High Court Strikes out claim alleging an implied overarching 'customer agreement' requiring the parties to "cooperate with each other and act in good faith".

Standish & Ors v The Royal Bank of Scotland plc & Anor [2018] EWHC 1829 (Ch) will be of interest to financial institutions seeking to enforce rights or exercise powers under facility agreements. In particular, where counterparties allege the existence of implied duties which they allege restrict the exercise of express rights and powers in facility agreements, this decision provides a helpful example of the circumstances in which the court is prepared to strike out such claims.

In the instant case, the claimant (a borrower in default) alleged the existence of an implied overarching 'Customer Agreement', which was said to contain implied duties of good faith that restricted the defendant bank's ability to enforce its express rights under the loan agreement. The Customer Agreement was referred to by the court as a "mysterious creature", with no particulars given as to how it came into being; rather its function was to provide a vehicle into which terms could be implied. Unsurprisingly, the court rejected the existence of both the implied contract and the implied terms.

While the decision arose from an interlocutory application and turned on the specific facts of the case, it restates the leading authorities and provides an interesting application of what are now well-established principles of contractual interpretation. It was common ground that no general duty of good faith exists in English contract law and a high threshold must be met before the court is willing to imply the existence of a contract or term. The case should dampen some of the enthusiasm with which claimants may have viewed Mr Justice Leggatt's (as he then was) 'Relational Agreement' formulation in Yam Seng Pte Ltd v International Trade Corp Ltd [2013] EWHC 111 (QB); a party seeking to argue that a 'Relational Agreement' falls to be implied must still be able to show that implying the 'Relational Agreement' is necessary to give business efficacy to the parties' arrangements (Yam Seng at [142]). Finally, Standish should also serve as a timely reminder to parties to be more confident in applying for strike out where statements of case clearly provide no reasonable grounds for bringing a claim.

It is understood that the claimants have applied for permission to appeal the decision.

Factual Background

The claimants were shareholders in a company named Bowlplex Ltd (the "Company"), which owned and operated bowling sites across the UK. National Westminster Bank plc, which is a brand of the Royal Bank of Scotland plc (the "Bank"), provided the Company with banking facilities from 2004. The Company's business suffered from both the introduction of the smoking ban and the global financial crisis, causing it significant financial challenges. This precipitated the Bank's referral in June 2010 of the Company to the Bank's Global Restructuring Group ("GRG"), following the Company's breach of financial covenants.

The key points of the chronology thereafter are as follows. In August 2010, the Bank's subsidiary and equity investment vehicle, West Register Number 2 Ltd ("West Register"), was introduced to the Company and a West Register employee began attending meetings between the Company and the Bank. The Company's financial difficulties continued and two refinancing deals were struck with the Bank through which (among other things) the Company agreed to transfer 60% of the equity and 45% of the voting rights to West Register (together, the "Refinancing"). Shortly after the second refinancing, in 2012, Mr Standish was dismissed from his position as managing director of the Company on what he claimed to be spurious grounds.

Importantly, throughout the relevant period the Bank and the Company were party to a series of standard banking agreements, none of which included an entire agreement clause.

Against the factual background set out above, the claimants alleged that the Bank and West Register were party to an unlawful means conspiracy to force the Company to transfer shares to West Register. The unlawful means were alleged to fall into three categories:

1. the Bank acted in breach of a duty of good faith;
2. the Bank acted in breach of certain equitable duties; and
3. West Register (alternatively the West Register employee) acted in breach of its fiduciary duties as a shadow director.

The focus of this e-bulletin is the alleged breach of a duty of good faith, as in relation to this issue the court made a number of points which will be of general application in similar cases.

Decision

The Bank applied for the claim to be struck out under CPR 3.4(2)(a), submitting that the particulars of claim showed no reasonable grounds for it being brought. The parties accepted that for the purposes of the application, the claimants' version of events should be taken as accepted. It was common ground that for the claim to be struck out, the court had to be certain that the claim was bound to fail.

The court began by highlighting the current public interest in West Register and GRG. However, it emphasised that the question for the court was not whether GRG had behaved in commercial terms which were unsatisfactory, but whether, as a matter of law, the claim showed reasonable grounds.

The claimants argued that a duty of good faith should be implied into an overarching 'Customer Agreement' and that the formal facility agreements were to be regarded as sub-agreements for particular purposes. The particulars of claim, however, provided no insight as to how or when the Customer Agreement was to have come into being. The court considered separately the alleged implied Customer Agreement, and the duty of good faith alleged to be implied into that contract.

Implied Customer Agreement

In reaching its decision that no Customer Agreement existed, the court restated the current law on implying contracts into existence as per Baird Textile Holdings Ltd v Marks & Spencer plc [2001] CLC 999:

1. for a contract to come into existence, there must be both (a) an agreement on essentials with sufficient certainty to be enforceable; and (b) an intention to create legal relations;
2. no contract should be implied on the facts unless it is necessary to do so in order to give business reality to a transaction and to create enforceable obligations between the parties;
3. it would be fatal to the implication of a contract if the parties would or might have acted exactly as they did in the absence of a contract.

The court relied on the comprehensive framework of standard banking agreements to conclude that there was no obvious reason why it should recognise an additional overarching agreement, without express terms, that was said to have come into being at some unspecified point in time. The claimants' case on the Customer Agreement (and therefore the alleged duty of good faith implied into that contract) failed on the following bases: (1) the alleged overarching Customer Agreement failed the "necessity test" for introducing an implied contract; and (2) the circumstances of its creation were wholly unparticularised in the claimants' pleadings. It was held that the Customer Agreement was a completely artificial construct that was divorced from the commercial realities of the dealings between the parties; its function was to provide the claimant with a vehicle into which the alleged terms could be implied.

Implied terms as to good faith

The court cited the leading authority on implied terms, Marks & Spencer v BNP Paribas Securities Services Trust Co [2015] 3 WLR 1843. Marks & Spencer made clear inter alia a number of key principles. First, the default position is that nothing is to be implied into a contract; the more detailed the contract, the stronger that presumption will be. Second, it is impossible to imply into a contract any term or condition inconsistent with the express provisions of an agreement. Third, the implied term must be necessary to give business efficacy to the contract; a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

Having found that there was no Customer Agreement in existence, the court noted that it was unnecessary to consider the Company's case based on terms to be implied in that agreement and therefore declined to do so. The Company did not allege ("realistically", in the court's view) that terms were to be implied into the facility agreements themselves.

It is interesting to note that having determined that there was no Customer Agreement, the court also deemed it unnecessary to consider in any detail whether the types of duties envisaged in Mr Justice Leggatt's (as he then was) 'Relational Agreement' in Al Nehayan v Kent [2018] EWHC 333 (Comm) and Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB) could be implied. Commentators are likely to watch with interest the next case where such arguments are raised, to see whether these authorities will be followed or distinguished.

Conclusion

The court therefore struck out the Company's claims based on the Customer Agreement and implied terms of good faith. It also struck out the Company's claims based on alleged breach of equitable and fiduciary duties.