Significant judgment on the application of the Civil Liability Act to debt claims

Ulster Bank Ireland Limited & Ors v McDonagh & Ors [2022] IECA 87

The Court of Appeal has recently delivered a significant judgment in relation to whether a lender’s entitlement to judgment against a borrower is reduced or affected by a claim for damages that the lender may have against another party.

Background

The proceedings were brought by Ulster Bank Ireland Limited (“the bank”) and receivers appointed by it against three borrowers, the McDonagh brothers, to whom the bank had advanced a loan of approximately €22 million in 2007 to part fund the acquisition of an 80-acre site at Kilpeddar, Co Wicklow, on which the defendants intended to build a data centre.

A condition precedent of the loan agreement was that the bank would receive an independent report addressed to the bank valuing the lands at a minimum valuation of €56 million. CBRE provided a report to the bank valuing the lands at €57 million.

For various reasons, the proposed data centre did not progress. The loan was not repaid to the bank.

In 2013, the bank and the defendants entered into a compromise agreement under which the bank agreed to write off the debt in exchange for a payment of €250,000, in addition to the proceeds from the sale of the land at Kilpeddar and some artwork items. The essence of the agreement was that the defendants’ liabilities, which at the time stood at roughly €25 million, were written-off, in return for payment of approximately €5 million.

It was agreed that the defendants were to keep the bank at all times fully appraised as to all enquiries into the site and any negotiations regarding its sale.

Later in 2013, the bank instituted proceedings against CBRE alleging negligence in the preparation of its valuation of the lands. These proceedings were settled in 2016 for approximately €5 million, which sum was credited to the defendants’ loan account.

In 2014, without the bank’s knowledge, the defendants purportedly sold the lands. In or around this time, the bank withdrew its consent to any sale and ongoing marketing of the lands and in October 2014, it appointed joint receivers over the lands.

The above proceedings were issued by the bank against the defendants in July 2018 for the recovery of the sum of €22,090,302.64.

High Court

The case was heard in the High Court over 21 days and our previous article linked hereexamined the decision in detail.

The first issue for the High Court to decide was whether the defendants were in breach of the compromise agreement, entitling the bank to treat the agreement as at an end and to pursue the defendants for the debt. The second issue was whether CBRE was a concurrent wrongdoer (with the defendants), which, the defendants argued, would preclude the bank from claiming from the defendants some or all of the debt by virtue of section 17(2) and section 35(1)(h) of the Civil Liability Act 1961 (“CLA”).

On the first issue, the court determined that the defendants had breached the compromise agreement in several ways, including a failure to comply with their obligation to keep the bank appraised of all negotiations regarding the sale of the land. Therefore, the bank was entitled to pursue its action to recover the debt from the defendants.

On the second issue, the court held that the defendants and CBRE were concurrent wrongdoers to whom the CLA applied. However, Mr. Justice Twomey found that the onus of proof was on the defendants to establish that CBRE was negligent in the preparation of its valuation report, that this negligence caused or contributed to the damage suffered by the bank, and that CBRE was liable to contribute more than the sum of €5 million to the bank’s loss. The court concluded that the defendants had failed to do so.

It granted judgment against the defendants jointly and severally in the sum of approximately €23 million.

Court of Appeal

The defendants appealed the High Court order. The principal issue to be determined on appeal was whether Part III of the CLA making provision for concurrent wrongdoers applied to debt recovery cases. The court, in a joint judgment of Mr. Justice Murray and Mr. Justice Collins (and with which Ms. Justice Pilkington agreed) held that it did not.

The court emphasised the distinction between the concept of ‘damage’ and that of ‘damages’ under the legislation. It held that the provisions of the CLA which govern concurrent wrongdoers are concerned exclusively with wrongdoers who face legal action for the recovery of damages. It held that a claim for damages for a wrong and a claim to enforce a primary legal obligation (i.e. the repayment of a debt) are conceptually and practically distinct, with the latter being akin to specific performance of a contractual obligation. The provisions of the CLA could not apply simply because the plaintiff has suffered damage (i.e. a loss of some kind).

The court continued that, even if the CLA is to be interpreted in such a way that an action for the recovery of a debt and an action for damages for breach of contract are to be equated so that debt recovery proceedings come within Part III of the CLA, a claim against a debtor pursuant to a loan and a claim against a valuer whose negligence is alleged to have resulted in the granting of the loan, are not actions to recover the same damage. The debtor’s liability is for the total of the debt while the valuer’s liability is (at its height) only for the amount of the loan that the lender is unable to recover from the debtor. The liability of the valuer and the debtor are not, therefore, concurrent.

It was also held that if the defendants wished to argue that CBRE was a wrongdoer, then they had to adduce expert evidence that the firm had acted negligently, as the defendants claimed. Further, any reduction in the bank’s claim against the defendants would only arise where CBRE had a contribution liability in excess of €5 million. The court held that it was “_impossible”_for CBRE to have such contribution liability, as the effect of this would be to relieve the defendants of a contractual obligation freely undertaken by them.

The defendants’ appeal was dismissed.

Comment

This is a significant decision in which the court clarified that the CLA does not apply to an action for the recovery of a debt, as it is not a claim for damages.

This decision, clarifying that “the law governing contribution as between or claims as against concurrent wrongdoers has never applied to an action for the recovery of a debt and nothing in the CLA changes that”, will also be relevant to proceedings seeking judgment against multiple borrowers where settlement with one has already occurred.

The authors would like to thank Jack Doyle for his contribution to this article.