company. He claims that as a result of a series of failings on the part of RBS, outlined in our earlier blog, the company went into default, was placed into administration, its assets were sold to West Register Group, and the Guarantee was called upon, as the company could not meet its liabilities to the bank.
Defending the Guarantee
In defending RBS’ claim under the Guarantee we are arguing that RBS owed Mr Wilcox’s company a duty to take reasonable care, and that in the particular circumstances of this case, they also owed the company a duty to act in good faith. We say both duties were breached, and that as guarantor of the company, Mr Wilcox is entitled to run any argument or defence which would have been available to the company if it had not failed. We are also contending that the Sheriff should be entitled to look at the whole circumstances of the case, to reach a view on whether it seems equitable that the Guarantee should not be enforced.
The Bank’s response to the defence
Yesterday before Sheriff Ross, however, the bank’s Counsel argued that a bank has no "fiduciary responsibilities" towards its customer and acts in "a purely contractual relationship", putting forward the following justification:
- No duty to take reasonable care for a customer
Because the company and the bank had elected to regulate their relationship by means of detailed facility agreements and contractual documentation, there was “neither need nor justification” to imply into the relationship a duty to take reasonable care for the company or Mr Wilcox. This assertion was met with some surprise by the Sheriff who commented that it was surely hard to support the proposition that a bank were not obliged to act with ordinary skill and care.
- No duty of good faith as no advice given by the bank
The bank argued that a duty of good faith could only arise if the relationship between the bank and the company could be described as a fiduciary one – a relationship where the bank had assumed responsibility for the company, and had adopted an advisory role. This situation was described on behalf of the bank as rare and an “extreme example”.
- No right for a guarantor to “step into the shoes” of the company
The bank maintained that Mr Wilcox as guarantor should not be entitled to “step into the shoes” of the company and use the arguments which would be available to the company if it were being sued for the indebtedness. Logically, this suggests that the way the bank see it is this: the bank can behave appallingly badly to a company, to the point of the company failing, but the guarantor should not be entitled to ask a court to consider the wrongdoing of the bank – so far as the bank is concerned, he must simply pay up no matter what.
- No equitable jurisdiction
The bank argued that there is no support for an equitable jurisdiction in the Scottish courts.
- Bank’s failings weren’t material
The failings on RBS’s part may not have been material breaches, said the bank.
No duty of reasonable care?
Many of these assertions were to say the least surprising. In particular as Sheriff Ross himself suggested, it seems very difficult to support to idea that a bank owes no duty to take reasonable care in respect of a customer. This would have the result that a customer could have no legal comeback for a mistake made by the bank in transferring funds from one account to another, honouring a direct debit or standing order, lodging funds in interest bearing accounts, applying interest and so on. This seems an astonishing position for a bank to be in.
Relationship managers providing no advice?
Many bank customers from the boom times will remember very clearly the proactive – some might say pushy – attitude adopted by their relationship managers where there is no doubt that advice was given freely in an attempt to boost revenue via commission. It is entirely artificial to argue now that there was no assumption or responsibility and no advice being provided. In Mr Wilcox’s own case, he had approached the bank merely for bridging finance whilst he progressed a sale of a site to a developer. He had no intention or desire to develop the site. Nevertheless his relationship manager persuaded him to apply for a larger development loan, which he did not want and had not asked for, on the basis it would be more advantageous for him. If that was not assuming responsibility and providing advice, it is hard to know what else could qualify.
No protection for guarantors?
The idea that a guarantor could not avail himself of the arguments or defences that would have been available to the company he had guaranteed also seems very suprising. By this logic, a creditor to whom a guarantee had been given could, if it chose, deliberately place a company in default and cause it to fail knowing that it had a guarantor “on the hook”.
The difference between the company and the guarantor, however, on this scenario would be that the company could, pre-liquidation, have defended any claim by the bank for repayment by pointing to the bank’s obvious wrong-doing. Once the company had gone into liquidation it would no longer be in a position to attack any of the bank’s wrong-doing. The bank meantime, could happily call up the Guarantee safe in the knowledge that although there were obvious arguments that the company could have made about the bank’s wrong-doing, the Guarantor would not be entitled to use any of those arguments and effectively would simply have to pay up on demand. Again, this seems entirely illogical and wholly absurd.
In our next article we will outline the arguments we put forward on behalf of Mr Wilcox. Meantime, if any of these issues seem familiar, and you have an issue with your bank in relation to a guarantee, please do not hesitate to contact us.
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