The recent case of Royal Bank of Scotland plc v William Derek Carlyle serves as a salutary tale to funders to take extreme care in giving assurances to developers in the context of a loan arrangement. In this case the defender is a property developer. The bank agreed to provide him with a bridging loan in order to allow him to purchase land at Gleneagles Hotel in Perthshire. The repayment date was stated in the loan agreements to be 12 months from drawdown. The repayment date came and went with no repayment by the developer. The bank raised an action to recover the loaned funds. So far so good.
None of these facts were challenged by the developer in the context of the court proceedings. He accepted that he had failed to repay the loan by the repayment date however he raised an interesting and complex argument that an assurance was given by the bank at the time of the loan agreement that additional funding would be given to allow the development of the plot of land purchased. He submitted that the assurance was given by the Bank in the knowledge and with the intent that he would act on it be entering into the original loan agreements. The Bank did not provide any additional funding.
The developer’s case was that the assurances given by the Bank regarding additional funding amounted to a collateral warranty of which the Bank was in breach. He sought to counterclaim for damages in excess of the principal sum craved and withheld payments due under the loan agreements pending resolution of his claim for damages.
The judge in this case held that assurances by the Bank and its employees to the effect that additional funding would be made available amounted to a collateral warranty. A witness who was an ex-employee of the Bank provided evidence to the effect that assurances had been made orally regarding additional funding which was held to be sufficient to constitute the contractual relationship required for a warranty to exist.
Parties should take heed and funders in particular take care when negotiating loans that the loan documentation details all of the discussions between the parties and that assurances in relation to further funding are restricted to assurances which are to be followed through.