Cat MacLean: Judgment could make it easier to hold banks to verbal promises

LEGAL action against large financial institutions is not to be taken lightly. They have the resources to fight, and more often than not the paperwork to back them up.

For this reason, a bank is rarely challenged in court by an aggrieved client, even if "right" happens to be on the side of the latter. No matter that justice is supposed to be blind to power, influence and wealth; the small business usually takes the view that a major bank is just too big to take on in the courtroom.

But perhaps that may change, in Scotland at least, following a recent ruling by the Court of Session.

Derek Carlyle, a Glasgow-based property developer, was sued for more than 1.4 million by Royal Bank of Scotland. The bank had lent him the money to purchase a plot of land within the grounds of Gleneagles Hotel for the development of housing. Mr Carlyle, our client, counter-claimed, alleging that the bank failed to complete the second half of the bargain – to provide cash to develop the plot, and that his subsequent loss was greater than the sum claimed by the bank.

The bank's case – that Mr Carlyle had not been given confirmation of the development loan in writing – was dismissed by the judge, Lord Glennie. He ruled that, based on commitments given verbally, and on the processes used in previous commercial joint ventures between Mr Carlyle and RBS, the bank had contractually agreed to provide the development capital.

This judgment has added a legal edge to a moral argument. It means a bank cannot promise commercial funding to a business – thus encouraging the business to make decisions based on that promise – and then feel able to withdraw the offer simply because it was not confirmed in writing. It should also give hope to smaller business interests who have been similarly let down, who want justice – and compensation – but who fear that the banks are so big that seeing them in court would result in utter ruination.

It is no coincidence that, between initially offering Mr Carlyle the funds for both purchase and development in 2007, and withdrawing the development finance the following year, RBS found itself in the middle of an unprecedented credit crisis. Since that crisis appeared out of nowhere, many more instances of banks withholding sums of loan capital previously promised to their clients have been brought to our attention.

Since the credit squeeze, the banks have been criticised for the extent by which they have reduced the levels of funding and development finance for business in general. But it seems clear that there was an even more acute problem as the squeeze began – firms being promised loans and putting expansion plans in progress as a result, only for the lenders not to come up with the money after all.

For many affected businesses, the consequences of its bank acting in this manner are much more than simply putting development plans "on hold", especially when these involve property. Firms rarely have the luxury of waiting until promised finance is actually transferred into their accounts; to make the project work they need to push on – drawing up architectural plans, negotiating with public utilities and engaging sub-contractors.

These tasks are expensive in time and money, and to embark on them and then be told the promised finance will not be forthcoming could be ruinous to the entire business, not just the planned project.

The judgment by Lord Glennie may also eventually filter through to a second benefit for aggrieved bank customers. Many law firms have not been willing to take instructions that will pit them against the banks, one reason being that these firms are on a "panel" for bank work, or might like to be. Lord Glennie's ruling may encourage more firms of solicitors to act against the banks.

How many affected businesses have given up the struggle for justice because of the difficulty experienced in finding someone willing to pursue it on their behalf?

The ruling should not be seen as a panacea by those small businesses that believe they have a grievance against banks linked to funding promises that were not subsequently followed through. Not all businesses affected by the recession will have a claim against their bank, just as not all business let down by their bank will have a claim.

But where there is a clear undertaking, and reliable evidence of that undertaking, this case does make it easier to hold a bank to its promises in future.

• Cat MacLean is an associate with MBN Commercial.