The High Court recently handed down its decision in Oliver Dean Morley t/a Morley Estates v. The Royal Bank of Scotland plc  EWHC 88 (Ch), in which the claimant made allegations of intimidation and economic duress against The Royal Bank of Scotland (RBS). In this alert, we look specifically at how the court considered these allegations and how this compares to the court's approach in considering similar allegations, such as unlawful means conspiracy.
The facts in Morley
In Morley, the claimant alleged that, following various events of default in his loan facilities, RBS tortiously intimidated him and subjected him to economic duress by threatening to appoint receivers over his property portfolio. These receivers would in turn arrange for the entire portfolio to be transferred in a "pre-pack" sale to West Register (Property Investments) Limited (West Register), a subsidiary of RBS.
In August 2010, the claimant entered into written agreements with RBS (the Agreements), which enabled him to salvage a proportion of the portfolio for £20.5 million, with the remainder transferred to West Register. The claimant alleged that RBS obtained the Agreements by using threats that amounted to the tort of intimidation, and/or that they were entered into under economic duress and should therefore be rescinded.
The court looked closely at the conduct of RBS. It did not consider that anything said by RBS up until 8 July 2010 amounted to a threat to appoint a receiver. It therefore focused on a meeting that took place on 8 July 2010 and considered three alleged threats made at that meeting: that unless the claimant signed up to a consensual deal, RBS would:
- appoint receivers on the following Monday (12 July 2010);
- appoint receivers on the Monday to sell the portfolio on a pre-pack basis to West Register;
- appoint receivers on the Monday to sell the portfolio on a pre-pack basis to West Register at an undervalue and/or without proper market testing and/or for an improper purpose.
On consideration of the facts and the law on the tort of intimidation and economic duress, the court found that the claimant had failed to establish either cause of action.
Elements of the tort of intimidation and economic duress
The court accepted recent authority on the elements of both causes of action, as follows:
- for the tort of intimidation: "there must be a threat to do something unlawful or 'illegitimate'; it must be intended to coerce the claimant to take or not take certain action; the threat must in fact coerce the claimant to take (or not take) that action; and damage must be incurred as a result"; and
- for economic duress: "there must be pressure to enter into a contract with the practical effect of compulsion or a lack of practical choice, which is 'illegitimate' and is a significant cause inducing the victim to enter into the contract".
Therefore, in order to make out both causes of action, the claimant first needed to prove that the threatened conduct from RBS was illegitimate, and that was the reason he entered into the Agreements.
How to determine whether conduct is "illegitimate"
To assist in assessing whether the threatened conduct was illegitimate, the judge, Mr Justice Kerr, took into account the following range of factors described by Dyson J (as he then was) in DSND Subsea Ltd v. Petroleum Geo-Services ASA  BLR 530:
- any actual or threatened breach of contract;
- good or bad faith;
- whether the victim had any real choice;
- whether the victim protested at the time; and
- whether he affirmed or sought to rely on the contract.
In considering the range of factors, Mr Justice Kerr specifically highlighted Dyson J's comment that "conduct which is 'illegitimate' must be 'distinguished from the rough and tumble of the pressures of normal commercial bargaining'".
He also accepted RBS's submission that economic duress cannot be committed where a threat is made to carry out an act which is lawful unless the person making the threat acts in bad faith i.e. "lawful act" duress cannot exist without the person applying the pressure acting in bad faith.
On the facts, the judge concluded that at no time (including at the meeting) did RBS act in bad faith. He specifically highlighted that aggression and unpleasantness are not the same thing as bad faith. Accordingly, without bad faith, economic duress could only be established if RBS threatened to carry out an unlawful act. Similarly, with the tort of intimidation, the required element of improper coercive pressure can only be present if any threat made were to carry out an unlawful act, i.e. one that RBS was not lawfully entitled to do.
What the court decided
Having clearly set out the elements required to establish each cause of action, Mr Justice Kerr looked at the alleged threats themselves, considering two key questions for each:
- Was the threat made at the meeting?
- If it was, was it a threat that RBS would carry out an unlawful act?
The first and third alleged threats
As to the first alleged threat, the judge concluded that if the threat was simply that RBS said it would appoint receivers in the absence of an agreed consensual deal, then it would be a threat to carry out a lawful act i.e. an act RBS was entitled to do. There was a clear event of default (being the claimant's breach of the loan to value covenant), and the legal charges over the properties enabled RBS to appoint receivers to take control of them.
As to the third alleged threat, the judge concluded that there was no evidence that the threat had been made and, accordingly, there was no need to consider the second question. He commented that it was "inherently unlikely that a bank employee would say he intended to sell a mortgaged asset at an undervalue or without proper market testing. If he did, a finding of bad faith would be likely to follow".
The second alleged threat
The second alleged threat was less straightforward. As to the first question, the court found that, on the evidence, the threat had been made at the meeting. It was not a mere warning, and the RBS employee's narrative, tone and demeanour placed it in the category of a threat.
The contemporaneous notes from the meeting recorded that the employee provided a pre-prepared draft consensual transfer agreement and then explained to the claimant "with disdainful insouciance" how and why the way the assets were viewed could lead to a profit and favourable outcome for RBS. Mr Justice Kerr concluded that handing over the pre-prepared agreement was "intended to concentrate the minds" of the claimant's representatives and the subsequent narrative was "the 'or else' part of the threat, if the transfer agreement were not executed".
He therefore moved to consider the second question in detail: would it be lawful for RBS to carry out the threat? The claimant's position was that it would be unlawful, because it was a threat by RBS to breach its duties as mortgagee of the portfolio properties. Using the factors set out above, this would make it a threatened breach of contract, making RBS's conduct illegitimate.
However, the court considered the duties of RBS as mortgagee of the properties in two stages: first, applying a conventional analysis and, secondly, considering whether such a conventional analysis was appropriate in the context of the present case.
What is the position applying a conventional analysis?
The judge concluded that, if applying a conventional analysis, it was very likely that RBS was threatening to carry out an unlawful and defective performance of its duties as mortgagee. To perform its duty to take reasonable steps to obtain the best price reasonably attainable, RBS would have to do much more than it planned to do, and the cost savings could not alone justify selling the portfolio as a single package. The proposed transfer seemed "more akin to seizure than sale, i.e. the mortgagee entering into possession through its subsidiary, rather than selling to it".
Is a conventional analysis appropriate?
The judge put forward two reasons as to why the conventional analysis was not appropriate.
- West Register could redeem the situation by undertaking to sell the properties onwards, on the open market. In that scenario, "the mortgagee's duty would be unperformed but not yet incapable of lawful performance".
- The claimant had no financial interest in how any receivership was conducted because he could have no possible equity in the properties themselves. In practical terms, this meant that any breach of the mortgagee's duties as conventionally formulated would not cause the claimant any loss.
In the circumstances, Mr Justice Kerr concluded that RBS was threatening to carry out an act that might or might not turn out to be lawful; the threat "flirted with illegality but did not inexorably commit to it" and "to be unlawful, the act would have to be unlawful vis-à-vis the claimant and not just in the abstract". He therefore categorised the threat as part of "the rough and tumble of the pressures of normal commercial bargaining" as set out by Dyson J above.
Having concluded that the threat was to carry out a lawful act, the court dealt swiftly with the other elements of both causes of action. Whilst it was clear that the claimant (through his representatives) protested at the time, it was not the case that he had no practical choice but to sign the transfer agreement. Indeed, he continued to negotiate with RBS, in order to obtain a better outcome than transferring the entire portfolio to RBS. Further, the claimant affirmed the Agreements, having taken no steps to set them aside until more than five years later. Accordingly, it was simply far too late to have the Agreements rescinded.
Similar causes of action
Claimants often plead similar causes of action together. Typically, this will be part of a "throw the kitchen sink" strategy at the opposition but, on occasion, the elements to establish one cause of action are so similar that it simply makes sense to plead them together. Mr Justice Kerr's approach to the tort of intimidation and economic duress highlights this – they overlapped substantially both in law and in fact and were, therefore, considered together.
A similar cause of action often pleaded with the tort of intimidation and economic duress is unlawful means conspiracy. To establish this cause of action: (i) there must be a combination of two or more persons; (ii) such combination must be to use unlawful means; and (iii) such unlawful means are intended to cause damage to the claimant (which need not be predominant).
The courts have considered allegations of unlawful means conspiracy in two recent decisions: Portland Stone Firms Limited and Others v. Barclays Bank PLC and Others  EWHC 2341 (QB) and Elite Property Holdings Ltd v. Barclays Bank  EWHC 2030 (QB) and  EWCA Civ 204. The facts of each of those claims were similar: in each case it was alleged that Barclays conspired with KPMG (in Portland) and BDO (in Elite) to execute an exit plan/take enforcement action against the claimants.
The obvious similarity between intimidation/duress and unlawful means conspiracy is the requirement of an unlawful act. The obvious difference is that for a claim in conspiracy to succeed, there has to be a combination of two or more persons. That requirement makes an allegation of conspiracy one of fraud and dishonesty. This changes the game entirely.
The court's approach
The approach of the court in Portland and Elite differed significantly to the approach in Morley.
In Morley, the court's decision turned on the key question of whether what RBS was proposing to do was unlawful. The answer turned on the facts, and Mr Justice Kerr concluded that, in the context of that case, RBS had straddled the line of illegality, but had not crossed it.
However, in both Portland and Elite, the court's starting point was entirely different, for the very reason that they were claims based on dishonesty. The court took into account the institutions themselves (that they were not known fraudsters), that it was inherently unlikely that they would engage in the conduct being alleged, and that there was no reason to engage in such conduct. The allegations were then considered against that background. With that context, it is not surprising that both claims failed.
Both Portland and Elite highlighted that, for claims alleging fraud and dishonesty, the hurdle for claimants is extremely high. In Morley, although the claims for intimidation and economic duress were dismissed, it appears, at first, as if the hurdle is a lower one. The court was willing to look past the institution against which the allegation was made and seriously consider whether the threat made was to carry out an unlawful act, as opposed to having a starting position that what was being alleged was simply unlikely.
However, that starting position was the exact approach applied by Mr Justice Kerr in relation to the alleged third threat – that it was "inherently unlikely" it was made by RBS. The difference between the two is simple: there was evidence that the second alleged threat was made, which required the court to consider whether such conduct was illegitimate, whereas there was no evidence of the third alleged threat, allowing the court to revert to its "default" position. Indeed, if there had been evidence of it, then Mr Justice Kerr made clear that a finding of bad faith would follow i.e. RBS would have been found to be dishonest.
It goes without saying that each case is considered by the court based on the evidence available to it. Nevertheless, it is certainly comforting that, in the absence of key evidence in claims involving serious allegations against reputable financial institutions, the court continues to demonstrate a reasonable, sensible and common sense approach finding in favour of such institutions.