A claimant failed to bring a time-barred financial mis-selling claim against its bank via the “backdoor” of an unfair relationship claim under s140A and s140B Consumer Credit Act 1974 (CCA). The judgment provides useful guidance on factors that a court will take into account when determining whether there is an unfair relationship, and how commonly used ‘basis clauses’ fit into this analysis: Carney & ors v N M Rothschild & Sons Ltd EWHC 958 (Comm), 1 May 2018.
The claimants, British expats living in Spain, had borrowed funds from the bank, secured against their properties, to enable them to enter into investments designed to reduce the Spanish equivalent of inheritance tax. They engaged the services of an independent financial adviser (IFA) throughout the process.
The investments underperformed and the claimants sued the bank for their loss, alleging that the bank had given them wrong advice, and made serious misrepresentations about the investments and tax implications. Their sole claim was under s140A and s140B CCA – namely that an unfair relationship arose between the claimants and the bank out of the loan agreements. The principal relief claimed was the removal of their indebtedness to the bank under the loan agreements and the discharge of the security. It appears from comments in the judgment that other types of claims were time barred.
The bank denied that any advice was given or any actionable representations were made, and if they were that they were not false, but insofar as necessary, it relied on certain “basis clauses” in the loan agreements. The claimants, however, alleged that those clauses themselves gave rise to, or contributed to, the purported unfair relationship and so could not be relied upon.
The loan agreements
The loan agreements were headed by an “important notice”, indicating that the claimants were advised to seek independent legal and tax advice.
They also included the following clauses:
− the bank made no recommendations as to the suitability, quality or future performance of any of the collateral;
− the bank had acted as the provider of finance only and had not provided any tax, legal or investment advice;
− the claimants had appointed a named IFA who was acting as their agent and not as agent for the bank; and
− a “whole agreement” clause which provided that the agreement constituted the whole agreement and that there was no reliance on any representation made by or on behalf of either party unless expressly contained in that agreement (together, the relevant clauses).
The law on unfair relationships
The court commented that where the alleged behaviour giving rise to an unfair relationship also constitutes a standalone cause of action, such as misrepresentation or negligence, the legal test for that cause of action must still be made out. However, the court noted that the burden of proof was on the lender to show that the relationship was not unfair.
On causation, the court held that if the borrower would have entered into the relevant agreement in any event, then this “must surely count against a finding of an unfair relationship under s140A”.
The fact that there had been no breach of a relevant regulatory rule might, in the court’s view, be “highly relevant”, but would not be considered “determinative”. By contrast, if the lender’s conduct would have amounted to a breach of such a regulatory rule, then that “can be relevant” even if that rule does not actually apply to it.
As to whether a clause itself gives rise to unfairness, the court held the following factors to be relevant:
− whether the clause is commonplace
− whether there are sound commercial reasons for the clause
− whether it represents a legitimate and proportionate attempt by the lender to protect its position
− to the extent that a clause is solely for the benefit of the lender, whether it exists to protect him or her from a risk which the borrower does not face
− the scale of the lending and whether it was commercial or quasi-commercial in nature (a court is less likely to find unfairness in a high-value lending arrangement between commercial parties than in credit agreements affecting consumers)
− the strength of the borrower’s bargaining position
− whether the terms have been individually negotiated or are standard terms and, if so, whether they were presented on a “take it or leave it basis”
The underlying complaints
In the context of assessing whether there had been an unfair relationship, the court considered each element of the advice and misrepresentation causes of action:
− No breach of advisory duty. The court concluded that the bank had not given material advice and had never assumed an advisory role. Crucially, the claimants had an IFA whose role had been specifically to advise on the elements of the scheme, whereas the loan agreement and an article included in the IFA’s newsletter made it clear that there was no advisory role for the bank.
− No misrepresentation. The court held that the bank had made no actionable misrepresentations or, to the extent any were made, they were not false. Even if the misrepresentations had been made, the court held that the claims would have failed on causation and expressed doubt as to whether the alleged misrepresentations had been relied on.
In case its findings that there was no breach of advisory duty and no misrepresentation were incorrect, the court went on to consider whether the bank would be entitled to rely on the relevant clauses to counteract the claimants’ allegations.
The clauses were basis clauses, not exclusion clauses
Basis clauses do not exclude a liability that would otherwise exist. Instead they define the parties’ obligations towards one another from the outset. Unlike basis clauses, exclusion clauses are regulated by the Unfair Contract Terms Act 1977 (UCTA) (now replaced by the Consumer Rights Act 2015 (CRA) in the consumer context) and the Misrepresentation Act 1967, and are subject to the requirement of reasonableness.
While the court accepted that distinguishing between basis and exclusion clauses was not often easy, it held it is necessary to consider the following (nondeterminative) factors:
− the natural meaning of the language of the clause in its contractual context
− the factual context in which the agreement containing the clause was made
− the format and location of the clause within the contract: if a clause was simply one of many standard terms, this might point to it being exclusionary
For its part, the court did not consider the relative bargaining positions of the parties to be particularly relevant.
The court concluded that the relevant clauses were basis clauses, ie clauses purporting to delineate the scope of the parties’ primary relationship, and which established a contractual estoppel against the claimants. They defined the scope of the relationship as not advisory and confirmed the absence of any representations made by the bank and/or any reliance thereon.
Basis clauses and unfair relationship claims
The court stated that the assessment of unfairness under the CCA was not the same as that which would be conducted under other regimes because of the “different and wider exercise” entailed by the unfair relationship provisions. Nevertheless, it held that the assessment is best made by reference to the other regimes, such as UCTA and the CRA. If a clause is found to be reasonable for the purposes of UCTA or the CRA, then it is less likely to be unfair for the purposes of s140A CCA.
In this case, the court held that even if the relevant clauses were exclusion clauses (and therefore subject to statutory control), they were “manifestly reasonable” and that, although the question was one of unfairness rather than reasonableness, the analysis and result should be the same: “if these particular clauses were reasonable for the purpose of UCTA, then there is no reason to say that they were nonetheless unfair for the purpose of s140A”.
Unfairness on other grounds
No unfairness arose from the regulatory codes, principles and other provisions relied on by the claimants, which either had not been breached or were irrelevant.
The court concluded that the bank had clearly satisfied the burden of showing that there was no unfair relationship.
This is a welcome decision for financial institutions. The court’s general comments in respect of having to prove all the elements to a standalone cause of action where that cause of action is alleged to have led to an unfair relationship are helpful, as they should reduce attempts to bring time-barred mis-selling claims via the backdoor of an unfair relationship claim.
The court’s finding concerning the basis clauses in the loan documentation is also positive. Basis clauses have historically been upheld by the English courts but this was the first time that the courts had considered (and upheld) their “fairness” in the context of an unfair relationship claim.