In Finch v Lloyds TSB Bank Plc and Promontoria Holding 87 BV v Finch(1) the High Court recently considered whether a lender owes a duty, in contract or in tort, to a borrower to advise it of onerous terms within a loan agreement. Significantly, the court observed that there is no general duty in tort for a bank to advise a customer and that a court would conclude that a bank comes under a duty to advise only in exceptional circumstances.
This case concerned two claims:
- the bank claim, which arose from a loan agreement between Lloyds TSB Bank Plc and Bredbury Hall Limited (BHL) in January 2008 pursuant to which Lloyds agreed to make a 10-year fixed-rate loan of up to £11.6 million; and
- the guarantee claim, by which Promontoria Holding 87 BV sued for sums due under personal guarantees that were given in respect of the loan agreement which was the subject of the bank claim.
This update focuses on the bank claim, which provides guidance on the scope of a bank's duty to advise its customers.
In 2007 Mr Finch and other senior staff at a hotel which traded as Bredbury Hall Hotel and Country Club sought to acquire the hotel by purchasing the entire issued share capital of the then ultimate owner. BHL was incorporated on July 31 2007 as a corporate vehicle to facilitate the acquisition.
The investors required funds to finance the acquisition. They were advised by:
- a corporate finance adviser whose scope of work included providing advice on the purchase price and funding structures, making introductions to potential sources of finance and assisting in negotiations with potential funders to obtain the most appropriate terms; and
- solicitors, who negotiated the terms of the loan agreement that was eventually entered into with Lloyds.
The corporate finance adviser made enquiries of a number of lenders on the investors' behalf. Having obtained indicative funding offers from a number of institutions, Lloyds was the only bank able to meet the investors' funding requirements. After a period of negotiation, the bank agreed to lend the investors a total of £11.6 million. The sum was split into £10.85 million (representing 70% of market value) secured against the hotel and its business and £750,000 to be secured by a series of personal guarantees given by the investors.
During the negotiations, two employees of Lloyds were noted to have had a very close relationship with the investors. The claimant investors argued that the presence of such employees at progress meetings was in line with Lloyds' marketing material, which described the bank not merely as a source of finance, but also as a 'trusted adviser' to its customers – both of which imported a duty of care to the investors.
The bank claim centred on a clause in the loan agreement that required the borrower to pay break costs in the event of an early repayment. These could include potentially significant costs incurred by Lloyds in breaking a swap that it had entered into to hedge against the risk posed by lending funds at a fixed rate that it had borrowed on the interbank market at a variable rate.
The claimants alleged that BHL was made aware of the true implications of this "ticking time bomb" only in July 2009, when it sought to refinance and discovered that it would be liable to pay around £1.5 million of break costs arising from Lloyds' hedging arrangements.
Following a period of financial difficulty, BHL was placed into administration because of a demand for repayment of its overdraft, which it was unable to meet. The claim vested in the investors as assignees of BHL.
The claimants alleged that Lloyds:
- owed an advisory duty (in tort and/or in contract) to BHL and that Lloyds breached that duty by failing to advise BHL, before the loan agreement was entered into, of the risks of the break clause in that agreement or, alternatively, that Lloyds owed a continuing advisory duty following conclusion of the loan agreement, which it breached by failing to advise on the risks of the break clause. The claimants alleged that BHL would have opted for a different loan provider if it had known about this;
- negligently misrepresented to BHL that the loan agreement was tailored to its needs and the requirements of the management team (in particular, in circumstances where two of BHL's investors wished to exit BHL within five years); and
- entered into a collateral agreement with the claimants under which it promised to lend additional funds to meet deferred consideration payments, and that such promises were never fulfilled.
Did Lloyds owe the claimants an advisory duty?
The court held that there was no contractual duty on Lloyds to give advice. It also rejected the argument that a contractual duty of care could be implied into the contract by operation of Section 13 of the Supply of Goods and Services Act 1982, such that Lloyds would have a duty to act with reasonable care and skill in the advice that it provided to BHL. Section 13 can imply a term only into a "relevant contract for the supply of a service", but the claimants had failed to plead and prove such a contract.
As regards tortious duty, the court noted the general principles in existing case law that a bank is under no legal obligation to provide advice, and that generally the relationship cannot be seen to be an adviser-client relationship. Whether a duty of care is owed in a particular case "will depend upon the application of one or more of the usual three tests" – in particular:
"the assumption of responsibility coupled with reliance test, the three-fold-test (reasonable foreseeability of loss, sufficient proximity between the parties and whether it is in all the circumstances just and reasonable to impose a duty) and the incremental test – having regard to the exchanges which cross the line between, and the dealings of, the parties in their context."
Having regard to these tests, the court noted that the case advanced by the claimants did not assert that advice had been sought, or that the advice that was given was negligent. Instead, it had been advanced on the basis that Lloyds allegedly had a duty to give advice that may be contrary to its commercial best interests.
The court concluded that the claimants' proposition went beyond existing case law. While not ruling out the fact that such an advisory duty could exist, it would be in "exceptional circumstances and markedly different from the conventional relationship of banker and customer". This is particularly the case where the customer has its own professional advisers.
Further, the use of the term 'trusted adviser' in Lloyds' marketing materials had no significance.
Had Lloyds misrepresented that the loan would be tailored to BHL's needs?
The court rejected this claim. There was no evidence to suggest that the claimants had informed Lloyds of their wish to exit within five years. In any case, the loan had been 'tailored' insofar as it met the sum and term required and offered a repayment holiday as requested. Tailoring did not require Lloyds to subordinate its interests to those of the investors.
Was there a collateral contract?
There was no contract to support the alleged implied collateral agreement to pay deferred consideration and, in any event, it was held to be unlikely that Lloyds would have entered into any such agreement, given its position on the sums already lent.
Finally, the court found that even had any of the claims succeeded on breach, no causation had been established. The claimants had failed to demonstrate that an alternative product would have been available to BHL.
This case is the latest in a line of unsuccessful mis-selling claims against banks, where claimants have sought to allege that the bank owes a duty to provide advice as to financial products. The case reinforces the position that a bank is under no legal obligation to provide advice to its customers on the suitability of agreements.
The judgment is also noteworthy because while in other mis-selling cases (eg, Crestsign(2) and Thornbridge(3)) the court looked at whether advice was negligent, here the focus was on whether the bank had offered to provide advice to the borrower and then failed to provide that advice.
In emphasising that a bank assumes a duty to advise only in exceptional circumstances, the decision creates another obstacle to be overcome when bringing a mis-selling claim against a bank in connection with the sale of financial products.
For further information on this topic please contact Emma Griffiths or Andy McGregor at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
(1) Stephen Frederick Finch v Lloyd's TSB Bank PLC and Promontoria Holding 87 BV v Stephen Frederick Finch  EWHC 1236 (QB).
(2) Crestsign Ltd v National Westminster Bank plc  EWHC 3043 (Ch).
(3) Thornbridge Ltd v Barclays Bank plc  EWHC 3430 (QB).