A recent judgment in proceedings commenced by a property developer against various parties including appointed receivers, has cast light on the ability of receivers to rely upon contractual exclusion clauses to exclude and limit liability in respect of their equitable duty to take reasonable skill and care to achieve the best price obtainable when selling charged assets.
This decision has implications for receivers but also lenders that have provided indemnities to the appointed receivers.
During the trial of preliminary issues in CMN Estates (Tolworth Tower) Limited v VeCREF I SARL and Others [2020] EWHC 1605 (Comm), Mr Justice Foxton considered legal principles of contractual construction in deciding the extent to which the joint receivers could rely on clauses contained within a debenture and an inter-creditor agreement to exclude potential liability to the property developer chargor.
In particular, while the receivers were successful in limiting (but not excluding entirely) liability in respect of their equitable duty to the property developer, the case highlights the importance of paying careful attention to both the clarity with which exclusion clauses (often market standard provisions) are drafted and the way in which clauses in different contractual documents interact with one another.
Background
The factual background is a relatively common one. The claimant was a property developer which wanted to finance the acquisition and development of a property and entered into two facility agreements to raise development financing.
The development site itself was charged as security for both loans by way of a debenture, to which the developer was a party, ("the Debenture") and by a mortgage. In addition all the parties to the facility agreements entered into an inter-creditor agreement ("the ICA").
Following the lenders serving a notice of default the security agent appointed the receivers as joint Law of Property Act receivers in respect of the development site. In turn the receivers appointed Knight Frank to act in relation to the disposal of the development site and the property was sold.
Dispute
The claimant claimed that the receivers failed to comply with their duty to exercise reasonable skill and care in exercising their functions and failed to obtain the best price reasonably obtainable on the sale of the development site.
Even though a receiver's primary duty is to the appointing chargee, they must act in good faith and must deal fairly and equitably with the chargor. There was no dispute between the parties that as a matter of general law the receivers owed the developer, as chargor, an equitable duty to take reasonable skill and care to achieve the best price reasonably obtainable for the development site.
The receivers contended, however, that they had made all reasonable and proper arrangements to market the property and obtain the best price available in the market following an appropriate sales process and having regard to price and transactional risk.
Further, and in any event, the receivers argued that they were not liable for any of the losses claimed due to exclusion clauses contained in the Debenture and the ICA.
The developer accepted that the receivers' equitable duty of care was capable of being modified by an appropriate contractual term and that the receivers could rely on the exclusion clauses by virtue of the Contracts (Rights of Third Parties) Act 1999.
The key issue to be decided was whether the particular contractual terms the receivers sought to rely upon had the effect of excluding and/or limiting liability to the developer for breach of the receivers' equitable duty.
Exclusion clauses
The exclusion clause in the Debenture read as follows:
"Neither the Security Agent, any Receiver nor any of their respective Delegates and sub-delegates (whether as mortgagee in possession or otherwise) shall either by reason of:
- taking possession of or realising all or part of the Secured Assets; or
- taking any action permitted by this Deed,
be liable to a Chargor or any other person for any costs, losses or liabilities relating to any of the Secured Assets or for any act, default, omission or misconduct of the Security Agent, any Receiver or their respective Delegates and sub-delegates in relation to the Secured Assets or otherwise".
The relevant part of the exclusion clause in the ICA read:
"none of the Security Agent, any Receiver nor any Delegate will be liable for:
any damages, costs or losses to any person, any diminution in value, or any liability whatsoever arising as a result of taking or not taking any action under or in connection with any Debt Document or the Security Property unless directly caused by its gross negligence or wilful misconduct;".
Decision
Taking into account general legal principles of contractual interpretation and those applicable specifically when exclusion clauses are relied upon to exclude a primary duty which would otherwise arise, Mr Justice Foxton held that:
- In respect of the Debenture the relevant clause was not sufficiently clear in its drafting to be effective in excluding the receivers' liability for breach of equitable duty. The clause could more reasonably be read as protecting the receivers from complaints relating to several other actions they might take when dealing with the charged assets.
- However, the exclusion clause in the ICA was effective in limiting the receivers' liability for breach of the equitable duty to cases where the liability in question was directly caused by the receivers' gross negligence or wilful misconduct.
- The fact that the ICA recognised that the receivers would be liable, at the very least, for breaches of the equitable duty resulting from gross negligence or wilful default was a factor which weighed against the suggestion that the Debenture excluded the duty altogether.
This case highlights the need for careful consideration of exclusion clauses and the suite of documents in which they sit particularly at a time when challenges to receivers' conduct are becoming more frequent.
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