JOHN WILLIAM SUTHERLAND AGAINST BANK OF SCOTLAND PLC
| OUTER HOUSE, COURT OF SESSION |
| | [2014] CSOH 113 |
| CA57/13 | OPINION OF LORD TYRE in the cause JOHN WILLIAM SUTHERLAND Pursuer; against BANK OF SCOTLAND PLC Defenders: ________________ |
Pursuer: Martin QC, McIlvride; Harper Macleod LLP
Defender: Lindsay QC; Anderson Strathern LLP
10 July 2014
Introduction
[1] On 16 January 2007, the pursuer granted a personal guarantee in favour of the defenders in connection with the debts of a company called Caithness Beef and Lamb Limited (“CBL”) of which he was formerly a director and which entered administration on 30 April 2012. In about October 2012, the defenders wrote to the pursuer demanding payment from him of £950,000 in terms of the guarantee. In this action the pursuer seeks reduction of the guarantee and of a charge for payment served upon him at the instance of the defenders on 14 May 2013. Alternatively, he seeks damages from the defenders of £964,220,63, being the sum now said to be due by him in satisfaction of his obligations under the guarantee.
[2] The pursuer’s case was presented on three alternative bases:
- Firstly, it was contended that it was agreed between the pursuer and the defenders’ relationship manager, Mr Callum MacDonald, that in consideration of the pursuer providing the guarantee, the defenders would make overdraft facilities up to a certain level available to CBL during its first three years of trading.The defenders failed to do so and, being in material breach of contract with the pursuer, were not entitled to enforce the guarantee.
- Alternatively, it was contended that, esto there was no such agreement, the pursuer was induced to sign the guarantee by a misrepresentation made by Mr MacDonald that such overdraft facilities would be made available.The guarantee was therefore voidable at the pursuer’s instance.
- Alternatively, it was contended that the pursuer had suffered loss and damage as a consequence of the fault of Mr MacDonald, for which the defenders were vicariously liable, in assuring the pursuer that such overdraft facilities would be made available when required.But for Mr MacDonald’s assurances the pursuer would not have signed the personal guarantee and would not have incurred the liability which the defenders were now seeking to enforce.
[3] The action came before me for proof before answer. Evidence was led from the pursuer, from Mr MacDonald (who retired in December 2008), and from two employees of the defenders, namely Andrew Michael Tomney and Mark Grant, who had responsibility for CBL’s account at times after Mr MacDonald’s retirement. An affidavit by Hilary Budge, Development Manager at Highlands and Islands Enterprise, Thurso, was lodged and agreed to be her evidence.
The pursuer’s business plan for CBL
[4] The pursuer was originally a butcher to trade, although by the mid-2000s he had built up a portfolio of businesses in the Caithness area, some of which were operated by companies under his control. In 2003 the pursuer purchased Wick Slaughterhouse Limited, a company which operated the only slaughterhouse in the area. The company made a small profit but in about 2005 the pursuer decided that he wished to expand the business by moving into meat processing. This would necessitate enlargement of the slaughterhouse to accommodate a cutting and boning area, a meat processing area, chills and other facilities.
[5] In August 2005 a business plan was prepared for CBL, then recently incorporated, by Dr Ian Moir of Business Development Advice Limited, Ellon, Aberdeenshire. The plan provided for the purchase of land by CBL, the construction of a building extension, and the installation of plant and equipment. CBL was not in a position to fund the project without assistance by way of grants and bank loans. The business plan stated that it was CBL’s intention to apply to the Scottish Executive for grant assistance under the Processing and Marketing Grant Scheme and also to Caithness and Sutherland Enterprise (“CASE”) for grant funding for capital costs. In addition, the plan stated that loan funding would be required for project capital costs and for working capital. It was anticipated that such funding would be by way of an increased bank overdraft facility or, if appropriate, “a term loan provided by the Royal Bank of Scotland” (this may have been intended to refer to the defenders). The total estimated project capital cost was £2,292,000. The business plan also contained the following statement (at paragraph 8.11):
“In terms of brand development John Sutherland is seeking to work alongside the Prince of Wales’ proposal for promoting quality products from the Castle of Mey estate and surrounding areas. This could open up premium UK markets in the South of England for top quality foods from Caithness and Sutherland.”
[6] At the material time, the pursuer had a long-standing business relationship with the defenders, having used the Bank of Scotland for personal and business banking throughout his adult life. Mr MacDonald had been the pursuer’s corporate relationship manager since 2004. The pursuer provided Mr MacDonald with a copy of the business plan and discussed the project in detail with him. Mr MacDonald did not have authority personally to approve any lending to a customer. At some time during the period between August and October 2005 (the exact date is unknown because the documentation produced by the defenders for the proof was incomplete), Mr MacDonald submitted CBL’s business plan to the defenders’ credit sanctioning department in Aberdeen with a request for approval of a loan to CBL of up to £1,200,000. On 26 October 2005, Mr MacDonald was advised that the status of his application was “Resubmit”, i.e. the application was not approved on the terms submitted. The director of the defenders’ credit sanctioning department, Mr Philip Andrews, was not satisfied that the proposed venture was a viable proposition.
[7] The pursuer instructed Dr Moir to prepare a revised business plan in order to address the defenders’ concerns. The revised plan was sent to Mr MacDonald on 13 December 2005. It included an expanded section entitled “Mey Selections” in inter alia the following terms:
“8.5.1 [CBL] has been in discussion with Mey Selections, part of HRH, The Prince Charles, Duke of Rothesay’s North Highland Initiative.
8.5.2 The initial major retail customer for Mey Selections is J Sainsbury plc and currently Mey Selections is acquiring lamb from the Dornoch-based processing unit and beef from a Linlithgow-based factory.
8.5.3 Mey Selections has indicated in writing to [CBL] that, if facilities are [sic] of an acceptable standard are provided, the company will be considered to participate in the Mey Selections project.
…
8.5.5 A letter of support from Mey Selections is provided in an appendix to this Business Plan/Project Proposal in which references are made to building a long term business relationship with [CBL].”
The letter of support referred to in sub-paragraph 8.5.5 was not among the documents lodged in court. The total estimated project capital cost remained £2,292,000.
[8] The revised plan was submitted by Mr MacDonald to the defenders’ credit sanctioning department; Mr Andrews in turn sought comments from the defenders’ area director for agricultural business, Mr John Taylor. In an email dated 17 February 2006, Mr Taylor noted that “the position looks much stronger in terms of safety with the offer of the collateralised guarantee”. (I take this to mean a personal guarantee by the pursuer supported by a form of security.) Mr Taylor still had concerns but noted that “the certainty of getting the Mey Selections contract business through Dungannon Meats is a major move forward and should give a guaranteed throughput”. He thought that “the safety features of the credit and the Dungannon Meats’ commitment makes the proposal an acceptable credit risk”. In his evidence to the court, Mr Sutherland explained that Dungannon Meats was a large slaughtering and meat processing company based in Northern Ireland with links to major customers who would or might be interested in products carrying the Mey Selections brand. It is worth noting at this stage (i) that throughout their scrutiny of CBL’s business proposals, the defenders appear to have attached considerable importance to business being obtained by CBL through the Mey Selections/Dungannon Meats connection; and (ii) that Mr Taylor and Mr Andrews must have had information before them in addition to Dr Moir’s revised business plan (or at least so much of it as was produced at the proof), which contained no express reference to Dungannon Meats, and no mention of any “collateralised guarantee”.
[9] On 21 February 2006, Mr Andrews emailed Mr MacDonald, observing that although the proposal was developing, the defenders needed “more comfort on the projections which we consider optimistic”. Mr MacDonald was asked to provide clarification regarding certain points raised by Mr Taylor, all of which related to the Mey Solutions/Dungannon Meats business connection. A number of other questions were asked including the following:
“P/G – what guarantee does J Sutherland already provide for related borrowings? With the heritable security held for J W Sutherland borrowings we would require additional properties, as security, to be provided to a value of at least £500k should we get comfortable on the viability and working capital requirements. It may be that we shall require the guarantee to be increased to support the asset finance facilities given the quality and nature of the assets.”
[10] Mr MacDonald responded to Mr Andrews’s queries by means of a document entitled a “Facility Amendment Report” dated 10 April 2006. This document has a number of significant features. Under a sub-heading “Security”, it included for the first time a reference to a Letter of Guarantee by the pursuer in the sum of £950,000. Mr MacDonald noted that “the Application has moved on in the interim and complete new build is now proposed on a ‘Green Field site’ adjacent to [Wick] Airport”. As regards the Mey Selections “contract”, Mr MacDonald stated that “Contract accounts for two thirds of budgeted turnover. Breakeven is shown at 66% of projected turnover.” In response to the question “How aggressive will Dungannon Meats be in what they pay for the processing of this beef?”, Mr MacDonald stated:
“Dungannon Meats and [CBL] have last Thursday agreed a deal which allows £100 per head for cattle killing & boning, £10 per head for sheep. This will reduce CBL outlays as they will no longer be required to fund Stock and debtors to anticipated level – just charge a killing fee. CBL Ltd are happy with this price and calculate killing cost at £48 per head for cattle.”
[11] The pursuer’s position in his evidence to the court was that Mr MacDonald’s responses regarding Mey Selections and Dungannon Meats were fiction created by Mr MacDonald himself. There had never been any concluded contract between CBL and either Mey Selections or Dungannon Meats. Matters had never proceeded beyond discussions of what might happen after CBL began to carry on business. According to the pursuer, Mey Selections was not a particularly important aspect of the business proposal. The pursuer’s focus was on the production by CBL of high quality processed meat products for which he considered that the market was strong. For his part, Mr MacDonald was adamant that all of the information contained in this report and in the others which he submitted to the credit sanctioning department came directly or indirectly from the pursuer. I return to this conflict of evidence below.
[12] In May 2006, Dr Moir produced what was referred to by the pursuer as a third business plan. It took the form of an application to the Scottish Executive for a Processing and Marketing Grant. An electronic copy of this document was sent by Business Development Advice Ltd to Mr MacDonald on 18 May 2006 at 13.47; Mr MacDonald immediately acknowledged receipt, jokingly describing it as “light reading”. It is necessary to narrate the terms of this grant application in some detail. As had been noted in Mr MacDonald’s April report (above), the proposed location for the project had by now been moved to a property at Keiss owned by the pursuer. The project was described as consisting of “the construction of a new state-of-the-art slaughtering and meat processing facility near Wick”. The Mey Selections connection was addressed in one of a number of paragraphs under a heading “New Markets” in the following terms:
“The company is currently negotiating with Mey Selections to become a supplier of top quality meat and meat-based products which will be sold under this innovative new brand. The business will be the only meat supplier based in Caithness and Sutherland supplying Mey Selections.”
Section D of the application contained a breakdown of how the project was to be funded. This indicated a total investment cost for land, buildings, plant and equipment, and technical charges of £2,331,998, of which 50% was to be met by grants from the Scottish Executive and from CASE, and 50% by “own sources/bank”. The latter figure was divided into “own capital” of £119,999 and loans of £1,046,000. Section E of the application contained a forecast of the financial situation of both the project and the whole business over its first three financial years. From the figures in the forecast, which were the same for the project and for the whole business, I extract the following:
| Year | 2007 £000 | 2008 £000 | 2009 £000 |
| Turnover | 2,815 | 3,256 | 3,620 |
| Fixed assets | 2,005 | 1,903 | 1,901 |
| Current liabilities: bank overdraft | 1,993 | 1,862 | 1,662 |
Receipt of the application was acknowledged by the Scottish Executive, Environment and Rural Affairs Department (“SEERAD”) on 19 June 2006. Certain additional information was sought from the pursuer, including a letter from CBL’s bankers confirming the amount, terms and conditions of any overdraft and/or term loan facilities that had been agreed.
The defenders’ agreement to provide overdraft facilities
[13] At this stage it is necessary to narrate the evidence regarding a meeting between the pursuer and Mr MacDonald which is said by the pursuer to have taken place on 18 May 2006, i.e. on the day when a copy of the SEERAD grant application was sent to Mr MacDonald. The pursuer’s evidence was to the following effect. On his reading of the business plan contained within the grant application, it stated a potential requirement of a working capital overdraft of £1,993,000 in the first year, diminishing to £1,862,000 in the second year and to £1,662,000 in the third year. This need for overdraft facilities was attributable to the fact that CBL would incur up-front costs in purchasing livestock for slaughter, with a delay before receipt of income from processed and added-value products. The pursuer considered the working capital facility to be central to the CBL business model: without it, the business would not be viable. Such a facility was additional to the bank loan required as part of the capital cost, and to a sum required for start-up costs such as staff training and licensing applications. At the meeting on 18 May 2006, the pursuer and Mr MacDonald discussed the grant applications and the facility that would be required by CBL from the defenders, were the applications to be successful. According to the pursuer, Mr MacDonald suggested overdrafts of (i) £1.2 million for construction costs, (ii) £125,000 for start-up costs, and (iii) up to £2 million for working capital, i.e. a total of up to £3.325 million. Mr MacDonald advised that the bank would require a loan to value ratio of 50%, so that the value of the project would have to be at least £6.65 million before the funding discussed could be made available. The pursuer had calculated, on the basis of advice from a surveyor, that the total construction cost of the slaughterhouse and processing facility (not all of which qualified for grant assistance) would be approximately £5.7 million. He treated this as equivalent to its value for security purposes. That left a shortfall of £950,000. Mr MacDonald told the pursuer that if he gave a personal guarantee for that sum, the loan to value issue would be satisfactorily addressed. The defenders would then be prepared to lend up to the £3.325 million figure discussed. In the course of cross-examination, however, the pursuer accepted the proposition that Mr MacDonald had indicated only that working capital funding would be provided if CBL could satisfy the defenders (a) that it required the funds, and (b) as to how the loan would be repaid. The pursuer regarded this as the same basis as that upon which the defenders had made overdraft facilities available without difficulty to his other businesses. These assurances, according to the pursuer, constituted the basis upon which he subsequently signed the personal guarantee in favour of the defenders.
[14] In support of his version of events, the pursuer produced a page from his desk diary applicable to Thursday 18 May 2006. The diary lists what appear to be telephone calls received at various times during the morning regarding unconnected matters. It then contains a handwritten note beginning with the letters “B.O.S.” and a mobile phone number as to which no evidence was led. The note continues with Mr MacDonald’s email address, the word “underscore” having been written longhand as if dictated. There follows part of a Thurso area phone number; again there was no evidence as to whose number this might have been. After that there is the following:
“Total cost 5.7m. approx.
To get 50% need 6.650 ml.
Give P/G for 950k. Will get the £3,325,000, as (?) required.
1,200 ml bld
125 s/up
2000 ml O/D
3325 ml 50%”
The pursuer stated that he took this note during the course of his discussion with Mr MacDonald.
[15] Mr MacDonald’s evidence was entirely at odds with that of the pursuer. He had had many meetings with the pursuer around that time and had no reason to disagree that one of these took place on 18 May 2006. However, he denied that the discussion as described by the pursuer above ever took place. The only commitment made by the defenders to the pursuer during Mr MacDonald’s period of involvement was to make available a loan facility of £1.2 million for capital costs and £125,000 for working capital. According to Mr MacDonald, he had indicated that the bank would consider increasing CBL’s overdraft facility as the business expanded, but at no time had a figure of up to £2 million been discussed. He had been aware of the figures in the grant application but saw them merely as part of CBL’s business plan, subject to change as the business actually commenced and developed. He would not have had an opportunity to peruse and digest the detail of the grant application in advance of a meeting on 18 May 2006. In any event, no reasonable banker, in Mr MacDonald’s view, would commit itself to providing an overdraft facility of up to £2 million to a business which had not yet even built the premises from which it intended to trade. In re-examination, his position changed somewhat in that he said that he would have said something along the lines that the bank would not go to the £2 million figure shown in Dr Moir’s report; he could not have told any customer what would be available two years later. What he would have said was that based upon the parameters in the plan he could give £125,000 and that if business increased towards Dr Moir’s projected turnover, there would be an increase in working capital, although this would have to be reviewed as business came on to the company’s books. As regards the note in the pursuer’s diary, Mr MacDonald was firmly of the view that the entry had been fabricated by the pursuer; nothing of that sort had been discussed. He stated that he had never heard the figure of £5.7 million mentioned until it was put to him at the proof. I shall require to address this conflict of evidence when I turn to consider my findings in fact below.
[16] On 21 June 2006, Mr MacDonald wrote a letter, addressed to the pursuer, stating as follows:
“As requested by [CBL] I write to confirm that the Bank has reviewed the proposal covering the development of the processing facility in Keiss.
I would further confirm that the Bank has considered the project and the request for support, in principal (sic), and a facility could be made available to cover the capital injection required by the company, subject to the FIFG and CASE grant application being successful.
I trust that this information is sufficient for your purposes at this time.”
[17] On 28 September 2006, Ms Hilary Budge, Business Development Manager with CASE, wrote to the defenders seeking detailed financial information regarding CBL, including the terms of all loans agreed and amounts outstanding thereon, and the details of any proposal for additional borrowing received or discussed. Mr MacDonald replied on 12 October 2006, stating inter alia as follows:
“Overdraft Facilities amounting to £1.2m in total are proposed to assist during construction phase of the development and also bridge the Grant funds pending payout. Capital cost to be transferred to a 10 year Term Loan on completion of construction with additional working capital overdraft facility of £125k to cover Cash Flow requirements when trading commences.”
Having addressed Ms Budge’s detailed queries, Mr MacDonald continued:
“The proposed development has been subject of a long term discussion between Bank of Scotland and John Sutherland. Bank have been kept fully aware of progress with various aspects and we have been provided with a detailed professionally prepared business plan.
The Bank are supportive of the Proposal and wish to assist subject to undernoted Conditionality which forms part of our Offer of Facilities. This Conditionality comprises…”
There followed a list of conditions, mostly concerned with the construction phase, but including
“Sight of Mey Selections Licence ifo Dungannon Meats and confirmation of [CBL] as sole processor of product.”
The letter concluded:
“John Sutherland of [CBL] has substantial interests in numerous other successful businesses within Caithness. This will stand this new company in good stead based on his natural business acumen and local network of contacts.”
An email in similar terms was sent by Mr MacDonald to SEERAD on 18 October 2006. On 7 November 2006, the pursuer was notified that CBL’s application to SEERAD had been approved. The application to CASE was also successful.
[18] It should be noted that at the time of approval of CBL’s grant applications, no bank loan funding was yet formally in place. However, once Mr MacDonald received confirmation of the approval of the applications, he re-applied to the defenders’ credit sanctioning department for conditional approval of a loan facility for CBL. Mr MacDonald’s application noted that the pursuer would be funding the proposal by way of £190,000 for transfer of existing farm land and buildings, £160,000 for transfer of existing abattoir machinery and equipment, and £60,000 for a steel portal building already owned, with £100,000 of the total to be shown as capital with the remainder as a director’s loan to CBL. Net capital borrowing was stated by Mr MacDonald to be:
“Funding requirement after Grant aid £1.180m
less JWS input 410k
Net 770k
Less Asset Finance 250k
Term Loan repayable over 10 years 520k”
Bank overdraft funding of £950,000 was requested to cover “planned outlays and also bridge Grant repayments pending receipt”.
[19] The basis upon which Mr MacDonald calculated that a term loan of only £520,000 was required is not immediately obvious. It may be noted that his deduction of £410,000 in respect of the pursuer’s contribution had not been made in previous calculations; that the total amount of the grants is in fact a little less than 50% of the total capital cost; and that the loan of £250,000 in respect of asset finance appears in the computation as a separate item. Mr MacDonald’s application continued:
“Overdraft borrowings to be transferred to a £520k 10 year Type 1 flexible interest Term Loan on receipt of all Grants. An initial working Capital Overdraft Facility of £125k will also be requested along with an Asset Finance facility of £250k for purchase of machinery costing £512k per Business plan.”
[20] Having thus stated the amounts of the facilities requested for CBL, Mr MacDonald’s completed the sections of the application form dealing inter alia with the nature of CBL’s trade, trading highlights, and probability of default. I do not propose to quote the application at length, but it is fair to say that it focuses to a significant extent upon CBL’s business connection with Mey Selections/Dungannon Meats. It includes the statements that
“The Licence for all Mey Selections branded products has been awarded solely to Dungannon Meats with the express condition that all Meat processing be handled by [CBL] in Wick as soon as acceptable processing facilities become available.”
and also that
“The Dungannon Contract accounts for two thirds of budgeted turnover.”
The application makes reference to a model used to assess the probability of default. Mr MacDonald confirmed when giving his evidence that this was a computer model used internally by the defenders. When it was put to him in cross-examination that the two-thirds figure was misconceived, and that the anticipated contribution of Dungannon business to CBL’s turnover was of the order of 22-25%, Mr MacDonald stated that he stood by the figure produced by the model. An important aspect of Mr MacDonald’s use of the model, according to his evidence, was that it satisfied him that £125,000 would afford sufficient working capital because the Mey Selections business would provide a faster turnover with earlier receipt of income.
[21] The conditions for grant of the facility proposed by Mr MacDonald accorded with those he had listed in his earlier communications with CASE and SEERAD. The application concluded by stating that “Approval is sought based on Conditionality”. On 27 November 2006, Mr Andrews of the defenders’ credit sanctioning department responded with conditional approval of a facility of £1,200,000. Mr Andrews expressed some continuing concerns regarding “viability/ability to generate forecast turnover/supply availability and the cash positioning”, but agreed to support the project “because of John Sutherland’s commitment to the project and his agreement to the collateralisation of his Guarantee”.
[22] On 29 November 2006, the defenders’ lending support unit (acting on instructions from Mr MacDonald) sent to the pursuer a formal offer of an overdraft of £950,000 for CBL. The pursuer was invited to accept the offer by signing and returning a duplicate copy within 21 days. What appears to have happened is that the pursuer made certain manuscript amendments to the defenders’ offer before signing it on 4 December 2006 and returning it. He amended the rate of interest over base rate from 2% to 1½% and the arrangement fee from £7,000 to £4,750. More significantly, he made amendments to a section headed “Additional Conditions Before Drawdown”, deleting references to sight of “Mey Selections licence” (but retaining a reference to Dungannon Meats) and also deleting the words “sole processor of product” as applied to CBL. There was no evidence of the defenders’ reaction, if any, to these amendments. It may be noted, however, that facility letters sent to the pursuer in subsequent years did not contain any section headed “Additional Conditions before Drawdown”.
The granting of the pursuer’s personal guarantee
[23] On or about 16 January 2007 (the copy document produced at the proof was undated), the pursuer signed a personal guarantee in favour of the defenders, unconditionally guaranteeing payment or discharge on demand of all money and liabilities for the time being due by CBL, up to a limit of £950,000 plus interest at 2% over the bank’s base rate from the date of demand until payment.
Subsequent events
[24] As already noted, Mr MacDonald retired on 8 December 2008. At that time construction of CBL’s premises was not complete. Responsibility for CBL’s account with the defenders was taken over by Mr Angus Morrison. One of Mr Morrison’s first tasks was to provide the defenders’ credit sanctioner with information regarding the pursuer’s various businesses in advance of a review of borrowing limits in February 2009. Having examined the files, Mr Morrison wrote to the pursuer on 5 December 2008, requesting a revised 12-month projection and observing:
“For myself, my real difficulty is with [CBL] as I agree that the facilities on offer are nowhere near enough to carry the business until a decent cash cycle is established through trading. What is currently on offer is a Term Loan of £520k and an overdraft of £125k plus Asset Finance of £250k – I can’t say how this was arrived at…”
Mr Morrison suggested two possible solutions, namely invoice discounting and outside investment, but stated that “Unless the current climate in Banking changes, I see no possibility of the Bank providing additional funding”. In response, the pursuer provided a two-year financial forecast for CBL, indicating that the premises were expected to be commissioned at the end of March 2009 but making no express mention of Mey Selections or Dungannon Meats.
[25] On 20 March 2009, the pursuer complained in writing to the defenders about their treatment of himself and his businesses. One of his complaints was that CBL’s overdraft facility had been reduced from £950,000 to £700,000, hurting its budget for completing construction and commencing production. On 24 April 2009, Mr Morrison submitted an internal report on CBL’s credit risk. Mr Morrison’s assessment was not encouraging:
“The company has run out of cash and the development is not yet complete. The company’s overdraft limit was cut from £950k to £700k in December following the draw-down of Asset Finance. J W Sutherland contends that such a reduction was not discussed with him at any time as a condition and the relative Facility Letter dated December 2008 makes no mention of it – not mentioned in previous FLs either. As far as he is concerned the £950k limit was his permanent facility to be converted to a loan on completion of the building…”
[26] Responsibility for CBL’s account was then taken over by Mr Michael Tomney in the defenders’ risk management department in Edinburgh. He summarised the position as he saw it in a credit risk credit application narrative dated 16 June 2009 as follows:
This connection was transferred to High Risk recently when the existing RM [i.e. relationship manager] advised that he could not reconcile the former RM’s (now retired) actions with the approval chain in place.
However, in simple terms, the now retired RM issued a letter in October 2006 committing the Bank to the provision of £1.2 facilities in assisting through the construction phase plus a further £125k for working capital. Conditionality was minimal and the customer has adhered to the letter’s requirements. The only area where the customer has not met the requirements of the letter is in terms of security. Previous credit papers quoted security to collateralise the guarantee from John Sutherland for £950,000. However research has confirmed that no such security is in place. We are in course of agreeing what additional security is to be put in place.
At this state we are requested to provide additional funding of £250,000 to finance the finishing costs of the abattoir and to agree to provide £125,000 of overdraft to fund the working capital…”
Mr Tomney’s narrative concluded:
“The situation is far from ideal and we are exposed to reputational risk should we not provide the funding now requested.
We would therefore suggest that we have no choice but to provide the £250,000 additional facility required to complete the building project now. We would seek to avoid making the additional £125k working capital facility available until we have at least a proposal regarding collateral in support of the guarantee…”
This last paragraph should be read in the context of Mr Tomney having written to the pursuer a few days previously, expressing the view that the defenders were “committed to providing a working capital facility of £125,000 which falls well short of the figure required should budget be achieved in terms of turnover”, and reiterating that any additional working capital would have to be funded from the pursuer’s own resources or from invoice discounting.
[27] Mr Tomney’s involvement with CBL ceased in about November 2009 when responsibility for the company’s account was taken over by Mr Mark Grant in the defenders’ commercial business support unit. Mr Grant had a number of meetings with the pursuer during 2010 and 2011. One of these took place on 2 June 2010 in the defenders’ premises in Inverness. The purpose of the meeting was to discuss an independent business review of CBL that had been prepared by KPMG. Mr Grant recalled that in the course of the meeting the pursuer mentioned that the defenders had promised working capital of about £1.9 million once the premises were built. Mr Grant regarded this as a comment made in passing and did not take it seriously. Thereafter the pursuer made repeated requests to the defenders for additional working capital funding, all of which appear to have been declined. In a lengthy letter to the defenders dated 23 May 2011, the pursuer referred to an agreement with Mr MacDonald that CBL would receive £1.2 million for the building, £125,000 for start-up costs, and working capital “…per business plan depending on our growth in year 2 & 3”. He described himself as having been “robbed of 2 million working capital”. Reference to an agreement to provide an overdraft facility of £1.9 million in the first year of trading was also made in a letter dated 13 December 2011 from solicitors acting on behalf of CBL to the defenders.
[28] On or about 30 April 2012, CBL was put into administration by the defenders. As already mentioned, the defenders have since demanded payment by the pursuer of the sum said to be due under his personal guarantee.
Assessment of evidence
[29] Resolution of the issues of law arising in this case is largely dependent upon my findings of fact, and in particular my findings regarding the meeting between the pursuer and Mr MacDonald said to have taken place on 18 May 2006. In the light of the conflict between their respective testimonies, it is necessary for me to assess the credibility and reliability of these two key witnesses with some care; no material issues of credibility or reliability arose in relation to any of the other witnesses. It is convenient to begin with Mr MacDonald.
[30] Mr MacDonald gave evidence reluctantly. He had refused to provide a witness statement to solicitors acting on behalf of either the pursuer or the defenders, and instead gave a statement and a supplementary statement to his own solicitor, in each case consisting of answers to questions framed by the defenders’ agents. He clearly harboured a strong sense of grievance that his credibility and reliability, as well as his professional competence as a bank manager, were being called into question. At times his evidence was coloured by anger directed towards the pursuer for telling what Mr MacDonald regarded as untruths. He had had limited access to contemporaneous documents when answering the questions put to him for his statements. When responding to questions under cross-examination, he was inclined to attempt to work out the purpose of the question, and then to give an answer which addressed what he thought was the purpose, rather than answering the question put to him. The consequence of this was that questions frequently had to be put to him more than once by senior counsel in order to obtain a direct answer. He was at pains to defend his actions during the critical period and denied that he had, knowingly or otherwise, misled either the pursuer regarding the bank’s commitment to the project or the bank regarding CBL’s business projections.
[31] It is apparent that Mr MacDonald saw himself as a traditional bank manager whose job was to “love customers to death”, as he put it. The pursuer was a valuable customer and Mr MacDonald was keen to do what he could to secure funding for the CBL project. It was entirely in keeping with his role as relationship manager to champion CBL’s application to the defenders for finance. It was submitted on behalf of the pursuer, however, that the evidence demonstrated that in his desire to assist the pursuer and thereby retain his business for the defenders, Mr MacDonald was willing to provide assurances to various parties which were at least equivocal, if not positively misleading. In the first place, the letter of 21 June 2006 and the communications with CASE and SEERAD in October 2006 were sent at times when no conditional approval of funding had been given by the defenders’ credit sanctioning department, and indeed at times when no revised application, following the initial refusals, was even outstanding. These letters amounted, as Mr MacDonald must have been aware, to a commitment on behalf of the bank: that was how the letter to CASE had subsequently been regarded by the defenders themselves. In the second place, it was submitted that Mr MacDonald misrepresented to his credit sanctioning department that contractual relationships were in place with Mey Selections/Dungannon Meats which ensured that CBL would receive this business when the new premises were commissioned. Mr MacDonald had placed considerable emphasis upon this aspect of CBL’s plan, both to persuade the defenders’ credit sanctioners that the business was viable from the outset and also to calculate the amount of working capital which the business would require. But there was no objective basis for representing the obtaining of this business as a “certainty” (as it was described by Mr Taylor in his email of 17 February 2006). Dr Moir’s second business plan had referred only to CBL being “considered” to participate in the Mey Selections project if its facilities were of an acceptable standard. There was no justification for Mr MacDonald’s assertion in his November submission to the credit sanctioning department that the Mey Selections licence had been awarded solely to Dungannon Meats on condition that all meat processing be handled by CBL. It was noteworthy that in a credit application submitted in October 2008, Mr MacDonald had altered his narrative to an “expectation” that meat processing would be handled by CBL. Absence of certainty regarding the Mey Selections business was consistent with the pursuer’s deletion from the offer of facilities of the references to the Mey Solutions licence and to CBL as sole processor. All of this, counsel submitted, demonstrated that Mr MacDonald was wont, albeit with good intentions, to give assurances which were beyond his authority and/or with no sound objective basis. Having regard to the then banking climate and to his past success in obtaining funding for the pursuer’s businesses, Mr MacDonald was confident that he would in due course obtain the funding sought by and promised to the pursuer for CBL. It was therefore probable that he did state to the pursuer at the meeting on 18 May 2006 that the overdraft facility referred to in the business plan annexed to the SEERAD grant application would be provided by the defenders. The pursuer’s evidence to that effect should be accepted.
[32] In my judgment Mr MacDonald was a patently honest witness who was at all times doing his best to tell the truth as he recalled events. I also regarded him as largely reliable, taking into account the lapse of time since the events about which he was being questioned and his limited access to documents prior to giving evidence. I accept the submissions on behalf of the pursuer regarding Mr MacDonald’s keenness to assist CBL’s application, but only up to a point. It is the case that Mr MacDonald made certain statements to CASE and SEERAD at a time when no approval had been given by credit sanctioning of the provision of loan finance to CBL. For my part, however, I do not regard the terms of his communications with these bodies as obviously open to criticism. What Mr MacDonald was being asked to provide – and did provide – was an indication of the defenders’ likely position should grant funding be made available. SEERAD in turn imposed as a condition of award of its grant that a letter from the defenders be provided confirming the amount, terms and conditions of any overdraft or term loan facilities agreed. (No equivalent award letter from CASE was produced.) Where, as here, finance is sought from more than one source, someone must necessarily declare their position first, albeit subject to conditions. In my assessment, Mr MacDonald did no more than that. I have no difficulty accepting the view of Mr Tomney and others that in circumstances where the grants were subsequently made available, the defenders were committed to providing the funding that Mr MacDonald had indicated was proposed. That does not, however, in my opinion, imply that Mr MacDonald overstated the extent of the defenders’ commitment as at October 2006.
[33] As regards his description of the connection (to use a neutral term) with Mey Selections/Dungannon Meats, I agree that there is no contemporaneous evidence to demonstrate that any contract had been entered into or that the licence awarded to Dungannon Meats was conditional upon use of CBL’s premises once these became available. To this extent it appears that the information provided by Mr MacDonald to his credit sanctioners was inaccurate. Mr MacDonald’s position on this was that nothing he said went beyond what he had been told by the pursuer or Dr Moir; if he had provided inaccurate information, that was because he and/or Dr Moir had been misled by the pursuer. For my part, I find this explanation plausible. I accept Mr MacDonald’s evidence that he was being put under pressure by the pursuer to obtain a funding commitment, in order that CBL might secure the grants and begin construction. I also accept his evidence that at the time when he made his credit submission in November 2006 he was being told by the pursuer that the supply to Dungannon Meats was central to CBL’s plans and that it would proceed provided that CBL’s processing facilities were acceptable. I reject as wholly implausible the notion that a highly experienced bank manager such as Mr MacDonald would invent these details in order to persuade his credit sanctioners to lend money for what he knew was regarded by them as a project carrying significant financial risk. I am satisfied that the detailed and specialised information contained in Mr MacDonald’s submission must have come from the pursuer (whether directly or indirectly via Dr Moir) and that within the information provided was an assurance that the Mey Selections/Dungannon Meats element of the business would proceed. The deletion by the pursuer of certain words in the overdraft facility letter are as consistent with concern on his part that he might have overstated the certainty of the Mey Selections connection to Mr MacDonald as they are with a unilateral exaggeration by Mr MacDonald. It appears that Mr MacDonald formed his own view, based on use of defenders’ computer model, as to the level of working capital that would be required initially when CBL began to trade. It may be that that view was misconceived, as his successors appear to have concluded. That, however, is not the issue I have to decide. What I have to decide is whether the evidence taken as a whole demonstrates a tendency on the part of Mr MacDonald to give assurances to third parties without authority or objective foundation. I am not persuaded that any such tendency has been demonstrated, and accordingly I do not find that Mr MacDonald’s dealings with either his credit sanctioners or with CASE and SEERAD affords any support for the proposition that Mr MacDonald gave an assurance to the pursuer that working capital of up to £2 million would be made available when CBL started to trade.
[34] I turn to consider the evidence of the pursuer. He gave his evidence in a straightforward manner, although his recollection of detail was often vague and he sometimes gave answers which indicated that he had not listened properly to the question asked. He too harboured a strong sense of grievance; in his case it was directed against the defenders with whom he had had a long-standing relationship, and whom he saw as having betrayed him at the very time when he needed their support. I have considerable sympathy with this view. It is easy to identify a change of attitude on the part of the defenders, no doubt due to the occurrence of the banking crisis, between 2006, when Mr MacDonald (and indeed others) wished to do all they could to assist the pursuer to create the CBL business, and 2009, when the defenders’ preoccupation was to extract themselves from the relationship at minimum cost. But the question I have to address is whether the pursuer has proved that, on or about 18 May 2006, the defenders (through Mr MacDonald) agreed, misrepresented or assured him that working capital funding of up to around £2 million would be provided to CBL when it commenced trading.
[35] In my opinion, the pursuer has failed to prove any such agreement, misrepresentation or assurance. As senior counsel for the defenders submitted, on one view of the evidence I could decide the case in favour of the defenders without making any adverse finding regarding the pursuer’s credibility or reliability. I have already mentioned that the pursuer agreed during cross-examination that he only recollected Mr MacDonald saying that working capital funding would be available if the pursuer could demonstrate (a) that CBL had need of the money and (b) how it would be repaid. That would not have amounted to an agreement or commitment to make available working capital of the particular amount that appeared in Dr Moir’s business plan, or indeed of any particular amount. However, it remained the pursuer’s case after proof that the agreement, representation or assurance provided by Mr MacDonald on 18 May 2006 was to provide working capital funding of up to £2 million and I must deal with the matter on that basis.
[36] My conclusion that no such agreement or representation was made, and no such assurance was given, is based partly upon my acceptance of Mr MacDonald as a credible and reliable witness, from which it follows that I must reject the evidence of the pursuer in so far as contradicting that of Mr MacDonald. It is also based partly upon the absence of reliable contemporaneous documentation consistent with the pursuer’s case. In support of his version of events, the pursuer founded principally upon two documents: the business plan contained within the grant application, and the entry in his desk diary. I deal with these in turn. In my opinion the grant application affords no support for the existence of any agreement, representation or assurance that working capital of up to £2 million would be made available by the defenders to CBL. The figure of £1,993,000 which appears in the projected balance sheet as the estimated overdraft of the business and the project after its first year of trading must necessarily include the whole of the projected bank loan of £1,046,000 in respect of capital expenditure, except in so far as any loan repayments had been made in the course of that year. The figure of £2,005,000 in respect of fixed assets roughly equates to the estimated total cost of purchase of land and buildings, construction of new premises, and purchase and installation of plant and equipment, excluding the contractor’s “technical charges”. The proposed capital contribution of £119,999 by the pursuer himself would have been insufficient to cover the “technical charges”. That leaves the full £1,046,000 million, including any element attributable to asset finance, committed to capital expenditure. At best for the pursuer, the business plan envisages a further £947,000 or thereby being provided during 2007-08 by way of an overdraft facility for working capital and start-up costs. That is a great deal more than the £125,000 included by Mr MacDonald in his subsequent application to the defenders’ credit sanctioning department, but it affords no support for the pursuer’s assertion that there was an agreement or promise to provide him with up to £2 million. On the contrary, it is, in my opinion, entirely consistent with an indication by Mr MacDonald only that the bank would consider, once CBL was ready to begin trading and periodically thereafter, its need for working capital and its ability to repay any further sums lent.
[37] I have given anxious consideration to the entry in the pursuer’s diary. Mr MacDonald’s assertion that this was a fabrication was not put to the pursuer for comment. The reason for this was that the questions presented to Mr MacDonald which formed the basis of his witness statements regrettably did not include any concerning this entry, and so provided no basis upon which it could have been put to the pursuer in cross-examination that the calculation had been written in the diary by him with intention to deceive. Nevertheless, as I have accepted Mr MacDonald’s evidence that there was no discussion on 18 May 2006 of the figures in the manuscript calculation, I must conclude that the note was not made during a meeting between the pursuer and Mr MacDonald. I consider that Mr MacDonald’s version of events receives support from the absence of any other contemporaneous reference to a total cost of approximately £5.7 million. I accept the pursuer’s point that there was expenditure on the abattoir which did not qualify for grant funding, but I note in this regard that the grant application does refer to non-eligible expenditure of £280,000 on building purchase; if the total cost of the whole project was expected in 2006 to be more than double the “total planned expenditure” of £2,331,998, I would have expected to see this mentioned somewhere in the business plan. On the basis of the material before the court, I do not believe that a figure of £5.7 million was in the pursuer’s mind in May 2006. If that is right, then the calculation producing a balancing figure of £950,000 falls apart. I do not, in any event, find the pursuer’s explanation of the calculation plausible. If, as he put it, the bank required a loan to value ratio of 50%, the granting of a personal guarantee would add nothing to the value of the project; it would merely provide a form of security for the loan element. I agree with Mr MacDonald’s comment that the calculation makes no sense in banking terms. It is also worth recalling that a personal guarantee by the pursuer in the sum of £950,000 had been mentioned in Mr MacDonald’s Facility Amendment Report dated 10 April 2006, i.e. over a month previously. I do not require to go so far as to find that the pursuer’s purpose in writing the calculation in his diary was to fabricate evidence to support his case at proof; it is enough for me to say that, having regard to the whole circumstances, I am satisfied that this part of the diary entry was not made during a meeting with Mr MacDonald on or about 18 May 2006, and that the pursuer’s evidence that it was so made was not true.
[38] Having thus rejected the two pieces of documentary evidence relied upon by the pursuer as supporting of his version of his conversation with Mr MacDonald, I consider that the absence of contemporaneous support affords a strong indication that there was no agreement, no misrepresentation and no assurance given to the pursuer. It may be, as Mr MacDonald stated during re-examination, that he mentioned £125,000 as a figure which the bank would lend on the basis of the information then available, but I accept his evidence that no higher figure was mentioned. If the pursuer’s assertion that the meeting took place on 18 May is accepted, then Mr MacDonald would only have received the grant application by email at 1.47 pm on that day. It is not credible, in my view, that without having had time to study the revised business plan incorporated into the application, Mr MacDonald would have committed the defenders to lending up to £2 million for working capital after construction was complete. It is clear from Mr MacDonald’s evidence that his usual practice was more prudent: before submitting the application which did receive conditional approval from credit sanctioning, he sought information from Dr Moir and also carried out calculations of his own based on the bank’s computer model. In reaching my view, I am also influenced by the fact that no reference was made by the pursuer to any agreement or assurance that up to £2 million would be advanced until June 2010. If he had genuinely believed that such a facility had been agreed or promised, there were a number of prior occasions when I would have expected him to mention it: for example, on receipt of the overdraft facility offer letter in November 2006, when signing the personal guarantee in January 2007, in response to Mr Morrison’s letter in December 2008, and when complaining to the defenders in March 2009 about having had his overdraft facility reduced from £950,000 to £700,000.
[39] I consider it more likely than not that what Mr MacDonald said at the meeting on or about 18 May 2006 was more or less as accepted by the pursuer in cross-examination, i.e. that working capital funding would be available if the pursuer could demonstrate that CBL had need of the money and was able to repay it. That, in my view, stopped a long way short of a commitment by Mr MacDonald, on behalf of the defenders, to make any particular amount – or indeed any amount – available by way of a working capital overdraft. On the basis of the successful relationship that the pursuer had had with the defenders for many years, and his own confidence that the CBL business would be successful, I infer that this was regarded by the pursuer as sufficient reassurance that funds would be made available to him when he requested them in order to begin trading. Unfortunately, by the time he did need working capital, the defenders’ attitude to lending to businesses was very different from what it had been in and prior to 2006. Mr MacDonald’s successors were not willing to increase their commitment to a venture which they regarded as carrying an unacceptable degree of risk. It is not for me to make any comment on the attitude taken by the defenders from 2008 onwards, other than to find that nothing that had been said or done by Mr MacDonald in 2006 precluded them from adopting the attitude which they did adopt.
The pursuer’s legal propositions
[40] Against the background of the foregoing assessment of the evidence, I turn to address the legal propositions advanced by the pursuer. The pursuers’ first proposition was that what Mr MacDonald did on 18 May 2006 was to enter into a contractual commitment on behalf of the defenders to provide an overdraft for working capital of up to £2 million as and when the business began to trade, in return for which the pursuer granted a personal guarantee. The effect of the principle of mutuality of contract was that because the defenders had failed to implement their contractual obligation to the pursuer, the personal guarantee could not be enforced and should be reduced. In my opinion, no such contractual commitment was given. At no time did the defenders enter into any legally binding agreement to lend any sums other than those actually provided. In this regard I refer to the observations of the Lord Justice Clerk (Carloway) delivering the Opinion of the Court in Royal Bank of Scotland plc v Carlyle 2014 SC 188 at paragraph 61, distinguishing between a statement of future intention on the one hand and a legally binding obligation on the other. It seems to me that the circumstances founded upon in the present case are weaker than those held insufficient in Carlyle to constitute a binding legal obligation.
[41] The pursuer’s second, and alternative, proposition in favour of reduction of the personal guarantee was that the evidence established that the pursuer was induced to grant it by Mr MacDonald’s assurance that the defenders would provide CBL with the overdraft facility which Dr Moir had indicated in his third business plan would be required to fund the company’s initial trading, as and when that working capital was required. I have found that the amount of bank overdraft which appears in Dr Moir’s third business plan cannot - or at least cannot all – have been intended by him as a statement of the amount required to fund the company’s initial trading, and could not therefore have formed the basis of an assurance by Mr MacDonald that an overdraft facility of up to £2 million would be provided. I have also found that, in any event, no such assurance was given by Mr MacDonald. In these circumstances I hold that no misrepresentation was made by Mr MacDonald that did or could have induced the pursuer to grant the guarantee. The factual basis of the pursuer’s second proposition is accordingly not made out. That being so, I do not require to address an argument presented to me on behalf of the defenders concerning the impossibility of restitutio in integrum, and I prefer to reserve my position on it.
[42] The pursuer’s third proposition was that if he was not entitled to have the guarantee reduced, he was entitled to damages as a result of the vicarious liability of the defenders for the actings of Mr MacDonald. The amount of such damages would be equivalent to the sum due by him in terms of the guarantee. It was submitted that in committing the defenders to provide substantial working capital of up to £2 million when trading commenced, without having any justification for making such a commitment, Mr MacDonald failed to take reasonable care to ensure that the pursuer did not make substantial commitments and sign a personal guarantee. As a general principle, a bank will be vicariously liable for the actings of its officials if they act negligently so as to induce a customer to enter into an arrangement as a result of which he suffers loss. Reference was made to Box v Midland Bank Ltd [1979] 2 Lloyds Rep 391, Lloyd J at page 399, applying the principle in Hedley Byrne v Heller & Partners [1964] AC 465, and to Pace v Westpac Banking Corporation [2001] QSC 415, a decision of the Supreme Court of Queensland on facts said to be similar to those of the present case. I accept that the cases cited vouch the existence of the stated general principle in the laws of England and Wales and of Queensland. There is, in my view, no obvious reason why application of the Hedley Byrne principle should not lead to a similar result in Scotland. I do not accept the submission on behalf of the defenders that it was incumbent upon the pursuer in the circumstances of the present case to prove (i) that the defenders, through Mr MacDonald, had assumed a duty to give advice which would not normally be owed by them; and (ii) that in assessing whether Mr MacDonald had acted negligently in giving advice, the standard to be applied was the test in Hunter v Hanley 1955 SC 200. In my opinion the present case is not concerned with the giving of professional banking advice; the pursuer’s contention is rather that Mr MacDonald negligently informed him that an overall funding package including up to £2 million working capital finance would be made available to him, that he knew or ought to have known that the pursuer would rely upon that statement when deciding whether or not to provide a personal guarantee, and that the pursuer did rely upon it: in other words, a scenario falling squarely within the Hedley Byrne principle. Again, however, I am of the opinion that the pursuers’ contention in law is not supported by the facts. I have found that Mr MacDonald did not inform the pursuer that working capital funding to such a level would be made available to him. There was accordingly no breach of duty by Mr MacDonald in respect of which vicarious liability could attach to the defenders.
Disposal
[43] For these reasons, I accede to the defenders’ motion to repel the pursuer’s pleas-in-law, to sustain the defenders’ second, third, fourth and ninth pleas-in-law, and to grant decree of absolvitor. Questions of expenses are reserved.