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No good faith or reasonable care obligation re mortgage: You can’t have Morley

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Driving a reasonable bargain: exclusion of statutorily implied term upheld

Following a borrower default, when a bank was considering whether to enforce its security, a statutory implied term of reasonable care in a loan was of no consequence and it was not right to imply the term into a mortgage (which wasn’t a contract for services anyway). Nor had the bank acted in breach of any good faith duty.

In talks about COVID and contracts, I frequently observe the time-lag between an event and any litigation. This case is a classic example: the loan was made before the 2008 global financial crisis and the dispute caused by it.

The bank opted not to enforce its security when the borrower defaulted. The argument was about whether the bank could be criticised for the commercial solution arrived at and how that was negotiated.

Morley alleged the bank had committed the tort of intimidation. This entails a threat to do something unlawful which is intended to, and does, coerce someone to take that action and suffer loss or damage. The Court of Appeal agreed that the judge was plainly right to find that Morley had not been coerced. He’d acted by his own free will.

More relevant to this blog is the contractual claim by Morley that there was a breach of an implied term to act with reasonable skill and care (by virtue of the Sale of Goods and Services Act 1982) and, separately, an implied term to act in good faith.

The only service being provided was a loan. By the time in question—after default and when the bank was deciding whether to enforce security—that service had ended. The relationship was governed by the express terms of the mortgage plus certain equitable principles. It was wrong to imply a contractual term into a mortgage (which was not in any event a contract for the supply of services). Even if there was an implied term, the bank was not in breach.

Morley also argued the bank was under a duty to act in good faith, or not to act vexatiously or contrary to its “legitimate commercial interests” (relying on a previous RBS case). The court said it would not necessarily accept that the bank was under this duty. But even if it was, the bank was not in breach. It didn’t add anything to say, as Morley did, that the bank was acting as buyer and not lender and, in any event, the court agreed with the judge that the banks actions were all rationally connected to its commercial interests.

I’ve quoted it before, but as Ed Peel has said, “The good faith cat remains firmly out of the bag”. In practice though, I’d say, it only tends to succeed as a claim where people have been quite “bad” some way.

Judgment: Morley v RBS