Carlyle (Scotland) v Royal Bank of Scotland Plc [2015] UKSC 13

A property developer secured oral assurances from his bank to fund both the purchase and development of a Gleneagles plot subject to a buy-back clause. The bank later refused development funding. The Supreme Court restored the Lord Ordinary's finding that a binding promise existed.

Facts

Mr Carlyle, a property developer, sought funding from the Royal Bank of Scotland to purchase and develop two plots at Gleneagles, Perthshire. The vendor (Gleneagles Hotel) required the plots to be developed by 31 March 2011 in advance of the Ryder Cup, and imposed a buy-back clause entitling it to repurchase any undeveloped plot at the original price. Mr Carlyle could not on-sell undeveloped plots.

Given this constraint, Mr Carlyle repeatedly insisted that he required a full commitment from the bank to fund both the purchase and the development costs (estimated at £700,000 per plot), or nothing at all. Following discussions with Ms Hutchison (assistant director of commercial banking) and Ms Young (private banking), a key telephone call took place on 14 June 2007 in which Ms Hutchison said:

“You’ll be pleased to know it’s all approved, Edinburgh are going for it for both houses”

On the strength of that call, Mr Carlyle paid the deposits and proceeded to purchase plot 5, drawing down secured loans of £845,000 and £560,000 in July 2007. The bank subsequently refused to provide development funding, called in the loans, and sued for £1,449,660.

The Lord Ordinary (Lord Glennie), after hearing evidence (including from Ms Hutchison, called by Mr Carlyle), held the bank had bound itself to advance up to £700,000 in development funding. The Second Division of the Inner House reversed that decision. Mr Carlyle appealed to the Supreme Court.

Issues

The central issue was whether, on an objective assessment of what was said between the parties (and particularly in the 14 June 2007 telephone call viewed in context), the bank had intended to enter into a legally binding promise to advance funds for both the purchase and development of plot 5.

A further issue concerned the proper scope of appellate review of a first instance judge’s findings of fact.

Arguments

For the bank (respondent)

Mr Keen QC argued that the Lord Ordinary’s finding could not be supported on the evidence. He submitted that: (i) Mr Carlyle’s own evidence characterised the 14 June statement as an agreement “in principle” only; (ii) the development cost was unknown at the time, so no sum had been agreed; and (iii) the bank could not have known Mr Carlyle’s overall indebtedness pending sales of his other developments. The Second Division had correctly held that essential terms (maximum draw down, interest, repayment, securities) were absent and that normal banking practice required a written loan agreement.

For Mr Carlyle (appellant)

Mr Dunlop QC argued that the Second Division had impermissibly substituted its own view for that of the trial judge contrary to the principles in Thomas v Thomas, McGraddie and Henderson v Foxworth Investments. Relying on Neilson v Stewart 1991 SC (HL) 22, he submitted that a Scots law contract of loan does not require express terms on interest rate or repayment date, and that a unilateral promise in Scots law is binding without consideration.

Judgment

Lord Hodge (with whom Lord Neuberger, Lord Kerr, Lord Clarke and Lord Reed agreed) allowed the appeal.

Appellate restraint on findings of fact

Lord Hodge reaffirmed the restricted role of appellate courts in reviewing factual findings, citing the formulation by Lord Reed in Henderson v Foxworth Investments Ltd:

“It follows that, in the absence of some other identifiable error, such as (without attempting an exhaustive account) a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence, an appellate court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot reasonably be explained or justified.”

Lord Hodge candidly observed that he might himself, at first instance, have shared the Second Division’s view, but that was not the appellate court’s task.

The Second Division’s three grounds rejected

First, although the Lord Ordinary could have construed the 14 June call as a mere internal approval, he was entitled to interpret it, in the context of the buy-back clause and Mr Carlyle’s repeated insistence on a full commitment, as creating a binding promise. Following Stobo Limited v Morrisons (Gowns) Limited 1949 SC 184, the parties’ anticipation of a later formal contract does not necessarily preclude an earlier binding agreement.

Second, the inherent improbability of a bank binding itself without written documentation was not decisive; this was a question of fact for the trial judge, and the prudence historically associated with Scottish bankers was “not always in evidence” in the period leading up to the 2008 financial crisis. The signing of indicative terms and loan agreements for the purchase price did not preclude the earlier promise to fund the development.

Third, the Second Division’s view that absence of agreement on maximum draw down, interest rates, repayment terms and securities precluded a concluded agreement was inconsistent with the evidence and overlooked Neilson v Stewart. The Lord Ordinary had legitimately addressed certainty (a facility of up to £700,000, with interest at rates known from other loans and a reasonable term informed by the development timetable). Lord Hodge endorsed the approach in Fletcher Challenge Energy Limited v Electricity Corporation of New Zealand Limited:

“The Court has an entirely neutral approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the Court’s attitude will change. It will then do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities…”

Collateral warranty terminology

Lord Hodge clarified that the pleading of a “collateral warranty” was a distraction. Either “promise” or “unilateral undertaking” would have been more apt. In Scots law, unlike English law, a unilateral promise intended to have legal effect is binding without consideration. The test is objective: what would a reasonable outside observer infer from all the circumstances?

Implications

Appellate review of fact

The decision reinforces the stringent limits on appellate interference with findings of fact, as developed in Thomas v Thomas, McGraddie v McGraddie and Henderson v Foxworth Investments Ltd. An appellate court must not substitute its own view simply because it might have decided differently; interference is permissible only where the trial judge’s decision cannot reasonably be explained or justified, or where there is an identifiable legal or evidential error.

Scots law of promise

The case underlines that, in Scots law, a unilateral promise is enforceable without consideration. A binding promise may arise orally, including in commercial banking contexts, where on objective assessment the promisor intended to bind itself. Anticipation of subsequent formal documentation does not by itself negate present binding effect.

Certainty and incomplete terms

The judgment confirms that absence of express agreement on matters such as interest rates or repayment dates does not automatically defeat a contract of loan in Scots law (Neilson v Stewart). Once the court is satisfied of an intention to be bound, it will, where possible, give effect to that intention, implying reasonable terms.

Practical significance

The decision is significant for banks and commercial lenders: oral assurances given in the course of negotiations, particularly where a borrower has clearly stated that they will only proceed on the strength of a complete commitment, may give rise to enforceable obligations even before written facility agreements are concluded. Lenders should ensure that internal approvals communicated to customers are carefully framed to avoid being construed as binding promises.

The Supreme Court remitted the case to a commercial judge in the Court of Session to proceed accordingly. Lord Hodge noted that further evidence may be needed concerning the parties’ prior dealings and shared understandings to determine what implied terms should govern the promise.

Verdict: Appeal allowed. The interlocutors of the Second Division of the Inner House dated 12 September 2013 and 3 October 2013 were set aside, and the case was remitted to a commercial judge in the Court of Session to proceed accordingly. The Lord Ordinary’s finding that the bank was in breach of a binding promise to make development funding of £700,000 available was restored.

Source: Carlyle (Scotland) v Royal Bank of Scotland Plc [2015] UKSC 13