This case concerned a duty of care to business customers to explain the financial implications of changing the interest on their borrowings from a variable rate to a fixed rate. A bank’s duty of care was higher than in Hedley Byrne, to take reasonable care not to misstate any facts. In some cases, even where there is no advisory relationship, there is a duty to explain the financial risks of a product prior to sale.
Philip and Helen Thomas (the Claimants) owned an organic farming business. In 2006, they refinanced their borrowings in order to facilitate the purchase of a farm in Bidwell Barton. The refinancier was Triodos Bank NV (Triodos), the defendant. The borrowings comprised of two loan agreements, the first loan for the sum of £300,000 and the second for £1,150,000, at interest rates of 1.25% and 1.75% respectively.
The Claimants were heavily indebted and were concerned about the cost of servicing the loans if interest rates continued to rise. Subsequently, they engaged in oral discussions with Triodos to change the interest on their borrowings from a variable rate to a fixed rate. The Claimants fixed their loans in two tranches, at 6.71% and 7.52% per annum respectively for a term of ten years.
The bank’s standard terms and conditions applied to both loans. Clauses 2.10 and 2.11 provided for an early repayment fee and an extra repayment premium (otherwise known as the ‘Redemption Penalty’) on fixed rate loans. However, the wording of the clauses made it difficult to distinguish the two fees.
Fixing interest rates prior to the financial crisis in September 2008 had financial implications for many customers, where they found themselves subsequently paying an interest rate way beyond the floating rate available at the time.
The Claimants alleged that the bank had failed to explain the financial implications of paying down the loans before the ten year termination dates. They had asked Triodos prior to fixing their rates whether the financial penalty for redeeming the loans early would be between £10 - £20,000, but received no reply. Later, the claimants discovered the early redemption fee was in fact £94,205.47.
Hedley Byrne duty of care
The Judge did not take the view that this was an advisory relationship; it was clear that Triodos did not give any advice. There was also no dispute that Triodos owed the Claimants a duty of care under Hedley Byrne principles, which assert that a duty of care can arise with respect to careless statements that the Claimants could be expected to rely on and which could cause pure economic loss. The question was whether in a non-advisory relationship, the duty of care owed could be greater than a duty not to misstate facts that might be relied upon.
The Business Banking Code (the BBC)
Triodos had made it known to the Claimants in its literature that it subscribed to the BBC. The Code explained that customers would be treated fairly and reasonably when sold products. It also stated that banks adhering to the Code would:
- give the customer information about the products in plain English
- explain the financial implications of the product so they had an accurate understanding prior to sale
- help customers to choose the right product to suit their needs.
The Judge stated that the existence of a duty of care and the level of that duty would apply on a case by case basis and policy reasons as to whether it would be appropriate to impose such a duty. In this case, Triodos owed a higher duty of care because there were no disclaimers or exclusions in the terms and conditions which would imply that Triodos would not assume responsibility for its promises in the BBC. In his opinion, the Bank was obliged to ‘provide an accurate description of how clauses 2.10 and 2.11 would operate in the event of an early repayment’. The Judge also criticised the drafting of clause 2.11, describing this as ‘seriously deficient’.
Breach of duty of care
Triodos received specific queries from the Claimants in relation to fixing their rates which the bank failed to answer, correct or refute. The failure to clarify was a misrepresentation which influenced the Claimants to enter into the fixed rate loans. The ball-park sum of £10 - 20,000 put forward by the Claimants should in itself have alerted Triodos to the fact the Claimants did not fully understand how clause 2.11 of the bank’s standard terms and conditions worked.
Triodos had a duty to give a clear explanation of what fixing the rates would entail following the Claimants’ queries. This included explaining:
- that the rate could be fixed for a period
- where the available rates could be found
- the cost of the money, going forward
- the financial consequences of early repayment.
In the Judge’s view, Triodos failed to do this.
This case provides useful guidance for financial institutions to not misstate facts and to explain the financial implications of a product prior to sale, even where there is no advisory relationship.
Financial institutions should be mindful of any voluntary codes of conduct that they have signed up to. Furthermore, as underlined by previous case law as well as this judgment, drafting bank standard forms clearly and concisely pays dividends. Disclaimers or exclusion clauses can be extremely significant and helpful to lenders and it seems surprising that these were not included in the bank’s standard terms and conditions.
In order to mitigate against the risks of litigation, financial institutions should ensure all relevant documentation is reviewed thoroughly, and all staff fully and regularly trained.