Property owner’s damages action against RBS dismissed after Court of Session rules claim had prescribed
A property owner who sued the Royal Bank of Scotland for breach of contract over the mortgage lender’s early termination and demand for repayment of three loans has had his £160,000 damages action against bank dismissed following an appeal.
The Inner House of the Court of Session upheld a decision of the sheriff to the effect that the pursuer had pled a relevant case of breach of contract, but that any obligation to make reparation had prescribed in terms of section 6 of the Prescription and Limitation (Scotland) Act 1973.
The Lord President, Lord Carloway, sitting with Lord Brodie and Lord Drummond Young, heard that the pursuer David Kennedy, a car salesman who also owned nine “buy-to-let” properties which were subject to standard securities in favour of the defenders RBS, had obtained three term loans from the bank to support his enterprises.
But by letter dated 8 February 2010 the defenders purported to terminate the loans before the expiry of the terms, citing an “irretrievable breakdown” in the bank-customer relationship, and giving the pursuer two days in which to repay £532,077.88.
If the loans were not repaid, the defenders stated that they would follow their specified debt recovery procedure.
By letter of 12 February 2010, following representations by the pursuer’s solicitor, the defenders extended the period for full repayment to 60 days from 12 February.
The pursuer’s evidence was that he had been the subject of a proceeds of crime investigation, having sold cars to persons believed to be involved in organised crime, but no proceedings had been taken against him.
On 4 March 2010, the pursuer wrote to the defenders referring to the unfavourable environment in which to secure alternative finance and the costs associated with legal/valuation work, along with arrangement and security fees.
He contacted friends and associates whom he thought might be interested in purchasing the properties at full value so he could satisfy the demand for repayment, but his efforts were unsuccessful, following which his wife then offered to obtain funding in her own name to purchase the properties.
On 22 March, she had an offer in principle from Birmingham Midshires of loan facilities at a level of 75% of the total value of the nine properties, and the dispositions and standard securities were executed on or about 25 March.
On 7 April, Birmingham Midshires approved and advanced the funds to Mrs Kennedy to buy the properties from the pursuer, who in turn used them to extinguish his liability to the defenders.
‘Breach of contract’
The pursuer raised the present action for breach of contract on 2 April 2015 seeking £159,078, being the difference between the market value of the nine properties and what he received for them.
In April 2016, after a debate, the sheriff found that the pursuer had pled a specific and relevant case of breach of contract, but held, as a matter of relevancy, that any obligation to make reparation had prescribed.
The Sheriff Appeal Court then allowed the pursuer’s appeal on prescription, having held that there was no “material” on which the sheriff had been entitled to reach the conclusion that the defenders’ demand for repayment of substantial sums of money within a short period of time, was bound, as at that moment, to cause the pursuer loss.
A preliminary proof on prescription was allowed and the cause was remitted to the same sheriff who had already dismissed the action and who, following the proof, reached the same conclusion on prescription; this time holding that the defenders had been in breach of contract, but that they should be assoilzied on the basis of prescription.
The pursuer appealed again, but the Sheriff Appeal Court remitted the case to the Court of Session “given the current flux in the law of prescription” and because the appeal raised “novel and more particularly, complex, issues”.
The pursuer appealed on the basis that the sheriff erred in law in determining that the action had prescribed in terms of section 6 of the 1973 Act.
It was submitted that the sheriff wrongly found that the concurrence of injuria and damnum, in terms of Dunlop v McGowans 1980 SC (HL) 73, had occurred on 12 February 2010.
The pursuer argued that the relevant date was 7 April 2010, when the transaction to sell the properties to the pursuer’s wife at undervalue had settled, as that was the date of the pursuer’s “actual loss”.
It was also submitted that the sheriff erred in his interpretation of section 11(1) of the 1973 Act when he considered that, for an enforceable obligation to make reparation to arise, there did not have to be “actual loss”.
There was no legal concept of “practical inevitability of loss”; it was the point at which loss - defined in Gordon’s Trs v Campbell Riddell Breeze Paterson 2017 SLT 1287 as the “existence of physical damage or financial loss as an objective fact” - was actually sustained that was relevant.
‘Injuria and damnum’
However the Lord President, with whom the other judges agreed, ruled that the loss was created when the defender terminated the pursuer’s credit facilities.
In a written opinion, Lord Carloway said: “The question of when injuria concurs with damnum in this, as in every, case is ultimately one of fact. It is, for the purposes of prescription, when did the pursuer first suffer loss as a result of the defenders’ alleged breach of contract; in this case as a consequence of the premature termination of the pursuer’s term loans?
“The relevant date is when the initial intimation of the termination was given (8 February 2010), even if there was, on 12 February, a later extension of 60 days, since it was then that it was apparent that the facilities would be coming to an end, one way or another, prematurely.
“The damnum (loss) was immediate upon the occurrence of the injuria (wrongful act). The pursuer no longer had his credit facilities, or at least did not have ones of the length stipulated in the conditions of loan.
“The sheriff erred, but perhaps only in expression, when he said that, for prescription to start running, the loss does not have to be actual. It does, but it does not either require to have been suffered or to be precisely calculable at the relevant date and it may increase over time.
“It is again an error, but only in expression, to say that it is sufficient that loss is inevitable. It has to have happened in one form or another.
“However, where loss is inevitable, as a matter of law, in almost all cases, loss will have already occurred. It is, put simply, quantifiable future loss. This is illustrated by Dunlop v McGowans, where loss would have been calculable from the point at which the solicitors had failed to serve the notice to quit.”
He added: “No matter what the liquidity of the pursuer might have been, the termination of his credit facilities amounted to a loss of a quantifiable benefit which enabled the pursuer to conduct his businesses; notably his ‘buy to let’ flats, which, financed by the secured loans, would return a profit on rents received.
“This termination resulted in future loss in the sense that the ‘inevitable’ need to re-finance the business was capable of quantification, albeit in an uncertain manner, as at the date of termination. That quantification would have necessitated an estimate of the costs of any predicted method of refinancing, taking into account, for example, the three options which were thought to be open to the pursuer.
“However difficult the exercise of quantification may have been at the point of termination, it is of a similar type of exercise to that often embarked upon by the courts in relation to the prediction of future events in damages claims. As at the date of termination, the pursuer’s loss was at least quantifiable by reference to a reasonable estimate of the legal, valuation, arrangement and security fees, to which an extra amount might be added to cover the likelihood of a less favourable credit facility.”
In a postscript, the Lord President stated that when the Sheriff Appeal Court remitted the case to the sheriff for a preliminary proof on prescription, it should have been allocated to a different sheriff.
He said: “In circumstances where a court of first instance has already made a decision on an issue, which essentially goes to the merits of the case, such as prescription, it is inappropriate for that case to be remitted to the same sheriff for determination of the same issue, albeit after proof.
“Although the court is confident that the sheriff determined the matter in an entirely objective way, the real possibility of at least sub-conscious bias…is something which the mercurial fair minded and informed observer would undoubtedly have had at the forefront of his mind, given that the sheriff had already adjudicated on the same matter as he required to re-determine after proof.
“As a matter of fairness, the proof should have been allocated to a different sheriff.”