[2013] CSOH 78



in the cause







Pursuer: McBrearty, Irvine; HBJ Gateley

Defenders: Barne; MBM Commercial

28 May 2013

[1] In September 2007 James O'Donnell and Ian McDonald (the defenders) incorporated Whinhill Developments Ltd. They were both directors of, and shareholders in Whinhill. It was incorporated as a vehicle to purchase a potential development site at Strone Farm, Glenbrae Road, Greenock. The defenders intended to obtain planning permission and thereafter sell the subjects to a house builder or developer. The Royal Bank of Scotland (the pursuers) agreed to provide a loan of £1.65 million to fund the purchase. The pursuers and the company entered into a one year loan agreement dated 13 and 14 September. Within 12 months, an exit fee of £160,000 was payable to the bank. This was in recognition of the extra risk being run by the bank, in that the site had no planning consent. The facility was termed a "spec' loan."

[2] The site was purchased by Whinhill for about £1.5 million. By way of security, Whinhill provided the pursuers with a standard security over the subjects and a bond and floating charge over the company's whole property and undertaking. Apart from the site, the company had no other assets. Come the loan expiry date in September 2008, Whinhill could not repay the monies. The pursuers and the company entered into negotiations in order to refinance the loan facility. The new loan was for £1.695 million, which sum, plus interest, required to be repaid by 31 March 2011. The defenders provided further security in the form of a joint and several personal guarantee dated 20 March 2009. They guaranteed to discharge on demand all liabilities of the company to the pursuers, under the proviso that the amount recoverable from the defenders would not exceed the aggregate of £300,000 plus interest and expenses (on a full indemnity basis).

[3] A default event having occurred, by letter of 24 February 2011 the pursuers sought immediate payment of all monies and liabilities owed in terms of the second loan agreement. Whinhill failed to make payment of the sum demanded. By letter dated 25 February 2011, the pursuers wrote to each of the defenders demanding immediate payment of the sum of £300, 531.21 due under the guarantee. The defenders have not made any payment to the pursuers.

[4] In this action the pursuers seek decree for payment by the defenders, jointly and severally, or severally, of the said sum, together with interest as calculated in terms of the guarantee, plus a declarator of entitlement to expenses on an indemnity basis. The action is resisted on the basis that the guarantee was induced by various misrepresentations made on behalf of the pursuers. The defenders also counterclaim for reduction of the guarantee and for recovery of the interest payments made on behalf of Whinhill in relation to the second loan agreement.

[5] At a proof, at which the defenders led, the following gave evidence:

· Both defenders.

· Leonard Marsh, a relationship director employed by the pursuers, who had particular responsibility for the Whinhill loan facility - and for the first defender's other projects.

· Joseph Wallace, a director of the commercial banking division.

· Graham Galloway, managing director of the same division.

· Robert Johnston of the bank's credit division.

· Brian Ronnie, a chartered surveyor and partner in Ryden LLP.

· Raymond Burns, a senior surveyor employed by Ryden LLP.

The pursuers were represented by Mr McBrearty and Ms Irvine; and the defenders by Mr Barne.

Events in 2007

[6] The defenders possessed a market valuation of the site prepared by Knight Frank LLP dated 24 July 2007 in the sum of £3.237 million, with a gross development value in respect of a 112 housing unit scheme of £18.097 million. They also had a heads of terms offer to purchase the site from Miller Homes addressed to Knight Frank dated 10 August 2007 for £5.185 million, additional on various matters, including detailed planning consent for the development scheme. The defenders gave the bank a proposed residential development layout dated 14 June 2007 prepared by Jewitt Arschavir & Wilkie, architects. It consisted of 63 detached and 24 semi-detached houses - 87 in all. Armed with this plan, on the instructions of the bank Ryden LLP inspected the site, and in due course forwarded a report and valuation dated 17 September 2007, expressing the opinion that the market value of the subjects was £3 million, with an estimated gross development value of £16.92 million. Assuming that planning consent could be obtained and certain title issues negated or overcome, Ryden expressed the belief that the subjects offered "good loan security" for the proposed loan. (Paragraph 1.3 explained that Ryden understood that the report was required by the bank for loan security purposes). The report and valuation was provided "on behalf of" the pursuers and their customer (Whinhill).

[7] In a letter dated 11 September 2007 from the first defender to Ryden's Mr Raymond Burns (with a copy forwarded to the bank's Mr Leonard Marsh) it was explained that Mr O'Donnell anticipated that the site would be capable of achieving in excess of 130 units "based on a mix of flats and low rise". Detached houses would form only around 30% of the site.

Events in 2008
[8] A year passed. For some time it had been apparent to Mr Marsh that Whinhill would be unable to sell the site, and thus the loan would not be repaid when due. The facility, expanded to include the exit fee, was extended to 31 October 2008. By then the economic crisis triggered by the collapse of Lehman Brothers in September was in full swing. According to Mr Marsh this was "a horrific period". There were huge problems across the whole group. It was thought that the market might recover in six to nine months. Meantime "all buyers had gone to ground". It was hoped that existing valuations would see the bank through to market recovery. There was a concern that a shortfall in security would be brought to the attention of regulators. This could create "an absolute problem". Mr Marsh's skill had been in expanding the loan book. He was employed to challenge the credit division of the bank. The ethos was to "do the deal". But now the focus had shifted away from income and sales to risk.

[9] Outline planning permission for housing on the site was granted on 2 October 2008. In the context of refinancing the now expired loan, the question arose as to whether the subject should be revalued. On 23 October, Mr Burns and Mr O'Donnell had a telephone conversation. In a note of the conversation, Mr Burns wrote that Mr O'Donnell wants "a fag packet valuation for £3 million with increased density" The same day Mr Marsh was told by Mr Burns of Ryden that he believed that a site price of somewhere between £1.75 million and £2 million was realistic. In his evidence Mr Marsh said that in subsequent communings with colleagues in the bank and others he did not refer to the £1.75 million figure because the valuation had not been formalised - " this stage the figures were indicative only". Mr Burns said that it was normal for there to be informal discussions with relationship managers such as Mr Marsh concerning potential valuations before instructions to value were given. The view expressed by Ryden meant that the loan facility, which now exceeded £1.8 million, contravened the bank's 70% loan to value (LTV) policy. Post-crash this test was being enforced more strictly than before. Mr Marsh found himself under pressure to resolve the situation. He and his colleagues in the commercial banking division preferred to avoid a formal revaluation of the site. This would merely confirm a difficult situation. Given the absence of a market for such sites in the latter part of 2008, Mr Marsh was reluctant to crystallise the bank's security. His preference was to refinance the facility using the 2007 valuation. This would allow the LTV criterion to be met. However the credit division insisted upon a revaluation of the subjects as a pre-requisite to any new loan agreement.

[10] Mr Burns stated that his "overriding recollection" was that the reason for a revaluation was to limit decreases in value. Both the bank and the borrower wanted Ryden to value on an increased density basis. (The previous report was based on 87 detached and semi-detached houses.) "We offered to revalue on a full market basis which was eventually declined by both parties". On 12 December 2008 Mr Marsh's immediate superior, Mr Joe Wallace, suggested that the defenders might be persuaded to provide personal guarantees totalling £300,000. On the same date, Mr Ronnie, the superior of Mr Burns and the signatory of the 2007 Ryden report, told Mr Marsh that, in a revaluation of the site, Ryden could get to £2 million. In an email he advised Mr Burns to similar effect. Thus, when he came to carry out his work, Mr Burns was aware of the assurance given to Mr Marsh. In his evidence Mr O'Donnell said that at a subsequent meeting on 16 December (to be discussed shortly) it was made very clear to him that Ryden would produce a valuation of £2 million. Mr Ronnie explained that RBS and Mr O'Donnell were long term clients of Ryden. Mr O'Donnell had asked Mr Burns if he could reach £3 million but had been told "no". Mr O'Donnell said in evidence that he was disappointed to hear of the £2 million valuation. He wanted £3 million, as did Mr Marsh.

[11] On 16 December 2008 Mr Marsh and Mr Wallace had a meeting with Mr O'Donnell. Mr O'Donnell was told that Ryden would value the site at £2 million. It was agreed that Ryden would be instructed to provide a valuation. Mr O'Donnell was concerned as to the implications of any Whinhill default for other RBS loans advanced to his development company, Zoom Developments Limited. However he was aware that there would be serious implications for the bank if the defenders simply returned the keys to the site. Mr O'Donnell mentioned this possibility. Mr Wallace said that the bank would not ignore any default so far as the Zoom loans were concerned. In evidence he said that, if there had been no personal guarantee, the whole Zoom connection would have gone to the global restructuring group, which would have meant that all of Mr O'Donnell's facilities would be taken away from Mr Marsh and given to another section of the bank designed to deal with distressed facilities. Mr Wallace and Mr Marsh suggested to Mr O'Donnell that a new loan agreement could be granted if the defenders were agreeable to a joint and several personal guarantee in the sum of £300,000. This would mean that the 70% LTV would be satisfied, though only just.

[12] The next day Mr O'Donnell met and discussed matters with Mr McDonald. They agreed to grant the personal guarantee. This was communicated to the bank. On 17 December Mr Ronnie emailed Mr Marsh saying that, to cut costs, they could provide an updated letter for £500 plus VAT, based on 120 units as per Mr Burns' last notes to Mr Marsh. In evidence Mr Ronnie said that he did not intend to bind Ryden to exactly 120 units.

[13] The defenders were paying for the valuation, and thus Mr Marsh asked Mr O'Donnell if he could instruct Ryden to go ahead. Mr O'Donnell emailed his consent. On 19 December 2008 Mr Marsh received a "desktop updated valuation" regarding the site. Although under Mr Ronnie's reference, the letter was prepared by Mr Burns. An assumption was made that 128 housing units would be permitted on the site. The poor market and economic conditions were noted. The 128 units produced a gross development value of £21 million (a substantial increase since the last report). Various assumptions were made which showed "an end site residual value of circa £2 million". It was noted that, in the uncertain economic climate, values were in a state of transition. Ryden reserved the right to revalue the subjects in the near future should valuations fluctuate further. The letter concluded by stating that:

"We are of the opinion that the market value of the development at 19 December 2008 is a sum in the order of £2 million. The above opinion of value is prepared solely for the use of the Royal Bank of Scotland and no responsibility is accepted to any other party. We would highlight that the above opinion of value has been carried out on a desktop basis without a re-inspection of the premises and should be used for indicative purposes only".

[14] During their evidence Mr Ronnie and Mr Burns explained that this meant that the updated valuation was not suitable for, nor to be relied on by the bank for lending purposes, and that £2 million did not represent Ryden's opinion as to the value of the subjects at the time. The 19th December letter was a valuation based upon a "what - if" scenario, the "what if" being the assumption that the site was capable of development to maximum density. It was a maximum possible value. If Ryden had been paid £2,500 for the exercise, as opposed to £500, they could have provided a full valuation "as prudent surveyors", but they were not allowed to do that. Mr Burns understood that the instructions were to provide a valuation at the highest possible level. "Our reported figure was an indicative value based on an increased density. The 2007 and 2008 valuations were very different types of reports".

[15] On its receipt Mr Marsh read over the 19 December revaluation letter. He did not identify any problems or errors. He did not understand that the report to be unsuitable for lending purposes. In evidence he said that perhaps he should have questioned the "indicative" nature of the valuation. He "must have overlooked it." He appreciated that assumptions were being made. "We all knew it was a theoretical exercise". At one point Mr Marsh said that if the site was put on the market, he would not have expected it to sell. No valuer could say what the value was," because there were no buyers". If Mr Marsh had noticed that 128 units were being used rather than 120, he would not have regarded that as a material issue. He did not regard a combination of flats and houses as essential. The "mix" was not crucial. The 120 unit idea was not fixed. It might be more - it might be less. Mr Burns said that he did not recall having discussed any necessity for a mix of flats and low rise on the site with Mr O'Donnell.

[16] Mr Marsh's recollection is that he photocopied the 19th December letter, put it in an envelope addressed to Mr O'Donnell, and placed it in an office mailing basket marked "first class post". During his evidence Mr Marsh said: "It is possible that I am misremembering posting out the report". In their evidence, the defenders said that Mr O'Donnell did not receive a copy of the Ryden revaluation from Mr Marsh. The first time they saw the 19th December letter was in February 2010, after the whole relationship with the bank had gone sour. More or less immediately they contacted their solicitor with complaints as to the terms of the report and the bank's conduct. They claim that the 11 acre site could never accommodate 128 detached and semi-detached houses. Such numbers could only be achieved by a mix of flats and low rise development. In addition, they assumed that Ryden was providing a professional opinion on market value which could be relied upon as an update to the earlier formal valuation.

Events in 2009/10
[17] On 9 January 2009 Mr Marsh emailed Mr O'Donnell to confirm certain matters in relation to the offer of renewal. In the course of it he said: "As you know Ryden have revalued the site at £2 million giving us a LTV of 85%." By February 2009 Mr Robert Teevan had assumed line responsibility for Mr Marsh and his portfolio. In an email to Mr Johnston he resisted any suggestion that the defenders should provide security for their personal guarantee. This would return the bank to "the position at December where the clients threatened to walk away". On 20 March 2009 the second loan agreement between the bank and Whinhill was executed. The facility was £1.695 million to be repaid by 31 March 2011. Amongst other things this was subject to the defenders' personal guarantee for £300,000 in respect of the obligations of Whinhill. It was provided that the loan minus the guarantee, expressed as a percentage of value, could not exceed 70%. "Value" was defined as "the market value of the property evidenced by the most recent valuation addressed to the bank". On the basis of a value of £2 million the LTV criterion was met, but only just. On 20 March 2009 the defenders signed the joint and several guarantee.

[18] In the course of 2009 Mr O'Donnell was asked to provide guarantees and additional security in respect of loans made to his property development company. He refused and the bank called in the Whinhill and Zoom loans. The bank sought a valuation of the Whinhill subjects from Messrs Graham & Sibbald. On 8 December 2009 they received a valuation based on 127 units (including 24 terraced houses and 68 flats) which would produce a cumulo total value of £14.74 million. The residual land value was stated at £156,000 or thereby, which assumed, amongst other things, a full planning consent. The surveyors stated that, if land engineering had been completed, a valuation of around £500,000 would be realistic.

[19] In February 2010 the defenders raised concerns as to the December 2008 valuation and the bank's conduct in respect of the second loan agreement. Subsequently the bank put Whinhill into administration and the site was sold for about £65,000. The first defender's wife has an interest in the company which now owns the subjects.

The defenders' case
[20] At the conclusion of the evidence, the defenders' counsel, Mr Barne, explained that the enforcement of the guarantee is resisted on the basis that it was induced by negligent misrepresentations by Mr Marsh while acting on behalf of the pursuers. Mr Barne prefaced his remarks by reference to Lord Jeffrey's opinion in Royal Bank of Scotland v Ranken (1844) 6 D 1418; the speech of Lord Clyde in Smith v Bank of Scotland 1997 SC(HL) 111; and Gloag & Irvine, Rights in Security at 706 ff. In summary, a creditor must not mislead a proposed cautioner as to the hazards of the undertaking whether intentionally, from carelessness, or by mere blunder. Any representation must be "full and fair". A misrepresentation can occur by withholding all or part of the truth.

[21] As the submissions developed, it became clear that Mr Barne relied upon the following alleged misrepresentations.

1. Mr Marsh's failure to disclose that in their email of 23 October 2008 Ryden were reporting a site price of "somewhere between £1.75 million and £2 million." In his communications with the defenders, Mr Marsh did not mention the lower figure, nor the reported range.

2. On 16 December 2008 the bank represented that Ryden would value the site at £2 million, and the second loan agreement proceeded on the basis that this had occurred. In fact Ryden never reached such an opinion. Based upon certain assumptions, Ryden produced an opinion as to value which was "indicative", not suitable for lending purposes, and not reflective of any professional opinion on actual market value at the time.

3. Mr Marsh never told the defenders that the valuation used an additional 40 of the same house types found in the 87 unit 2007 report. The site could not accommodate this density of development.

4. The defenders were not informed that Ryden used a 128 unit scheme, not the 120 units agreed to by the bank and the first defender in an email dated 17 December 2008.

[22] The £2 million revaluation was said to be key to the defenders' decision to grant the personal guarantees. They never received a copy of the valuation. They were relying on Mr Marsh and the information provided by him. Whether viewed individually or cumulatively, the above demonstrated that, as prospective cautioners of part of the debt owed to the bank by Whinhill, the defenders were not treated fairly by the bank in its dealings and communings with them.

The pursuers' response
[23] Mr McBrearty submitted that there had been no misrepresentation and no failure in duty on the part of the pursuers. In any event, any such failures did not induce the defenders to provide the guarantee. It was clear that Mr O'Donnell wanted the revaluation to be done on a "broad brush basis". Despite requests, he failed to supply Ryden with a detailed layout. The number and mix of the units on the site was not "set in stone."

[24] As to the £1.75 million, Mr Marsh did not mention the range because it was not formalised and might yet change. At that stage it was not known that there would be a need for a revaluation. On 5 November 2008 Mr Marsh told Mr O'Donnell that Ryden would be able to revalue at around £2 million. The layout was not discussed. On 16 December Mr Marsh confirmed to Mr O'Donnell that Ryden "could get to £2 million". Mr O'Donnell did not inquire as to the assumptions behind such a revaluation. Mr Marsh was expecting that the Ryden report would be made available to the defenders. The defenders agreed to the personal guarantee on 17 December, some days before the report was prepared. It was never agreed that the revaluation would be referable to 120 units. Messrs Marsh, Burns and O'Donnell all expected a broad valuation. In any event there was no agreement upon, nor specification as to a mix of flats and houses. It was up to Mr Burns to exercise his own professional judgement. Having read the report, Mr Marsh took steps to forward a copy to the first defender. If it did not reach him, it was not the fault of Mr Marsh. In late 2008 and early 2009, Mr O'Donnell was suggesting that income for the bank could be generated by the extraction of minerals from the site - as reflected in clauses 4.2 and 8.1.2 of the second loan agreement.

[25] Mr McBrearty indicated that he was no longer relying upon an argument that the pursuers owed no duty of care to the defenders. There remained the issue as to whether there was a breach of duty. There is a further question as to whether, in the absence of any failure to take reasonable care on the part of Mr Marsh, the guarantee was induced by an innocent misrepresentation on his part. In this event, reduction of the guarantee would be available, but no damages for any loss sustained by the defenders.

[26] It was submitted that Mr Marsh made no misrepresentations. If he did, it (or they) did not induce the defenders to enter into the guarantee. In general, a proposed cautioner must look to his own interests, and a creditor is entitled to proceed upon the basis that he will do so. Reference was made to Young v Clydesdale Bank Ltd (1889) 17 R 231 at 244 (Lord Shand) and Smith v Bank of Scotland 1997 SC(HL) 111 at 117 (Lord Clyde). There is no obligation upon the creditor to make any disclosure to the cautioner - though it was accepted that any disclosure must be "full and fair". Any known material change in circumstances impacting upon a representation previously made must be brought to the attention of the proposed cautioner (Shankland & Co v Robinson & Co 1920 SC(HL) 103 at 111).

[27] As to the case based upon the £1.75/£2 million range, Mr Marsh's statements were substantially true, thus there can be no liability (Avon Insurance plc v Swire Fraser Ltd [2000] 1 All ER (Comm) 573 at paragraph 17 (Rix J). The revaluation had still to be formalised. At that time no one was mentioning a personal guarantee. It was still possible that the whole matter would be resolved using the 2007 report. When the issue of a guarantee was under active consideration, Mr Ronnie had told Mr Marsh that Ryden could reach £2 million. That was reported to Mr O'Donnell. The earlier £1.75/£2 million indication fell into the historical background.

[28] In any event, so far as Mr O'Donnell is concerned, he took his own view on the value of the site and whether he should retain an interest in it. Mr O'Donnell did not rely upon anything said by Mr Marsh or Messrs Ryden. He wanted a broad brush valuation. He would not provide a layout, despite his receiving one from Colliers. He simply wanted a valuation which would allow the loan to be renewed. He exaggerated the aggregate extraction prospects to further this goal. He showed no interest in the Ryden revaluation. He never asked for a copy. Even if he did not receive the document sent for posting by Mr Marsh, the decision to proceed with the guarantee was taken the day after the 16 December 2008 meeting with Mr Marsh, which predated the revaluation. He continues to recognise value in the property, given his wife's current interest in it. Mr McBrearty acknowledged that the same factors do not apply with equal force in respect of the other defender. Nevertheless, Mr McDonald took a quick decision on 17 December. In saying that £2 million was his limit, he was exercising a considerable degree of hindsight.

[29] Mr Marsh's statement at the 16 December meeting that Ryden would revalue at £2 million was" entirely accurate." As to the submission on 128 as opposed to 120 units, this must be based on a careless failure on the part of Mr Marsh to notice this difference when reading the report, and then on his failure to report it to the defenders. Everyone was expecting a high level report. The number of units was never fixed. In any event, the key thing was not so much the number, as the mix of flats/houses. As to the alleged misrepresentation based upon a failure to report that the valuation used 128 of the same type of houses as the 87 units referred to in the 2007 report, Mr McDonald said in evidence that he could appreciate that Mr Marsh might not have picked up on the mix point. Mr O'Donnell placed more weight on the number, as opposed to the mix of the units. In the absence of a detailed layout provided by Mr O'Donnell, everyone must have appreciated that Mr Burns would require to use his professional judgement. He was not told to value on the basis of a substantial number of flats and/or terraced houses. Mr Marsh was entitled to rely upon Mr Burns exercising that judgement in a reasonable manner. There was no good reason for him to notice and flag up either the number or the nature of the units used in the report. In any event, given that the defenders were keen to have as high a valuation as possible, any failure to disclose in these respects did not induce or cause them to provide a personal guarantee. If these matters were critical, they would have requested a copy of the report before signing the guarantee.

[30] Turning to the defenders' case based upon the indicative nature of the revaluation, Mr McBrearty submitted that there was no reason for Mr Marsh to realise the significance of that part of Ryden's letter. It did not state in terms that the revaluation was not suitable for lending purposes, nor that it failed to reflect Ryden's true opinion on the value of the site. Mr Johnston did not notice anything amiss with the report. In these circumstances Mr Marsh did not breach a duty of care towards the defenders. In any event, as submitted earlier, Mr O'Donnell just wanted a broad brush valuation - see the "fag packet" memorandum of 23 October 2008. In the event, that is what he received.

[31] Counsel submitted that no misrepresentation was made at the meeting of 16 December, so the key issue is the content of the Ryden revaluation letter of 19 December, allied to the fact that Mr Marsh did not appreciate the significance of its "indicative" nature. In these circumstances any failure on his part to alert the defenders to the importance of this part of the report did not amount to an innocent misrepresentation on his part. Reference was made to the Inner House decision in Shankland at 1919 SC 715, and in particular Lord Dundas at 722/3. Counsel recognised that this passage might be regarded as inconsistent with his submissions, but properly understood, the speeches in the same case in the House of Lords vouched the proposition that a failure to disclose a change of circumstances can only amount to an innocent misrepresentation if the significance of the new state of affairs is understood by the representor. The speech of Lord Dunedin at page 111 was cited in this context.

[32] In short, an innocent failure to disclose a material change of circumstances does not amount to a misrepresentation. Mr McBrearty suggested that the contrary view expressed in Gloag on Contract 2nd ed at 461 is not supported by the authorities relied upon, and is contradicted by the House of Lords' decision in Shankland. Gowans v Dundee Steam Navigation Co 1904 12 SLT 137 did not touch on the question whether the representor required to be aware of any change of circumstances in order to be liable for a failure to bring such to the attention of the other party. Reliance was placed upon With v O'Flannigan [1936] Ch 575, and in particular Romer LJ at 586. As discussed in Chitty on Contracts at paragraph 6-021, that decision, and others following it, rest on the party making the representation knowing about the relevant change in the true facts. It has not been tested in England whether an innocent failure to disclose a change in circumstances gives rise to a misrepresentation. Reference was made to an article on the subject by Rick Bigwood in the 2005 Cambridge Law Journal (page 94ff).

[33] As a case study of the causes and consequences of the property crash in 2008, this litigation is probably as good as any. The site was first identified as a possible investment opportunity by Mr McDonald. Unlike Mr O'Donnell, he is not an experienced property developer. He is a joiner to trade with particular experience in renovations. While willing to invest cash in the project, he recognised the need for the involvement of someone with Mr O'Donnell's track record and special skills, not least in dealing with the bank and the planning authority. The site was bought for just over £1.5 million in mid-2007 at the height of the market. Notwithstanding the lack of a planning consent, the pursuers were willing to provide a more than 100% loan to a company with no assets other than the site. This was on the strength of a market valuation of £3 million provided by Ryden. Ryden achieved this by assuming that a development of 87 detached and semi-detached houses could be built and sold within a set period. The bank financed the loan out of what was called a "spec' pot" (because of the absence of planning permission). The one year term of the loan would generate not only interest payments, but also, within a year, an exit fee of £160,000. Clearly the assumption was that everyone would win. For many years this had been the norm, and there was no reason to suppose that this time things would be different.

[34] By the time the loan came to be repaid, the bubble had well and truly burst. In the words of one witness, property prices had "fallen off a cliff." The banks were facing a crisis of unprecedented proportions (at least in everyone's lifetime). The internal pressure on relationship managers such as Mr Marsh to "de-risk" loan facilities was enormous. However, like his colleagues, Mr Marsh was faced with the expectations and demands of his borrowers, whom he regarded as his clients. He was caught in the middle. The situation in respect of the Whinhill loan was particularly difficult given the absence of any collateral security. Almost overnight the market had disappeared. If the site had fallen in value, perhaps to almost nil, there was little option other than to persuade the credit division to rely upon the 2007 valuation, or to obtain additional cash or security from the defenders. If pushed too hard, they could simply walk away from the site, albeit sustaining substantial losses in the shape of interest payments already made, funds pledged and costs incurred.

[35] In the lead up to the key events in December 2008, Mr Marsh and Mr O'Donnell adopted a shared strategy, namely to mothball the site (which by now had gained a residential planning permission) until the market recovered. The defenders would continue to pay interest on the now increased loan, given the roll‑over of the exit fee. But there was a problem. The bank was now enforcing its 70% loan to value policy, and Mr Johnston, the head of the credit division, was unwilling to ignore the current economic conditions and proceed upon the basis of the £3 million valuation. In October 2008, Ryden indicated a site price of £1.75/£2 million. Given the size of the loan and the LTV issue, this left Mr Marsh, in his words, "under water" (memorandum of 23 October), and in need of some other solution. He wanted to avoid crystallising what might well be a more or less worthless security. That would help no one. He had the support of his superiors in the commercial banking division, but crucially, not of the credit division, which insisted upon a revaluation.

[36] By early December 2008, Ryden's Mr Ronnie had expressed the view to Mr Marsh that Ryden could get to £2 million for the site. At the meeting on 16 December, Mr Marsh and Mr Wallace could only hope that the prospect of still making money from the site would persuade the defenders to agree to a joint and several personal guarantee of £300,000. Based upon Mr Ronnie's assurance to Mr Marsh, those at the meeting were proceeding upon the basis that Ryden would revalue the site at £2 million. In respect of a loan of £1.695 million, a £300,000 guarantee would allow the 70% LTV requirement to be met.

[37] The need for a £300,000 guarantee was set by three things:

1. The LTV policy.

2. The size of the loan.

3. The indicated valuation of £2 million.

The third element was also critical in allowing the defenders (and this seemed to be especially important to Mr McDonald) the "comfort" of knowing that the market valuation had to fall by 15% before the guarantee could be called upon, and a further 30% before all of it was at risk. Mr McDonald said that he would have been concerned if he had known that the revaluation was carried out on a less robust basis than the original report. He would not have been prepared to sign a personal guarantee on a "what if" scenario.

[38] For some time Ryden had been calling for a detailed development scheme. For whatever reason Mr O'Donnell did not provide Ryden with a layout, although Colliers had given him a £1 million valuation on the basis of a particular scheme. Mr O'Donnell explained this valuation on the basis that he was negotiating for the purchase of an area of land required for access to the site, and it suited his purpose to exhibit a low valuation. The Colliers report was based upon certain specific assumptions which reduced the valuation. (It would appear that vastly differing valuations of the site were obtainable depending upon whatever assumptions the valuer was asked to, or chose to adopt.)

[39] At different times various numbers of housing units were mentioned in respect of the site, including up to 130. Mr O'Donnell and Mr McDonald had in mind that such numbers would require a mix of flats and houses, possibly including terraced houses. That they envisaged a substantial number of flats had been confirmed in a letter to Mr Burns and copied to Mr Marsh dated 11 September 2007, but by now more than a year had passed since that correspondence. I do not think that Mr Marsh ever really applied his mind to such details. Initially he saw an opportunity for the bank to profit from Mr O'Donnell's eye for a commercial opportunity. Latterly his main concern was to keep the show on the road. In respect of the cost of the revaluation, Mr O'Donnell baulked at Ryden's fee quotation of £2,500. He reasoned that the bulk of the work had been done in 2007 and only a broad brush update was required. Whether he used the phrase "fag packet valuation", or whether that was Mr Burns' description of what he said, the gist was clear. Ryden were not to waste money on an overly detailed exercise. In the event Mr O'Donnell consented to a fee of £500.

[40] It may be important to appreciate that the main lines of communication were:

1. Mr Marsh - Mr O'Donnell.

2. Mr Marsh - Ryden.

3. Mr O'Donnell - Ryden.

4. Mr O'Donnell - the planning authority.

The second defender was an interested party, but was largely out of the loop, apart from such information as was passed to him by Mr O'Donnell.

[41] The defenders were remarkably uninterested in the detail of how and why Ryden reached a revaluation of £2 million. The day after the 16 December meeting they agreed to the guarantee on the strength of Mr Marsh's assurance that Ryden would revalue the site at that amount. Subsequently, when they failed to receive the report - I accept their evidence on that point - they did not ask for a sight of it. In due course they signed a formal guarantee, still with no explanation and no copy of the 19 December 2008 letter. This is perhaps not as surprising as at first it may seem. In their minds Ryden had already carried out a detailed formal valuation on a scheme for the site in September 2007. The December 2008 exercise was to be an update on that report in the light of current market conditions. It was not a fresh, from first principles valuation.

[42] It is true that an increased density was to be used. It was hoped that this would counter-balance the fall in market values. In the absence of Ryden being given a detailed layout, there was scope for confusion and uncertainty as to the details of the development to be assumed for the purpose of the valuation. Ryden used a computer programme (Kell Delta) which produced figures for gross development value and residual land valuation based upon certain assumptions, such as the number and type of units, the sales period, professional fees, etc. By altering the detailed assumptions, differing valuations could be produced. In the result, Mr Burns, working under time pressure and on a small budget, was able to reach the promised £2 million valuation only by stretching the density of the house types used by him to the limit, and by altering some of the Kell Delta computer programme calculations to maximise value. I accept Mr McDonald's evidence to that effect. Mr Ronnie said that he could understand why it was thought that the Kell Delta calculations had been "tweaked" by Mr Burns to reach £2 million. Mr Burns denied this, but, in my opinion, it is beyond coincidence that so many details were altered from the previous scheme, on the face of it, all designed to ensure that the end result met the figure previously promised by Mr Ronnie. The most obvious example is the use of 128 as opposed to the instructed 120 units. For 120 units, the value would have been £1.8 million. 128 brought it to just over £2 million. While both Mr Burns and Mr Ronnie insisted that a density of twelve houses per acre was achievable, on any view this was the absolute maximum conceivable. I am more than persuaded that both Mr McDonald and Mr O'Donnell considered this an impossibility, and, if they had been aware of it at an earlier stage, would have objected and raised questions which would have cast very substantial doubt upon the Ryden exercise.

[43] I have some sympathy for Mr Burns. He was put in this situation by the promise made to the bank by his superior, Mr Ronnie. It is hard to avoid the view that such informal assurances can create expectations and pressures which militate against a wholly objective valuation exercise by whoever is required to carry out the detailed work.

[44] One of the reasons for my acceptance of the defenders' evidence that they did not receive the Ryden revaluation until February 2010, is that it is clear that, in their view, Mr Burns' 128 units had to involve a number of flats. I am satisfied that if the details of the report had been made available to the defenders before March 2009, neither of them would have executed the joint and several guarantee. Even if, as Mr McBrearty submitted, Mr O'Donnell would have ignored such details in favour of pressing on, I accept Mr McDonald's evidence that it was very important to him that he was being told that Ryden had provided a reliable up to date revaluation at £2 million. Although he had been involved in a number of companies, this was his first personal guarantee. It is true that he was very keen to maintain his interest in the site and retain the prospect of profits down the line. However, his own financial position meant that he had to think very carefully before committing his own resources to the venture, not least given the economic uncertainties at the time. Furthermore, he was not involved in Zoom Developments Ltd, and thus was not vulnerable to collateral pressures from the bank. (Even if Mr O'Donnell was not relying on the Ryden revaluation as a professional view from a large and respected firm of surveyors, there is no scope for rewriting a single guarantee by Mr O'Donnell for £15,000.)

[45] Had either Mr O'Donnell or Mr McDonald raised questions about the report, it is probable that it would have emerged that Ryden were not purporting to offer a market valuation upon which weight could be placed for lending (and presumably personal guarantee) purposes. Mr Galloway, the head of the commercial division, said that the purpose of the revaluation was "to check that the bank was properly covered". The defenders could reasonably take the same view in respect of their guarantee. The Teevan memorandum in early 2009 supports the defenders' evidence that walking away from the site was neither a joke nor a negotiating gambit. I accept that there was a limit to the extent to which they would provide personal guarantees. I am satisfied that it has been proved that this limit would have been reached if they had been aware of the terms of the Ryden letter of 19 December and of the limitations involved in its "indicative" nature. Neither Mr McDonald nor Mr O'Donnell would have signed the guarantee if they had known that the Ryden revaluation could not be relied upon as a professional opinion from a large and respected firm of surveyors. If the proposed arrangement had fallen through, the facility would have been referred to the bank's global restructuring group, and, in all probability, the events of February 2010 accelerated by about a year.

[46] Mr McDonald is of the opinion that Mr Marsh deliberately concealed the report, in that he knew that it would not be acceptable to the defenders. I am not prepared to endorse that view. There are at least two other possible explanations for what occurred. One is that, for whatever reason, the report was placed in the internal mailing system by Mr Marsh but never reached Mr O'Donnell. Alternatively, and as accepted as possible by Mr Marsh, he is wrong in his recollection as to putting the report in an envelope marked for mailing to Mr O'Donnell. No particular reason was given as to why Mr Marsh would have a specific recollection of doing that. It might well be that he has thought about this matter so much that he is genuine, but wrong in his memory. If the report had been posted it is likely that it would have turned up by now. Mr McDonald was particularly convincing in his evidence that he saw the report for the first time in February 2010. While there are a number of possibilities, my view is that the most likely explanation is that, for no sinister reason, Mr Marsh simply failed to send the report to Mr O'Donnell. He had just told Mr O'Donnell that it would be pitched at £2 million, and Ryden's letter provided confirmation on that point. He had been told that the defenders would sign the requested guarantee on that basis. Having read the letter of 19 December and noted the figure of £2 million, he filed the letter and turned to the other very pressing matters on his desk.

[47] The issue of the potential extraction of aggregate by quarrying or re-profiling operations on the site was discussed with witnesses during the proof, though Mr Marsh said that it was not a factor upon which the new facility was granted. I do not consider this issue to be material to the proper determination of the case. In the latter part of 2008 and early 2009, the possibility of making money from the site through whinstone was being talked up in the hope that it would help persuade the credit division to approve the proposed refinancing of the facility. There never was any whinstone extraction contract. Given that Mr Marsh made no real attempt to pursue the matter, I am inclined to accept Mr O'Donnell's evidence that, given the unlikelihood of a consent for blasting, this was, at best, a marginal proposition, which had served its purpose once the new agreement was approved and signed.

[48] On three occasions the bank told the defenders that Ryden would or had valued the subjects at £2 million. The first was at the meeting on 16 December 2008. The second was in a 9 January 2009 email from Mr Marsh to Mr O'Donnell. The third was in the body of the terms of the second loan agreement itself. These statements were made in the context of an update to the original formal valuation report. Mr Marsh and both defenders understood the Ryden revaluation to be a professional opinion on the market value of the subjects which could be relied upon for lending (and personal guarantee) purposes. The bank's statements were positive assertions of fact - not of opinion or of future intention. A reasonable person would so understand their purpose and effect. On each occasion, when made, these statements were false. The evidence of Mr Ronnie and Mr Burns demonstrated this quite clearly. They were material factors in the defenders' decision to execute the guarantee in March 2009. I hold it proved that if the defenders had been aware of the true position, the guarantee would not have been granted. It was provided under an operative error of fact caused by information given to the defenders by Mr Marsh. He knew that the defenders were relying on what he said to them. The initial decision to agree to the guarantee proposal was intimated to him the day after the 16 December meeting and before Mr Burns framed his letter of 19 December. Nothing happened thereafter to alter this state of affairs.

[49] In the whole circumstances the defenders were fully entitled to place reliance on the representations. This all occurred in the context of the bank telling the defenders that, if they did not provide the guarantee, the loan facility would not be renewed. The defenders are entitled to decree of reduction of the guarantee on the basis of one or all of these misrepresentations. Whether the defenders can also claim damages for any loss sustained by them will depend on whether the misrepresentations amounted to a breach of a duty of care owed to the defenders. (I say this on the basis that section 10 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 did no more than abolish the rule in Manners v Whitehead.)

[50] As at 16 December 2008 Mr Marsh had no reason to question that Ryden could provide a proper valuation of the subjects at £2 million. Thus the statement made on that occasion to Mr O'Donnell was an innocent misrepresentation. There is no suggestion by counsel for the defenders that thereafter Mr Marsh was guilty of a dishonest misrepresentation or of fraudulent concealment. The submission for the defenders is that, having made the positive statement on 16 December, once he had read the Ryden letter of 19 December Mr Marsh had sufficient information to raise questions with the valuers, which would have revealed the truth. As it was, Mr Marsh read the references in the report to its "indicative" and "desktop" nature, yet simply repeated the earlier assurance to Mr O'Donnell by way of the email of 9 January 2009.

[51] It was accepted that a duty of care was owed. (In the absence of such a concession, I would have so held.) The specific context is the positive statement made at the 16 December meeting to Mr O'Donnell and, through him, to Mr McDonald, that Ryden could value at £2 million. On any view, this was to be understood as a reliable and professional valuation, not a mere speculation upon which no bank could be advised to rely. Having made that statement to Mr O'Donnell, and having a few days later read the caveats attached to the valuation letter, the question is - did Mr Marsh comply with his duties by filing the report, and then repeating the assurance in the 9 January email, and subsequently allowing the same impression to be conveyed in the terms of the loan agreement?

[52] Under reference to the case of Shankland, Gloag comments (Contract 2nd ed at 461):

"The House of Lords, taking a different view of the negotiations, decided that nothing had occurred which would have suggested (to Shankland) that requisition was probable, and therefore sustained the sale, but all the judges concurred in holding that where a representation had been made there was an obligation to disclose any subsequent fact which affected its truthfulness. It is conceived that the obligation, in such cases, is to disclose all new developments which would affect the mind of a reasonable man, and that non-disclosure will render the contract voidable even although the party may have honestly thought the new developments immaterial."

This passage is set in the context of entitlement to reduction on the grounds of a misrepresentation, but, in my opinion, given the developments in this area of the law since Professor Gloag was writing, similar sentiments apply when assessing whether, in the particular facts of this case, a duty of care was breached. Mr Marsh had been alerted to the distinction between a valuation suitable for lending purposes and an "indicative" report (see the earlier Ryden valuation of £4.5 million in which he was told that the valuation could not be relied upon but was merely indicative of what increased density would do to the site value with everything else being equal). In his evidence Mr Marsh explained his failure to mention the £1.75 million lower end of the range suggested by Mr Burns on the basis that it was an indicative report subject to change when formalised. In the course of his evidence Mr Marsh accepted that he should have questioned the terms of the Ryden letter. He said that he must have overlooked its indicative nature.

[53] In my opinion, at the very least the terms of the 19 December letter put Mr Marsh on enquiry as to the status of the revaluation report and as to the accuracy of the information previously tendered to and the impression imparted to the defenders. The bank was relying upon this valuation as an important part of the justification for the guarantee sought from the defenders to support, at least in part, Whinhill's debt to the bank. Having made the positive representation on 16 December, and in the light of being informed that the valuation was "for indicative purposes only," in my opinion Mr Marsh was under a duty specifically to inform the defenders of this, and of the potential implications of it; or seek further information and clarification from Ryden, and then alert the defenders to what had occurred. In using the assurance given by Mr Ronnie before the 16 December meeting to help persuade the defenders to agree to the guarantee, Mr Marsh must be taken as having assumed responsibility for its accuracy. Thus he came under an obligation of enquiry or disclosure if subsequently he received material which cast doubt on the information given to the defenders. Thereafter, he had a duty not to repeat the misrepresentation.

[54] Even if Mr Marsh did place the report in the mailing tray addressed to Mr O'Donnell, I agree with Mr Barne's submission that this alone would be insufficient to fulfil his duties to the defenders. In any event the misrepresentations were repeated in early 2009. In my view, these were negligent misrepresentations, made in breach of a duty of care owed by Mr Marsh to the defenders. It follows from all of the above that the defenders are entitled to damages for any loss directly sustained as a result of Mr Marsh's breach of duty.

[55] Though Mr Barne placed reliance on the decision in Smith v Bank of Scotland 1997 SC(HL) 111, I am not persuaded that it applies to the present case. I have reached the above conclusions on general principles as to when a duty to take care for the economic interests of others will arise - see, for example, Lord Oliver in Caparo v Dickman [1990] 2 AC 605 at 638. It is now well established that a misrepresentation, if made in breach of a duty to take reasonable care to provide accurate information when negotiating a contract, can create a liability in damages for loss sustained by the other party. In Esso Petroleum Co Ltd v Mardon [1976] QB 801, at page 820 Lord Denning MR stressed that if a representation is made by one party with the intention of inducing the other to conclude a bargain, he is under a duty to take reasonable care to see that the representation is accurate and reliable. This seems particular apposite when a bank is hoping to persuade someone to act as a guarantor in respect of debts owed to the bank.

[56] For completeness I should address the other grounds upon which the defenders sought to resist enforcement of the guarantee. There is no need to dwell on the failure to mention the £1.75/£2 million site price range. By the time the issue of a personal guarantee arose, it had been superseded by the more recent £2 million assurance given by Mr Ronnie. As to the failure to alert the defenders to the number and type of the housing units used by Mr Burns, in my view, on their own these factors would not justify the defenders' case. They anticipated an update to the 2007 report, albeit with increased density. No doubt they had made various assumptions as to the number of units and the mix of flats/houses etc which would be appropriate on the site and for the purposes of a revaluation, but none of that was the result of a specific representation or failure to disclose on the part of Mr Marsh. The claim was that Mr Marsh should have appreciated that Mr Burns had used an impracticable density of housing development. Mr O'Donnell focused particularly upon the number of units; Mr McDonald upon the absence of any flats. I consider that it would be going too far to conclude that Mr Marsh was under a duty to identify those particular issues and alert the defenders. The "indicative" nature of the report is in a wholly different category. It went to the heart of the assurance given at the 16 December meeting.

[57] In any event the detail of the development was never set in stone. Various numbers and types of unit had been mentioned in the course of 2007/8. For whatever reason Mr O'Donnell chose not to provide Ryden with a specific layout. Mr Marsh was entitled to assume that Mr Burns had some professional basis for the assumptions used by him when carrying out his work. In my view, in these particular respects the defenders' complaints are directed more at Ryden than the bank.

[58] All that said, the details of the development used by Mr Burns are not wholly irrelevant. If the defenders had been alerted to the low status of the opinion expressed by Ryden, these points would have emerged before the guarantee was signed, and would have given the defenders cause to be critical of the quality of the Ryden report, all at a time when they were being asked to put their own resources at risk.

[59] Finally, I should mention that a chapter of Mr McBrearty's submissions proceeded upon the basis that the 19 December letter amounted to a change of circumstances which, without the knowledge of Mr Marsh, rendered the representation made on 16 December untrue, it having been, as at that date, "entirely accurate". In my view this submission proceeds upon a misconception. The factual assertion that Ryden could and would revalue at £2 million was never correct. They did not provide such a valuation on 19 December. However, this was not a material change of circumstances in the sense used in the cases and texts mentioned by Mr McBrearty. It would be different if Ryden could value at £2 million on 16 December, but three days later, because of some unexpected new factor, they could not do so. Mr Ronnie made a promise which was not fulfilled, but this does not mean that the blunt assertion made to Mr O'Donnell was true and accurate. In any event the statement was repeated after receipt of the Ryden letter, so the submission is academic.

[60] If forced to reach a view on the point, I would prefer to proceed on the basis that if a representation remains operative at the time of the contract, and is at that time inaccurate, whether because of a change of circumstances or otherwise, at a minimum the representee is entitled to reduction of the contract. I see no logic in allowing reduction if an innocent misrepresentation is false when made, but refusing it if, before the execution of the contract, and unknown to the representor, a statement becomes untrue. In this regard I am in agreement with the comments made by Professor Cartwright in Misrepresentation, Mistake and Non-Disclosure (3rd edition) at paragraph 4-27.

[61] I shall absolve the defenders in respect of the conclusions in the principal action, and grant decree of reduction of the guarantee as sought in the counterclaim. The defenders also seek damages for losses caused by the interest payments made under the new facility. There was little or no discussion of this aspect of the case at the proof. My impression was that Mr McBrearty accepted that if any misrepresentation or failure to disclose was negligent, it would follow that I should pronounce decree for payment in terms of the relevant conclusions in the counterclaim. However, in case I am mistaken on this, before decree is pronounced I shall allow the pursuers an opportunity, if so advised, to make representations on the matter at a by order hearing.