A decision from the Scottish appeal court has held that early termination of a term loan agreement creates loss and the point from which the five year prescriptive period can run, even if the loss cannot be quantified at the time of termination.
Mr K had two terms loans and one revolving credit agreement with RBS. On 8 February 2010, RBS wrote to Mr K advising that due to a breakdown in the banking relationship the 3 loan agreements were to be terminated in 2 days’ time. On 12 February 2010, the Bank granted an extension of 60 days for repayment of the outstanding sums - £532,077.88. As security for the 3 loans, Mr K had granted the bank standard security over 9 buy-to-let properties. Mr K tried refinancing, and tried to sell the properties to 3rd parties but his efforts were unsuccessful. Ultimately, his wife bought all 9 properties from him at 75% of their market value. The shortfall to the bank was almost £160,000.
Mr K raised the court action on the grounds that the early termination of the loan agreements was a breach of contract. The sheriff court held that any obligation to make reparation under the alleged breach of contract had prescribed. The appeal court looked at whether the sheriff court made the correct decision. In terms of the Prescription and Limitation (Scotland) Act 1973, any obligation to make reparation as a result of an alleged breach of contract is enforceable from the date when ‘loss, injury or damage’ occurred (sections 6 and 11). The ‘loss, injury or damage’ is that which is suffered by the pursuer as a result of the defender’s action.
What is the relevant ‘loss’?
Mr K argued that the date of the relevant ‘loss’ is the date of actual, quantifiable loss to the bank. He argued that occurred when the properties were sold at undervalue. The court held that the relevant ‘loss’ was in fact the loss of liquidity to Mr K which he suffered on termination of his loan facilities. Although, at the time the loss was unquantified and quantification might be difficult, it was no different to predicting future loss in a damages claim. The Lord President held that while the loss does have to be actual in order for prescription to start running ‘it does not…require to have been suffered, or to be precisely calculable at the relevant time and may increase over time’ (see para 20).
Breach of contract
As the appeal was only brought on the prescription point, there is no decision on the alleged breach of contract. However, reference is made to the fact that the sheriff found that the Bank had been in breach of contract. The appeal court also spent some time discussing the breach of contract point (Lord Drummond Young at paras 32-35). He comments that he does consider early termination of a term loan to be in breach of contract.
Although this might seem like a good outcome for the Bank, it does provide a warning against attempts to terminate early without an express right to do so. The decision also provides some clarity for customers. It could remove the often complicated task of working out the point at which loss occurs in situations where banking facilities are terminated early by the Bank.