This article examines the response by the High Court to recent efforts to establish the existence of a tort of reckless or negligent lending.
"Reckless lending"
On January 26, 2010, Charleton J. delivered judgment in ICS Building Society v Grant. The defendant in that
case had purchased an investment property in Co. Wicklow in 2002, with the potential to be developed as a housing estate. By the end of 2004, he had borrowed almost €900,000 from the plaintiff, which was secured by way of a mortgage over the property in question. The defendant defaulted in relation to his repayment obligations and the bank took possession of the property in December 2008, having obtained an order from the court (Dunne J). The property was duly sold, €355,000 being the best available price in September 2009, and the Master of the High Court granted judgment in the plaintiffs favour for the shortfall of approximately €663,000. The defendant appealed
against the Master's order and, while a number of issues were pleaded, Charleton J. summed up the defence as follows:
"The overall claim of the Defendant is that reckless lending took place from the bank to him". [Mr Justice Charleton]
The existing legal landscape
Before commenting on the defendant's attempt to establish the existence of a tort of reckless lending, the trial judge restated some time-honoured principles of contract law which constitute part of the legal landscape in which any such tort would have to survive. Charleton J. began by emphasising that the law will assume that those entering into an agreement intend that it should be legally enforceable unless the contrary is shown. He referred to the well-established entitlement of the court to declare a contract void where it is found that one of the parties entering the contract was subject to undue influence, stressing that such undue influence must be established by the facts in
the particular case. The learned judge also referred to the concept of reckless trading, which has the potential
to expose a director to both criminal and civil liability, explaining that:
"Reckless trading must involve some lack of prudence going beyond the risk-taking that is inherent in the enterprise of business so that a real and apparent risk emerges that a company will be unable to pay its debts". [Mr Justice Charleton]
His judgment also emphasised the very well established principle that parties are entirely free to enter agreements which may be commercially unattractive but which will be nonetheless enforceable. Charleton J. summarised the position as follows:
"People can enter into bad bargains. The law never enquires into the adequacy of any consideration for a contract. One can sell a motor manufacturing company for a billion Euros or for 10 Euros". [Mr Justice Charleton]
The argued-for Tort
Commenting on the attempt to establish and rely on a tort of reckless lending, Charleton J. then had the following to say:
"Here, what is asserted is some alleged wrong akin to reckless lending. I have no material whereby I could come to any such conclusion on this case since both the Plaintiff and the Defendant seemed to have taken the same
overvalued view as to the worth of the security. But. more fundamentally, the argued for tort of reckless lending does not exist in law as a civil wrong. It is not within the competence of the court to invent such a tort. The Oireachtas could,if it saw fit, pass a law creating such a civil wrong. It is difficult to imagine the parameters of such a law since those who seek a loan will have a view as to what should be borrowed, and if a loan is badly made by a bank, how can the issue of contribution be escaped from by the borrower who sought the money in the first place. Defining that civil wrong would tend to remove the presumption of arms length dealing as between borrower and bank and replace it with a new relationship based on a duty of nurture that other common law countries do not see it as their duty to put into the marketplace as any argued-for law as to reckless lending does not appear in the works on tort that I have consulted from any other common law jurisdiction". [Mr Justice Charleton]
ICS Building Society v Grant Approved
Kelly J. delivered his judgment in McConnon v President of Ireland on May 23, 2012. The plaintiff in those proceedings had obtained a bank loan of €32 million in 2007 to construct and complete a shopping centre in Castleblaney, Co. Monaghan. The project encountered difficulties and, as a result of the plaintiffs inability to meet his obligations to the bank, proceedings commenced in November 2010, with Birmingham J. granting summary judgment against the plaintiff on March 4, 2011. The plaintiff appealed against that decision and sought a stay in relation to the execution of the judgment pending the determination of his appeal. In July 2011, the Supreme
Court refused to grant such a stay, and in October 2011, the plaintiff commenced proceedings against a
number of parties, including the President of Ireland, the Taoiseach, the Minister for Justice, Equality and
Law Reform, Ireland, the Attorney General, the Commissioner of An Garda Slochana and the holder of the judgment against him, being Zurich Bank Ireland (the "Bank"). The reliefs sought in the proceedings included: a declaration that, due to misrepresentation on the part of the Bank, the plaintiff was induced into entering the relevant loan facility; a declaration that the €32 million loan agreement was void; and a declaration that the plaintiff be released from his indebtedness. Kelly J.'s decision concerned the application by the Bank to strike out the proceedings on the basis that aspects of the plaintiff's claim disclosed no cause of action with any reasonable prospect of success. The Bank also submitted that the principle of res judicata applied, arguing that a final and
conclusive judgment had already been handed down by a court of competent jurisdiction, and that the
plaintiff's proceedings were, in effect, an impermissible attempt to raise matters which were or could have been raised at the summary judgment application determined in the Bank's favour by Birmingham J. Kelly J. found in favour of the Bank. Having looked at what was now pleaded against the Bank by the plaintiff, the court was satisfied that the declaratory relief and damages claim were subject to the res judicata rule. Kelly J. also went on to make explicit comments about any attempt to develop a reckless lending tort, stating:
"Insofar as it may be suggested that Mr. McConnon is seeking relief in respect of an alleged tort of reckless lending and that that does not fall within the ambit of material which was or ought to have been raised before Birmingham J, I am satisfied such a tort does not exist as a civil wrong in Irish law. In this regard, I agree with the judgement of Charlton J. in ICS Building Society v. Grant [2010] IEHC 17. Thus, even if that allegation does not fall to be dismissed on the basis of res judicata, it is dismissed as having no reasonable prospect of success". [Mr Justice Kelly]
"Reckless lending procedures"
Despite the foregoing decisions, it seems likely that the concept of reckless lending will continue to feature in attempts by borrowers in claims against financial institutions. On September 4, 2013, Laffoy J delivered her judgment in Taite v Quearney In those proceedings, the plaintiffs sought injunctions restraining the defendant from interfering with the exercise by the plaintiffs of their rights as joint receivers over certain properties. During the course of her judgment, Laffoy J. noted that, on July 8, 2013, the defendant issued plenary proceedings against Allied Irish Banks Plc in which, in addition to seeking an order declaring the relevant mortgage null and void, €1 million in damages was sought. Among the pleas in those proceedings was a claim for damages due to
the "reckless lending procedures by the Bank". The existence of this claim by the defendant against the bank was viewed in the following terms by Laffoy J. when granting injunctive relief in favour of the plaintiffs:
"[The defendant] has not demonstrated that, as a matter of probability, the Plenary Proceedings against Allied Irish Banks Plc, which he has recently initiated, will result in a positive reversal of fortune for him". [Ms Justice Laffoy
A "shield" if not a "sword"?
In National Asset Loan Management Ltd v McNulty, a range of arguments were canvassed by the defendants who argued that they should be relieved of liability in respect of the multi-million euro sums borrowed from the former Anglo Irish Bank and/or guaranteed by them. In opposing the plaintiff's claim for judgment, the defendants raised various issues, including mistake, non est factum, delay, breach of duty and the alleged insolvency of the bank in question. In submissions to McGovern J., counsel for the defendants accepted that a tort of reckless lending has not been recognised in this jurisdiction but went on to argue that, even if no such tort provided the defendants with a sword, a finding that the lending was reckless would provide a shield for the defendants, relieving them of liability. In his judgment delivered on July 26, 2013, McGovern J. had this to say:
"While acknowledging that a tort of reckless lending has not been recognised in this jurisdiction (see the judgments of Charlton J. in ICS Building Society v. Grant [2010] IEHC 17 and of Kelly J. in McConnon v. The President of Ireland [2012]1 I.R 449), the defendants seek to advance the proposition that a claim of
reckless lending should be a good defence to a claim for judgement on foot of loan agreements and guarantees. I do not accept that such a defence exists, but in any case the defendants have failed to adduce sufficient
evidence to ground a finding that there was recklessness on the part of the Bank". [Mr Justice McGovern]
Contract law and the "tort"
In the manner explained by Charlton J. in ICS Building Society v Grant, several long-established principles of
contract law appear to be fatal to attempts to develop a tort of reckless or negligent lending. The cases discussed in this article all concerned loan agreements which had been entered into between financial institutions and borrowers. The essentials of an enforceable contract were present, including offer, acceptance, consideration and the capacity to enter the agreements in question. There was no evidence of undue influence, all agreements were in writing and all were commercial in nature. As practitioners will be well aware, when parties enter into commercial arrangements, it will be presumed that they intended to create legally binding contracts. The loan
agreements which allegedly involved reckless lending were undoubtedly contracts supported by consideration. One of the major obstacles in the way of the development of a tort of negligent lending is surely the common law's insistence that once a contract is supported by consideration, the adequacy of that consideration is irrelevant to the enforceability of the contract. According to Cheshire and Fifoot:
"It has been settled for well over three hundred years that the courts will not inquire into the 'adequacy of consideration'. By this it is meant that they will not seek to measure the comparative value of the defendant's promise and of the act or promise given by the plaintiff for it, nor will they denounce an agreement merely because it seems to be unfair". [Cheshire and Fifoot]
The comments by Lord Somervell over half a century ago in Chappel & Co Ltd v Nestle Co Ltd are still relevant:
"A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration if it is established that the promisee does not like pepper and will throwaway the corn". [Lord Somervell]
Tort law principles
Quite apart from an analysis of the would-be tort of reckless or negligent lending through the rubric of well established contract law principles, the argued-for tort fails to meet the basic elements required of any tort. As
practitioners can well imagine, for a borrower to avail of a tort of reckless or negligent lending would require at least the existence of a legally recognised duty of care owed by the financial institution to the borrower with regard to the prudence of the borrower getting the loan which the borrower wants, a breach of that duty of
care, loss or damage to the borrower, and a causal connection between the lender's conduct and the borrower's loss. In addition, the borrower would surely have to demonstrate that there was no lack of care on his part which would provide a contributory negligence defence. Given that it is the provision by a lender of a loan which a borrower wanted to obtain which is at the heart of the argued-for tort, the doctrine of volenti non fit injuria would also appear to be a major obstacle in the way of an aggrieved borrower, even in its current and much-circumscribed form. As McMahon and Binchy explain, the doctrine of voluntary assumption of risk has changed radically over the years, yet "where a person consents to the negligent act, he may not complain when it cccured". Although the argued-for "tort" continues to feature in cases before the High Court, it can be said with certainty that no such tort exists and, in light of long-established common law principles, efforts to use the concept either as a basis for a claim in damages or as a defence to a claim for monies owing, seem doomed to fail.