Clarification on lenders’ duties

James Colvin

James Colvin


Holly Stevenson

Holly Stevenson


On 7 June 2022 the Supreme Court refused permission to appeal the Court of Appeal’s decision in Morley (t/a Morley Estates) -v- The Royal Bank of Scotland Plc [2021] EWCA Civ 338, as the application did not raise an arguable point of law. 

The decision

The Supreme Court’s decision will be welcomed by financial institutions as the Court of Appeal’s decision provided clarity for lenders on the scope of their duty of care in relation to distressed borrowers and, in particular, did not imply any additional duties over and above the equitable duties owed as a mortgagee.
The Court of Appeal upheld the High Court’s ruling that the lender had not breached an implied duty to provide banking services with reasonable care and skill, or a duty of good faith, nor had the borrower transferred mortgaged properties to the lender’s subsidiary because of intimidation or economic duress.

Duty to take reasonable skill and care 

The Court of Appeal held that an implied term (derived from Section 13 of the Supply of Goods and Services Act 1982) that the lender must provide banking services with reasonable skill and care was not relevant at the material time. Under the loan agreement, the lender's services were making funds available to the borrower. These services had been performed by the time the borrower failed to repay the loan on the final repayment date. Accordingly, implying such a term into the loan agreement was not relevant, nor was it appropriate to imply a contractual term into the mortgage because it is not a contract for the supply of services. The parties' relationship was governed by the mortgage's express terms and a mortgagee's equitable duties.
The Court of Appeal further held that, even if the lender owed a duty to provide banking services with reasonable skill and care, it had not breached such duty by failing to follow its internal guidance to support viable businesses. The Court of Appeal held that “The aspirational language of a purely internal document provides no secure foundation for any case of breach of duty by the bank”.  
Similarly, the borrower's argument that the lender did not provide banking services with reasonable skill and care, because it also acted as a potential purchaser of the properties rather than merely as an enforcing lender, was rejected. Even if the bank had mixed motives, that would have made no difference since it is unnecessary that a lender’s motive should only be the recovery of the debt secured by the mortgage.

Duty to act in good faith

Even if it was assumed that the lender was under an implied duty to act in good faith or not to act vexatiously or contrary to its legitimate commercial interests, the lender had not breached such duty because the Court of Appeal upheld the High Court’s finding that its actions were rationally connected to its commercial interests.

Intimidation / economic duress

To amount to intimidation or economic duress, a threat had to coerce the claimant to take the action in question. On the facts, the Court found that the borrower had not been coerced: the agreement concluded was the result of a robust negotiation between commercial parties, each of which had legal advice and was able to look after itself. In any event, the borrower did not submit to the bank's demand and the bank did not carry out its threat. Instead, the parties continued to negotiate for several weeks, just as they had done over the whole period during which the borrower had been in default. In the end, the agreement concluded was the agreement which the borrower wanted and had originally proposed, and which the bank had rejected, namely a "split deal". This was materially different from what the bank had earlier demanded.

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