The High Court recently ruled on whether the relationship between a lender and a borrower was, in the circumstances, a fiduciary relationship. In Irish Bank Resolution Corporation Ltd (In Special Liquidation) v Morrissey(1) the defendant borrower had raised two issues which the court was asked to determine as preliminary issues. The first related to whether the plaintiff (formerly Anglo Irish Bank) was entitled to make demands under the relevant loan facility. The court found that there was no agreement or arrangement by which the plaintiff would not demand repayment under the relevant loan facility; nor was there any estoppel basis to prevent the plaintiff bank from doing so. The second issue was whether the relationship was a fiduciary one, by virtue of which the plaintiff should not have demanded repayment of the facility.
The court began by acknowledging that both parties agreed that their relationship did not fall within one of the settled categories of fiduciary relationships, although such settled classes were not closed, and that the existence of such a relationship is primarily a question of fact to be determined by examining the specific facts and circumstances.
The High Court noted that the defendant relied on the Supreme Court of Canada judgment Galambos v Perez,(2) in which it was stated that:
"apart from the categories of relationships to which fiduciary obligations are innate, such obligations may arise as a matter of fact out of the specific circumstances of a particular relationship… The existence of the fiduciary obligation is thus primarily a question of fact to be determined by examining the specific facts and circumstances."
The High Court's judgment in Irish Life & Permanent plc v Financial Services Ombudsman(3) was also cited, wherein it was observed that "[t]he banking system is, by its nature, a highly regulated one which, is - or, at least, ought to be - based on trust".
The High Court observed that whether the relationship based on the facts constituted a fiduciary relationship must be informed by a consideration of what is meant by being 'a fiduciary'. In considering this issue, the court cited McMullen v Clancy (No 2),(4) which in turn had approved the description given in Bristol & West Building Society v Matthew(5) as follows:
"A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary… he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary."(6)
In characterising the relationship, the plaintiff contended that the existence of a commercial relationship governed by a contract between parties of equal status is a strong indicator that a fiduciary relationship does not exist. Citing the High Court of Australia in Hospital Products Ltd v United States Surgical Corp,(7) the defendant conceded that this was a relevant consideration, but not a decisive one.
The defendant submitted that the court should consider the position of the parties over time, as it resulted from the agreement or arrangements entered into. In this regard, the defendant sought to rely on his dealings with the bank over the period of the relationship (including the refinancing of borrowings from other institutions) as establishing a fiduciary relationship. The court observed that it had reviewed in detail the communications and dealings between the parties. From this, it accepted that the plaintiff bank:
- was keen do business with the defendant;
- cultivated a relationship with the defendant;
- considered the defendant to be an astute businessman; and
- entered into detailed negotiations with the defendant in relation to the terms of the facilities.
However, the court felt crucially that the evidence did not disclose the defendant seeking advice from the bank or the bank proffering advice to the defendant in relation to his property investment business or share portfolio for which he obtained funding. Rather, it found that the bank was not participating as a "venture-capital financier" and the lending terms at all stages were confined to the bank obtaining a return by way of arrangement fees and interest payments, with the benefit of any capital increase for the defendant alone. Ultimately, the court felt that both the plaintiff and defendant were acting in their own respective commercial interests.
Therefore, based on the facts, the court concluded that the relationship between the plaintiff and the defendant did not go beyond that of a contractual relationship. Moreover, there was no fiduciary relationship in existence between the plaintiff and the defendant before the demand was made.
The decision clarifies that as a general principle, the relationship between a lender and borrower does not involve a fiduciary relationship under Irish law. This is especially so where each party acts in its own commercial interest and the commercial relationship is governed by a written contract.
However, this is not to say that a fiduciary relationship may not exist if the facts support such a contention. Although the court did not comment definitively on the criteria required to elevate the lender-borrower relationship to that of a fiduciary, it would appear that the interests would need to be far more closely aligned, that the risks and rewards are shared on a far more equal basis, with the borrower actively advising the lender (whether on request or not) with regard to the use of the loaned moneys. Therefore, while it would seem that in theory there can be a fiduciary relationship between lender and borrower, the factual circumstances giving rise to such necessarily involve a very different conception of the conventional relationship. Accordingly, it would appear that a fiduciary relationship between lender and borrower is likely to arise only in very rare cases.
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