Following a long line of recent successes for banks in mis-selling cases, there has now been another significant success, this time for Lloyds Bank (Bank), in a fixed rate loan dispute relating to the issue of break costs. The decision in Finch v Lloyds TSB Bank Plc [2016] EWHC 1236 (QB) (Finch) is significant for a number of reasons but perhaps most importantly for the court’s observation that there is no general duty in tort for a bank to advise a customer and that there would need to be “exceptional circumstances” before a court would conclude that a bank came under a duty to advise. In mis-selling cases where borrowers regularly assert that an advisory duty was assumed by their bank, this represents another significant obstacle that they will need to overcome.

Facts

The case concerned a 10 year fixed rate loan that was taken out in January 2008 by a hotel business operated by the claimants. The claimants were advised by a corporate finance advisor, who had acted as a finance broker to the investors in soliciting offers of funding from various banks, and by solicitors, who negotiated the terms of the loan agreement ultimately entered into with Lloyds.

The loan agreement contained a fairly typical clause which required the borrower to pay break costs in the event of a prepayment. The claimants alleged that it was only when they sought to refinance in 2009 that they discovered this “concealed time bomb” i.e. c.£1.5 million break costs which then prevented them from refinancing.

In other swaps mis-selling claims, such as Crestsign Ltd v National Westminster Bank Plc and Anor [2014] EWHC 3043 (Ch) and Thornbridge Ltd v Barclays Bank PLC [2015] EWHC 3430 (QB), the claimants alleged that their banks gave negligent advice. In Finch however, the claimants alleged not that the Bank had given advice which was negligent but rather that the Bank had offered to provide advice to the borrower (which offer was accepted) but that the Bank had then failed to provide that advice. Specifically the claimants alleged that the Bank had failed to advise as to the existence of any onerous terms and the effect of such terms on a prepayment prior to entering into the loan.

Issues

The key issue for the court to determine was whether the Bank had a contractual or tortious duty to advise in this case. If it did, the question was whether the Bank had breached that duty by failing to advise on the risks of the prepayment clause.

The claimants also alleged that the Bank had negligently misrepresented that the loan was “tailored” to the borrower’s specific needs and requirements (in particular in circumstances where the investors wished to exit from their investment prior to the loan maturity date).

Decision

HHJ Pelling QC dismissed the claim in its entirety.

Contractual duty

The judge held there was no contractual duty on the Bank to give advice and the claimants had not evidenced any contract to support such an advisory duty.

He rejected the argument that a contractual duty arose by implication under s.13 of the Supply of Goods and Services Act 1982. He said s.13 had the effect only to imply a term by operation of law into a “relevant contract for the supply of a service”. To rely on this section the claimants had to plead and prove a contract under which the Bank had agreed to provide a service that included the provision of advice. They had not done so and therefore the claim on this point failed.

Tortious duty

The judge rejected the allegation that the Bank had voluntarily assumed a tortious duty to advise. He reaffirmed the principle that banks have no general duty to advise customers and that there would have to be “exceptional circumstances” before it could safely be concluded that a Bank, which was pitching for the business of a potential customer, came under a duty to give advice in relation to the product it was offering. This was particularly so in a case such as this where the customer had its own professional advisers and the giving of any advice by the Bank might have been contrary to its own commercial best interests.

The judge also said that the Bank’s use of the phrase “trusted advisor” in its marketing materials had no significance other than the fact that it was a phrase adopted by the Bank as part of a marketing strategy to distinguish it from its competitors.

Breach of duty

Because of the finding that there was no advisory duty, the judge did not consider the question of breach i.e. whether on the facts Lloyds had discharged any duty of care to ensure that the loan was suitable for the borrower’s needs.

Misrepresentation

The judge rejected the claim that the Bank negligently misrepresented that the loan would be “tailored” to the borrower’s needs. He noted that the Bank was never informed that the investors wished to exit within five years. In any event the loan was tailored to the borrower’s needs because it met its requirements for the amount and term whilst offering a repayment holiday as requested.

The judge also preferred the witness testimony given on behalf of the Bank.

Causation

Having dismissed the claimants’ claims, the judge did not grapple in any detail with causation save to note the difficulties the claimants had in relying on indicative offers from other banks to evidence alternative financing available to them. The judge said that those offers were merely indicative and were made before any formal market valuation of the claimants’ businesses had taken place.

Fraud

A separate allegation of fraud made against the Bank and its relationship manager was withdrawn during the course of the trial. The judge was very critical of the fact that the allegations had not been dropped earlier and that the claimants had not taken the opportunity to apologise to the relationship manager when he had finished giving evidence given the serious nature of the allegations.

Conclusion

The case is particularly helpful for the following reasons:

  1. It serves as another reminder that the courts are reluctant to imply terms into a contract. To demonstrate a contractual advisory duty, claimants will need to point to an express term in the contract.
  2. Recognising the fact that banks have their own commercial interests to pursue, the court reaffirmed the principle that banks have no general tortious duty to advise customers. There would have to be "exceptional circumstances" to find otherwise. This is particularly helpful in cases where a bank is dealing with a new (or relatively new) customer or where the customer is represented by a broker. The position may be different where there is a long standing relationship with the customer.
  3. It is another stark reminder that, given the potential reputational and regulatory risks for banks, the courts will treat allegations of fraud very seriously. Allegations of fraud should not be advanced lightly without substantial supporting evidence.