In the recent decision in Crestsign Limited v (1) National Westminster Bank and (2) Royal Bank of Scotland, the court found that banks could successfully exclude their common law duty of care when giving recommendations to customers, by providing documents that seek to exclude a duty to provide advice.

Background

The claimant company was a family run business which invested in commercial properties for letting. In 2007 the directors looked to refinance, as a result of concerns about Northern Rock’s solvency and the bank’s request for capital debt repayments.

Crestsign was at that time paying annual interest at a level linked to LIBOR which by the end of 2007 was not much below 8%. Having entered into discussions with NatWest, Crestsign accepted one of their proposals which included an interest swap with RBS at a fixed rate of 5.65% after the first two years, ensuring there would no longer be the uncertainty of LIBOR fluctuations.

During negotiations Mr Parker (a director of Crestsign) professed to being “particularly stupid” about products such as hedging, and made his confusion clear to the bank. Due to time constraints imposed by Northern Rock, Crestsign did not obtain independent financial advice on the products offered.

After two years the agreement became more expensive for Crestsign, as they started to pay the difference between the 0.5% base rate and the 5.65% swap to RBS, on top of interest at 2% of the underlying loan. Crestsign looked to find alternative forms of refinancing, but due to the break costs of approximately £600,000 were unable to do so.

Crestsign brought a claim against the banks, alleging that the swap had been mis-sold as it was unsuitable due to the high break costs, which the directors were unaware of, and the exposure to interest rate conditions.

Duty of care

The court found that advice, and not merely information, had been provided to Crestsign on the investments.

Although the giving of advice does not necessarily mean that there is an assumption of responsibility for the advice given (and consequently a common law duty of care to give the advice carefully), the court found that the relationship between the directors and the banks' advisors meant that such a duty of care would in principle have been assumed by the banks. The differences in knowledge and the roles of the parties meant that it would have been reasonable for the directors to rely on the advisors’ skill and judgment.

However, the court went on to state that the banks had successfully excluded this duty by disclaiming responsibility for any advice provided. The disclaimers were contained in a variety of documents including the Risk Management Paper and two sets of business terms documents which were provided to Crestsign.  These were drawn to the directors’ attention prior to agreement of the interest swap and it was held that “they defined the relationship as one in which advice was not being given”.

As the banks had successfully excluded a common law duty of care, the issue of whether the duty of care had been breached did not have to be decided.  The judge made clear, however, that were he wrong in finding that the banks did not owe a duty of care, then he would find a clear breach of the duty.  In considering the duties owed by the banks, the judge noted that the duties owed at common law and those under the COBS rules are not necessarily co-terminous but that it did not follow that breaches of duties owed under COBS cannot also be negligent at common law.  Although a right of action for breach of COBS is only open to a “private person” (in practice largely limited to individuals), and had not therefore been available to Crestsign, the COBS duties are likely to be relevant when determining the standard of care required of a reasonably careful and skilled advisor.

In terms of the information provided to Crestsign (as opposed to advice) the court held that the banks were under a duty to explain accurately the effect of any products which they volunteered, but were not under a duty to explain alternative products which might have been available. This duty was held not to have been breached, although the judge said that he had “considered anxiously”whether describing the break costs as substantial provided sufficient detail on the effect of the product.  He concluded that the banks had provided “just enough” information to avoid a breach, noting that the language used, of the break costs being “significant”, might well have prompted further enquiries by Crestsign’s directors.

Comment

This case provides further guidance on the courts’ reluctance to find additional duties in relationships between customers and banks, where contracts exist to set out the terms of the relationship, as set out in JP Morgan Chase Bank v Springwell Navigation Corporation [2008] which also dealt with a claim that the products advised by a bank were unsuitable for the customer. Crestsign however goes further, in finding that where a duty does exist the banks may exclude it.

Banks should review their documentation and sales practices carefully to ensure that they include the necessary disclaimers to avoid attracting liability in situations where although not providing advice they may also have a liability for making a recommendation.

Further reading:

Crestsign Limited v (1) National Westminster Bank and (2) Royal Bank of Scotland [2014] EWHC 3043 (Ch)

JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186