McDonagh v Bank Of Scotland Plc & Ors

Factual and Procedural Background

In 2007, the Plaintiff sought to purchase an investment property known as Sony House located on a technology park near Liverpool. To finance this purchase, the Plaintiff entered into a loan agreement with the First Defendant, a bank, for an amount intended to be €7.5 million. The parties disputed whether the loan was denominated in euros or pounds sterling. The Plaintiff subsequently bought Sony House, valued at £9.9 million at the time.

In 2010, the Plaintiff and the bank entered into a second loan agreement, the terms of which were undisputed, but the Plaintiff challenged the bank's ability to enforce it, alleging duress.

Following the 2008 financial crisis, Sony House’s value declined significantly, with disagreement over the extent of the depreciation. The bank demanded repayment, which the Plaintiff did not make, leading to the appointment of receivers (Second to Fourth Defendants) who sold Sony House as part of a portfolio of properties in October 2011. The Plaintiff claims the sale was at an undervalue and brought claims against both the bank and the receivers. The bank counterclaimed for sums due under the loan agreements.

The claims against the bank and the receivers were tried together, though they largely addressed different issues.

Legal Issues Presented

1. What is the correct interpretation of the first loan agreement regarding the currency and amount of repayment?
2. Is there an estoppel by convention preventing the Plaintiff from denying the bank’s interpretation of the first loan agreement?
3. Could and should the first loan agreement be rectified to reflect the bank’s interpretation?
4. Did the bank breach the first loan agreement or banker-customer contract by treating the sum due as the outstanding balance in euros or sterling equivalent?
5. Did the Plaintiff enter into the second loan agreement as a result of duress or intimidation by the bank, rendering it voidable?
6. If the second loan agreement is set aside for duress, what sums are payable by the Plaintiff?
7. If the second loan agreement is valid, is it enforceable and what sums are due?
8. What damages and interest, if any, is the Plaintiff entitled to for breach of contract, duress, or intimidation?
9. Was Sony House sold at an undervalue by the receivers, and did they breach their duties in conducting the sale?
10. If a breach of duty by the receivers occurred, what loss did the Plaintiff suffer and what compensation is due?
11. Is the Plaintiff entitled to interest on any sums related to the receivers’ sale?

Arguments of the Parties

Appellant's Arguments (Plaintiff)

• The Plaintiff contended that the first loan agreement required repayment of a fixed sum of £7.5 million, not the outstanding balance in euros or sterling equivalent.
• The Plaintiff alleged that the second loan agreement was entered into under duress and intimidation by the bank and should be set aside.
• The Plaintiff argued that the bank breached the first loan agreement by demanding repayment in euros rather than the fixed sum.
• The Plaintiff asserted that the receivers sold Sony House at an undervalue by including it in a portfolio sale rather than marketing it separately, resulting in loss.
• The Plaintiff challenged the bank’s enforcement of the loan and the conduct of the receivers, seeking damages and equitable compensation.

Respondents' Arguments (Bank and Receivers)

• The bank argued that the first loan agreement was a euro loan repayable in euros or sterling equivalent, not a fixed sterling loan.
• The bank contended that the Plaintiff received consideration for the second loan agreement and that it was enforceable.
• The bank denied any duress or intimidation, asserting the Plaintiff was in default and the bank acted within its contractual rights.
• The receivers maintained they owed equitable duties to obtain the best price reasonably obtainable and that selling Sony House as part of a portfolio was a reasonable commercial judgment likely to produce a better outcome.
• The receivers argued they considered the interests of the Plaintiff and the bank, took proper legal advice, and acted reasonably in marketing and selling the portfolio.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully construed the first loan agreement, concluding it was a loan of a sum in euros, not sterling, supported by the agreement’s terms and the admissible background facts. Clause 1.5’s reference to repayment of £7.5 million was interpreted in context with clause 1.3, requiring repayment in euros, meaning the repayment amount in euros was fixed at the date of drawdown, not at the date of repayment. The Plaintiff’s interpretation that he could repay a fixed sterling sum irrespective of exchange rates was rejected as commercially unviable and inconsistent with the agreement’s terms and background.

The court noted that if the Plaintiff’s interpretation were correct, the bank would bear significant currency risk, which was contrary to commercial common sense and the parties’ intentions.

The bank’s claim for rectification of the first loan agreement was considered unnecessary given the construction adopted, but the court found that had the Plaintiff’s interpretation prevailed, rectification would have been justified due to a common continuing intention not reflected in the written agreement.

The court rejected the Plaintiff’s argument that the second loan agreement lacked consideration, finding that the bank’s suspension of covenant testing constituted valid consideration. The Plaintiff’s unpleaded arguments regarding non-satisfaction of conditions precedent and non-implementation of the second loan agreement were dismissed as unpleaded and likely to fail on the evidence.

The court analyzed the Plaintiff’s claims of duress and intimidation in entering the second loan agreement. It found no illegitimate pressure or unconscionable conduct by the bank, noting the Plaintiff was in default, the bank acted within contractual rights, and the second loan agreement was beneficial in suspending covenant testing. The Plaintiff’s claims for damages for intimidation failed accordingly.

Regarding the receivers, the court examined their equitable duties to obtain the best price reasonably obtainable for Sony House. It recognized that while the conventional approach is to sell a property separately, a receiver may sell as part of a portfolio if reasonably satisfied that it is in the mortgagor’s best interests and likely to produce a better result.

The court found the receivers had properly considered the interests of both the bank and the Plaintiff, obtained expert advice, and reasonably concluded that a portfolio sale would likely achieve a better overall outcome. Evidence showed Sony House was an average property in the portfolio, not a “jewel” or “bait,” and that the short lease term presented market risks mitigated by the portfolio sale.

The court rejected the Plaintiff’s criticisms that the receivers failed to consider marketing Sony House separately or that the portfolio sale was detrimental to its value. The marketing process was thorough, and no separate offers for Sony House were made during the portfolio sale campaign.

The valuation evidence was divergent; the court rejected the Plaintiff’s expert valuation as unrealistic and accepted the valuations provided by the bank’s and receivers’ experts as more credible, though it did not make a definitive market value finding.

Overall, the court concluded the Plaintiff failed to establish any breach of duty by the receivers or any loss arising from the sale method chosen.

Holding and Implications

The Plaintiff’s claims against the bank and the receivers are dismissed.

The court held that the first loan agreement was a euro loan repayable in euros, and the bank’s interpretation was correct. The Plaintiff’s claims of duress and intimidation in relation to the second loan agreement were rejected, and the agreement was found enforceable with valid consideration. The bank’s counterclaim for sums due under the second loan agreement succeeds.

The receivers acted within their equitable duties in selling Sony House as part of a portfolio, and the Plaintiff failed to prove any breach of duty or resultant loss. The Plaintiff is entitled only to the properly apportioned part of the portfolio sale proceeds, which has already been credited.

No broader legal precedents are established by this decision; it primarily resolves the factual disputes and applies established principles in contract construction, economic duress, and receivership duties. The direct effect is a judgment in favor of the bank on the counterclaim and dismissal of the Plaintiff’s claims.