A recent High Court case has reaffirmed that a lender is not under a general tortious duty to provide advice to borrowers where they have not specifically agreed to do so, writes Greg Standing, partner and head of Retail & Finance Automotive Sector Group at Gowling WLG
Lenders do not owe a duty of care in contract or tort to advise borrowers of a potentially onerous clause in a loan agreement.
This was recently reaffirmed by the High Court in the case of Finch v Lloyds TSB Bank PLC. The claim advanced in this case was not that advice had been sought or given and was negligent or misleading.
Rather it was that, because of the close relationship between the bank and the borrower, the bank was under a contractual and tortious duty to give voluntary advice that was or might be contrary to its own commercial best interest, and had failed to do so.
In Finch v Lloyds TSB, the bank and a company (B) entered into a 10-year fixed-rate loan for £11.6m (€13.7m).
The claimant (as assignee of B’s cause of action) alleged the bank had owed B a duty to advise it of onerous terms in the loan agreement, and in particular that it would be liable for any break costs associated with repaying the loan early (the break cost clause) but that it had failed to do so.
The claimant alleged that it was only after entering into the loan and when it sought to refinance, that the bank advised that the break costs would include costs incurred in having to break a swap agreement entered into and were likely to be in excess of £1.5m.
The claimant argued B could not refinance its borrowings without borrowing those additional break costs, and as a result was unable to refinance at a lower interest rate. This ultimately meant B’s business failed and B went into administration.
The claimant also alleged the bank had negligently misrepresented that the loan had been tailored to suit B’s needs. It brought claims against the bank for breach of contract, negligence and negligent misrepresentation.
The court’s findings
The High Court dismissed the claim.
No contract to be breached
The claimant alleged a breach of the Supply of Goods and Services Act 1982 (1982 Act) s13, which implies a term that a supplier will carry out the service with reasonable skill and care.
However, the claimant had not pleaded or proved any contract which imposed a duty on the bank to provide a service that included the provision of advice, and so the 1982 Act was not engaged.
The bank owed no contractual duty to give advice to B on the existence or effect of the break cost clause, either under the 1982 Act or at common law generally.
The court found it unarguable that a contract to advise had arisen out of the closeness of the relationship built between the parties during the loan negotiation period. The relationship between B and the bank was based on self-interest but their respective commercial interests were diametrically opposed, and B had been represented by professional advisers throughout the negotiations.
No duty to advise
Neither was the bank under a tortious duty to give disinterested voluntary advice that was, or might be, contrary to its commercial best interests.
There is no general duty in tort for a lender to provide advice to a customer. Such an advisory duty could exist but that would be in exceptional circumstances which were markedly different to the conventional banker and customer relationship. This would be particularly so where a bank was pitching a product to a new customer and where that potential customer was represented by professional advisers.
To find a tortious duty of care existed in such circumstances would go further than any of the authorities cited to the court permitted. B’s own accountants and solicitors should have advised it on the break cost clause or raised enquiries of the bank if they considered the clause uncertain.
The use by the bank of the phrase ‘trusted adviser’ was made in a marketing context and was not sufficient to import a duty of care.
The claim for negligent misrepresentation – that the bank would tailor a product to the needs of B’s investors but had failed to do so – also failed.
The claimant failed to establish that B had intended to repay the loan early or that the bank knew that two of B’s investors wished to exit within five years.
The bank had tailor-made the loan to B’s requirements to the extent those requirements had been made known to it (amount, term and inclusion of a repayment holiday) and to the extent the bank, in its commercial judgment, was prepared to do so.
The bank was not required to offer facilities on terms that subordinated its commercial interests to those of B and its investors.
This is a helpful judgment to banks and other financial entities.
It confirms that a lender is not under a general tortious duty to provide advice to borrowers where they have not specifically agreed to do so. In the absence of any express regulatory obligations, lenders and other financial entities are unlikely to be liable to their customers for failing to ensure that the customer understands the product it is buying.
If a lender does however provide advice, then it must do so with reasonable care and skill. If there are unusual terms or features in an agreement, then although a lender may not be obliged to draw them to the borrower’s attention, it might be best practice to do so or advise that independent legal advice is obtained.<