Judge rejects bank’s bid for couple to disclose privileged legal advice in loan guarantee dispute

John Bullough and his wife Georgina Bullough raised an action against the Royal Bank of Scotland over alleged “misrepresentations” by the lender’s relationship manager about the consequences of signing the personal guarantee, but the bank lodged a motion for commission and diligence seeking to recover certain documents, including the legal advice the couple received before entering into the agreement.

However, a judge in the Court of Session ruled that the pursuers had not “impliedly waived” their right to insist upon legal advice privilege.

‘Personal guarantee’

Lord Doherty heard that the pursuers, using a separate company McEwens Direct Limited (MDL), acquired the shares in McEwens of Perth Limited (MoPL) from the first pursuer Mr Bullough’s father as part of a management buyout (MBO) of the company in 2008.

The MBO involved MoPL and MDL refinancing loans with the defenders, with the borrowing to be secured by a personal guarantee granted by the pursuers in respect of the liabilities of MoPL and MDL up to the aggregate sum of £750,000, with the couple’s home given as security in a Standard Security.

On 18 January 2008 the pursuers signed the first personal guarantee, but claim they only did so after being advised by the defender’s relationship manager Ken Anderson, whom they “highly trusted” and thought was “sensitive to their interests”.

The couple had expressed “unease” about signing the guarantee, but averred that Mr Anderson had told them that the bank would exhaust all rights under the group’s securities before enforcing the personal guarantee, adding that the process was “just a box-ticking exercise” and that the bank “would never take their home”.

However, the signing of the guarantee exposed the pursuers to “personal risk” in the event of the company’s default and the couple claimed that Mr Anderson failed to advise them of the “true consequences” and that they were “induced” into signing the document.

The court was also told that prior to signing, the second pursuer Mrs Bullough was offered legal advice and taken into another room by a solicitor, Iain Hutchison of Thorntons LLP, who explained the personal guarantee, but she said she felt she had “no choice but to agree” to it.

The pursuers accordingly sought reduction of the personal guarantee on the basis of Mr Anderson’s “misrepresentations” and on the basis of the “breach of the duty of good faith” by the bank.

‘Implied waiver’

RBS then sought recovery of certain documents, including an attendance note completed by Mr Hutchison during his meeting with Mrs Bullough, and details of the legal advice the couple received before signing the personal guarantee.

The couple produced a copy of the note, but it was redacted to exclude material covered by legal advice privilege.

But the bank wanted to see the unredacted version, arguing that the couple “impliedly waived” privilege in relation to that advice.

It was submitted that the pursuers had relied upon the circumstances at the time of signature, but the legal advice given was part of, and inseparable from, those circumstances.

The pursuers’ reliance upon, and production of, the redacted attendance note involved “partial disclosure” of what had taken place at the meeting, but they ought not to to be able to pick and choose what information to disclose, as that would be “cherry-picking, which would be “unfair” to the defenders.

The judge ruled in favour of the pursuers and refused the defenders’ motion, but on an in hoc statu basis - meaning the position may have to be revisited if the terms of the legal advice are relied upon by the pursuers in witness statements or affidavits, or in oral evidence at the proof.

‘Legal advice privilege’

In a written opinion, Lord Doherty said: “In my opinion neither the making of the averment (that the guarantee was explained to the second pursuer by Mr Hutcheson) nor the production of the redacted note involve either pursuer relying upon or otherwise deploying any part of the legal advice which he or she was given by Mr Hutcheson. There has not been partial disclosure, or cherry-picking, of the contents of legal advice.

“There is no indication that the pursuers are employing a strategy of using legal advice in a selective manner to obtain a forensic advantage, or that the conduct complained of gives rise to a risk that they will obtain such an unfair forensic advantage.”

The judge acknowledged that causation was likely to be in issue at the proof, ie whether Mr Anderson’s representations and/or the alleged breaches of duty by the defenders caused the pursuers to enter into the personal guarantee, and that the defenders would seek to rely on the fact the pursuers had received legal advice, but he observed that there was no indication that the pursuers propose to challenge that.

Lord Doherty added: “On the facts, I do not regard the pursuers’ insistence upon legal advice privilege as being productive of unfairness. The working assumption at the proof is likely to be that competent and appropriate legal advice was given to the second pursuer (and to the extent that legal advice was given to the first pursuer, that it was also competent and appropriate). I do not understand the pursuers to suggest otherwise.

“In the whole circumstances, looking at the facts objectively, I am not satisfied that the pursuers have impliedly waived the right to insist upon legal advice privilege in respect of the documents which the defenders seek to recover. I am not persuaded that the conduct from which the defenders seek to infer waiver is inconsistent with the pursuers continuing to assert privilege. 

“Nor am I persuaded that the combination of that conduct and the assertion of privilege is likely to result in unfairness to the defenders, or to mislead them or the court. I do not think that the pursuers’ conduct is inconsistent with the reservation of legal advice privilege which they made when they produced the redacted attendance note.”