Concurrent wrongdoers and debt recovery

A concurrent wrongdoer in Ireland is defined in s. 11 of the Civil Liability Act 1961 as “one of two or more people responsible to a plaintiff for the same damage” (“Concurrent Wrongdoer/s”).  Concurrent Wrongdoers are jointly and severally liable for the damage sustained by a plaintiff[1].

A recent Court of Appeal decision[2] has clarified that in terms of a debt secured by a mortgage over a property, a valuer who produced a negligent valuation and a borrower who was contractually obliged to repay the debt are NOT Concurrent Wrongdoers for the purposes of the Civil Liability Act 1961 (the “Act”).

The significance of the foregoing lies in the way in which a Court is required to ascertain the extent of the liability of one Concurrent Wrongdoer when a plaintiff has reached a settlement agreement with another pursuant to s. 17 (2) of the Act.

The decision will be of particular interest to lenders and professional valuers.

The Law

S. 17 (2) of the Act provides that where a plaintiff (“P”) has reached an accord or agreement with one Concurrent Wrongdoer (CW1) to release him/ her from liability, unless the agreement/ accord expressly or by implication releases the other Concurrent Wrongdoer/s (CW2) from liability, the liability of the other Concurrent Wrongdoer/s (CW2) will be released by the greater of :-

• The amount of the settlement between P and CW1; or
• Any amount stipulated in the settlement agreement between P and CW1; or
• The extent by which it can be said that CW1 was liable to contribute to CW2 if CW2 had paid the entire claim.

S. 35 (1) (h) and s. 17 (2) of the Act also require, (in the case of an agreement reached between P and CW1 WITHOUT the intention to release CW2) a plaintiff to “identify” with CW1 in any proceedings it issues against CW2. Identification is a legal term, and in this case is employed here so that P does not recover on the double and enjoy a windfall from CW2. Identification provides that in the foregoing instance P be deemed to be responsible for any acts of CW1 in those proceedings by way of contributory negligence.

Executive Summary

In the case in question, the borrowers (ie CW2) alleged[3] that the valuer (ie CW2 due to allegedly negligent provision of a property valuation), as Concurrent Wrongdoer with them, would have been required to contribute to them some or all of the loan outstanding and that consequently the borrowers’ liability to the bank should be reduced or set at nought pursuant to s. 17 (2) of the Act.

The borrowers’ argument was ultimately rejected by the Court of Appeal on the basis that a borrower and a valuer that provided a negligent valuation of property that induced a bank to lend to the borrower, were not Concurrent Wrongdoers. The Court held that any windfall to the bank by reason of its claims against both the valuer (for damage caused by an alleged negligently drafted report) and the borrowers (for the amount of the loan unpaid), was to the detriment of the valuer only and not the borrowers.  Therefore, the Court held that the borrowers could not rely on any settlement reached by the bank with the valuer to relieve the borrowers of having to repay the full amount of the unpaid loan.

The Case and Background/ Facts

The appellants in this case, Ulster Bank Ireland Limited & Others, Plaintiffs/ Respondents -v- Brian McDonagh & Others, Defendants/ Appellants, IEHC 2022 87, were three brothers (the “Borrowers”) who borrowed €21.5 million from Ulster Bank Ireland Limited (“the Bank”) to part fund the acquisition of a site at Kilpedder, Co. Wicklow in 2008.  The Borrowers secured planning permission for a data centre, but the development did not go ahead and the Borrowers were not able to repay the loan.  The Bank and the Borrowers entered into a Compromise Agreement and the Borrowers had to disclose all their respective assets in a Statement of Affairs. The Borrowers were alleged to have breached the Compromise Agreement and the Bank looked for summary judgment for €21.5m against the Borrowers. The Bank issued professional negligence proceedings against its valuer, CBRE for allegedly failing to properly value the Kilpedder lands. This claim was settled for €5 million which, (at the election of the Bank) was applied against the Borrowers’ loan in reduction of the debt. As set out in the decision of the Court of Appeal, there was no apparent legal basis for the Bank to reduce the Borrowers’ liability by the amount paid by CBRE.

High Court decision

Two broad issues were contested before the High Court. The first centred on whether or not the Borrowers/ defendants had breached the Compromise Agreement and secondly, whether CBRE was a Concurrent Wrongdoer with the Borrowers/defendants and thus whether or not the Bank was precluded from pursuing the Borrowers/defendants for the debt under section 17(2) of the Act in full or in part.

Mr. Justice Twomey delivered two judgments on behalf of the High Court. The first judgment[4]  was delivered on 6 April 2020 and determined that the Borrowers/defendants were jointly and severally liable to the Bank for the full amount of the outstanding debt. It was determined that the Borrowers had breached the Compromise Agreement and the Bank was entitled to pursue its claim for monies against the Borrowers/defendants.

With respect to the Act, the Court determined in its second judgment[5] that if some defendants in an action are alleged to be in breach of a contract for failing to pay a debt, and there were others responsible for that same debt on the basis of their wrongful conduct, then they were Concurrent Wrongdoers and s. 17 (2) of the Act applies.

However, the High Court concluded in its second judgment[6] that as no evidence was available to the Court to establish that the valuer was negligent in relation to the issue of its valuation report and that the report was the cause of the non-repayment of the loan by the Borrowers the Borrowers were found to be liable for the full amount of the debt outstanding in the amount of c. €22m. The Borrowers/ defendants appealed the case to the Court of Appeal.

The decision of the Court of Appeal relating to the Act

The Court of Appeal comprising the Honourable Mr Justice Brian Murray, Mr Justice Maurice Collins and Ms Justice Teresa Pilkington, delivered its judgment on the 6^th of April 2022 and held that the Act is concerned with apportioning responsibility between wrongdoers facing legal proceedings for the recovery of “damages”[7]. The Court concluded that a claim for the recovery of a debt is not an action for the recovery of damages but for the enforcement of a primary contractual right. Even if a claim for a debt could be construed as a claim for “damages” as defined by the Act, the Court of Appeal held that a claim for damages for professional negligence and a claim for repayment of a debt were not actions for the “same damage”, as required by the Act[8]. The Court went on to say that a debtor would be liable for the entire debt, whereas the maximum amount for which the valuer could be held liable was a figure representing the amount of the loan which the lender could not recover from the debtor. Therefore, it was held that the liability of the debtor and valuer were not concurrent as required by s. 17 (2) of the Act.

Ultimately, the Court dismissed the Borrowers’ case on the matter of the application of the Act to proceedings for the recovery of debt and found the Borrowers liable for the full amount of the debt outstanding.  The Court of Appeal found absolutely no basis on which it could be suggested that the valuer, CBRE, could have any liability to contribute to the debt of the defendants, as required by s. 17 (2) of the Act. The Bank was not obliged to have deducted the €5m received from CBRE on foot of the settlement from the debtors’/Borrowers’ liability but as it had elected to do so, the Borrowers’ liability was reduced in that amount.  Therefore, the Borrowers were found to be liable for the full amount of the loan (€27m) less the settlement sum received from CBRE and applied to their loan account (€5m) with interest thereon. The effect of the second judgment of the High Court was upheld and the judgment of c. €22.9m against the Borrowers on a joint and several basis remained.

Further, the Court held that proofs critical to establish negligence – including a professional report confirming that the valuer failed in meeting its standard of care by adhering to general accepted and approved practice – were not present and the Borrowers’ argument was bound to fail for that reason, even if the Court held that the valuer/CBRE and the Borrowers were Concurrent Wrongdoers (which, as above, was not the case).

The Court of Appeal made clear[9] that the case is not concerned with the manner in which liability as between joint debtors or debtors and guarantors should be determined. In its decision, the Court emphasised that its findings do not in any sense have the consequence that in either of these situations a creditor is entitled to effect double recovery nor does it mean that a compromise with one debtor in these circumstances has no implications for another party liable on the debt. Instead, the relevant common law rules and applicable equitable principles (in particular of recoupment and contribution) continue to operate, the court held.  In the case of joint debtors this means that the release of one co-debtor in an agreement which did not expressly or impliedly reserve the creditors’ rights against the others will wholly extinguish the creditor’s rights. In the case of the relationship between guarantors and debtors issues as to whether and if so at what point of time in the context of a particular guarantee the guarantor has a right to indemnity or contribution from the principal debtor, those rights, the guarantor’s rights to subrogation, and indeed its rights against co-sureties fall to be determined in accordance with those equitable principles developed ‘to ensure that the person primarily liable should bear the whole burden in relief of others’ (Re Eylewood Ltd. [2011] 1 ILRM 5 at para. 35 per Finlay Geoghegan J.)[10].

Conclusion

The decision, insofar as it relates to the application of the Act to cases where it appears more than one person is or may be responsible for loss sustained by a plaintiff, is an important one as it clarifies the fundamental steps to take when examining the relationship between two parties to ascertain if they are Concurrent Wrongdoers.  The decision will be welcomed by banks and lending institutions as it makes it clear that the full amount of a loan remains outstanding even in situations where the lender was induced to lend on foot of an allegedly negligently prepared valuation report.

Further reading – see “The Blame Game”, by John Kennedy SC in the Law Society Gazette, 01 July 2022 and for wider background “Appeals court upholds €22m judgment against brothers over data centre lands”  Anthea McTeirnan of the Irish Times dated 06 April 2022.

[1] S. 12 of the Act

[2] Ulster Bank Ireland Limited, Paul McCann and Patrick Dillon, Plaintiffs/ Respondents -v- Brian McDonagh, Kenneth McDonaghj and Maurice McDonagh, Defendants/ Appellants. 2022 IECA 87

[3] amongst other arguments that will not be addressed in this article

[4] Ulster Bank Ireland Limited & Others, Plaintiffs -v- Brian McDonagh & Others, Defendants, 2020 IEHC 185

[5] Ulster Bank Ireland Limited & Others, Plaintiffs -v- Brian McDonagh & Others, Defendants 2020 IEHC 311 delivered on 20 June 2020

[6]  Ulster Bank Ireland Limited & Others, Plaintiffs -v- Brian McDonagh & Others, Defendants 2020 IEHC 311 delivered on 20 June 2020

[7] As defined in s. 2 of the Act

[8] S. 17 (2) of the Act

[9] Para 104,pg 63 & 64 of the Court of Appeal judgment

[10] These principles, the Court found were summarised before in Breslin and Corcoran, Banking Law (4th Ed 2019) at paras. 14-19 – 14-27.