Little faith to be had in implied terms of good faith

3 October 2018

In a decision which will be welcomed by lenders, the High Court held in Standish & Ors v The Royal Bank of Scotland plc & Sig Number 2 Ltd (formerly West Register Number 2 Ltd) [1] (RBS and West Register) that there was no general equitable duty for mortgagees to act in good faith.

The Claimants (the Standish family) were shareholders in a company named Bowlplex Ltd (Company).  The Company owned and operated bowling sites throughout the U.K. The Defendants provided banking facilities to the Company.

In 2004, the Company executed a debenture over its undertakings and legal charges over its properties in favour of NatWest (for whom RBS was acting as agent). Unfortunately, as a result of a difficult trading environment, the Company was referred to RBS’ Global Restructuring Group and through two “restructures” the Standish family’s shareholding was reduced from 100% to 20%. The Company’s Managing Director, Tracy Standish, was dismissed in 2012 and the Company was subsequently sold by RBS in 2015.

The Claimants claimed that the Defendants were party to an unlawful means conspiracy to, in broad terms, maximise their own equity in the Company and minimise the equity of the Claimants. The alleged unlawful means fell within three categories:

  1. RBS acted in breach of a duty of good faith;
  2. RBS acted in breach of certain equitable duties; and
  3. West Register acted in breach of its fiduciary duties (as an alleged shadow director).

The Company had entered into a number of formal agreements with NatWest and RBS over the period of time bank facilities were provided to it. None contained express duties of good faith or any of the “certain equitable duties” alleged to have existed. Rather than argue that said duties should be implied into the pre-existing formal agreements (an argument which would likely have been unsuccessful), the Claimants asserted that there was an overarching “Customer Agreement” into which said terms should be implied. The Defendants applied to strike out the claim.

In granting the Defendant’s application, the court took the opportunity to restate the law regarding implied contracts[2]:

  1. For a contract to come into existence there must be both: (a) an agreement on essentials with sufficient certainty to be enforceable, and (b) an intention to create legal relations.
  2. The party asserting the existence of such a contract must show the necessity for implying it; necessity in regard to both giving business reality to a transaction and creating enforceable obligations between parties.

In short, the law imposes strict constraints as to the implication of terms as the results can be so intrusive; the default position is that nothing is to be implied into a contract and the more detailed the contract is, the stronger the presumption[3]. Here the court considered that the Claimants’ assertion of a “Customer Agreement” into which good faith and other obligations were to be implied failed the “necessity” test, given that extensive and comprehensive contractual agreements between the parties already existed, and moreover that the “Customer Agreement” was “a completely artificial, transparent device designed to circumvent the difficulty of implying duties of good faith in operative written agreements”.

Although the court was rightly cautious about striking out the claim at what was an early stage of the proceedings, it felt that for inter alia the reasons set out above, the claim was bound to fail. Nevertheless, whilst parties seeking to imply duties, including those of good faith, into business relationships will have a high hurdle to overcome, it remains the case that, subject to the particular circumstances, such duties may arise.


Co-authored by Thomas Wilkinson (Administrator)

[1] [2018] EWHC 1829.

[2] See The Aramis [1989] 1 Lloyd’s Rep 213, subsequently approved in Baird Textile Holdings Ltd v Marks & Spencer plc [2001] C.L.C 999.

[3] Marks & Spencers v BNP Paribas Securities Services Trust Co [2015] 3 WLR 1843.


 

Leigh Callaway Author
Leigh Callaway
Senior Associate
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