FML Timeline: Finch and Anr v Lloyds TSB Bank Plc

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The dispute arose in connection with a fixed interest rate loan of £11.6m for a term of ten years that a bank (the Bank) made available to a borrower. Under the loan agreement the borrower was obliged to pay any resulting break costs incurred by the Bank resulting from early repayment of the loan. These could include costs (likely to exceed £1.5m) incurred by the Bank in breaking swaps it had entered into to hedge against interest rate fluctuation on monies it had borrowed in the interbank market at a variable rate.

As the borrower would be required to pay these costs on early repayment, the claimants (as assignees of the borrower's cause of action) argued that the borrower had been prevented from refinancing at a lower interest rate, in turn preventing the borrower from meeting a demand for the repayment of its overdraft. The borrower was consequently placed in administration.

The claimants claimed that:

Contractual duty of care

The Bank owed the borrower a duty to advise it in contract under s.13 Supply of Goods and Services Act 1982 (the SGSA), in respect of any onerous terms in the loan agreement. This provision implies a term in contracts for the supply of services that the supplier will use reasonable care and skill. The claimant alleged that the lender failed to use reasonable care and skill in not explaining the scope of the break costs provision.

Tortious duty of care

The Bank owed the borrower a tortious duty of care under common law to advise it in respect of any onerous terms in the loan agreement but it failed to do so as it did not explain the scope of the break costs provision. The claimants contended that a duty to advise arose because of the close relationship between the borrower and the Bank; that the Bank was not simply a source of finance but was, as it described itself, a "trusted advisor" to the borrower and its investors.

Negligent misrepresentation

The Bank negligently misrepresented to the borrower that the loan agreement had been "tailored" to its needs as the costs of early exit made it unsuitable, particularly because it was alleged that the Bank was aware that the borrower would want to repay early.

The borrower was advised on the finance arrangements by a finance broker and solicitors.

Decision

Judge Pelling rejected the arguments made by the claimant. Dealing in turn with the claimants’ claims:

Contractual duty of care

Judge Pelling ruled that even if the claimants had been able to prove the existence of a contract whereby the Bank was to provide a service that included the provision of advice (which they had not done), the only implied term was that this service was provided with reasonable care and skill. In this instance the claimants were not alleging that negligent advice had been given, rather that advice should have been given that was not. S13 of the SGSA did not therefore bite.

Tortious duty of care

Judge Pelling started by outlining the legal principles of the common law duty of care. Namely, that in general a bank is not under a legal obligation to provide advice but if it gives advice then it must do so using reasonable care and skill (Woods v Martins Bank Limited [1958] 1 QB 55; Bankers Trust International Plc v PT Dharmala Saki Sejahtera [1996] CLC 518; and National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 52).

Whether a duty of care in tort is owed in any particular case will depend upon the application of one or more of the usual three tests, that is:

• the assumption of responsibility, which has been relied on
• the three-fold-test (reasonable foreseeability of loss; sufficient proximity between the parties, and; whether it is in all the circumstances fair, 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 considered in their context.

Judge Pelling noted that when applying the above tests the provision of advice in a commercial relationship context should be distinct from the assumption of responsibility for that advice. (JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm)).

It was held that the Bank was not obliged to advise the borrower on the existence, or the effect, of the break cost clause. Any duty to provide such advice voluntarily would go further than current authorities and undermine the general principle that there is no legal obligation for banks to provide advice. Judge Pelling did not confirm whether there are any circumstances in which such a duty could arise when applying the tests outlined above, however he considered that any circumstances would be “exceptional and markedly different from the conventional relationship of banker and customer”, which is distinct from the advisor and client relationship.

Any exceptionality was likely to be removed where, as here, to the knowledge of the bank, the potential customer was represented by a broker, where the bank concerned was required by the broker to communicate only via the broker, where all meetings attended by the potential borrower and the bank were at the offices and in the presence of the broker's representatives, where all communications concerning the terms of the loan were required to be and were directed by the bank to accountants as advisor to the borrower and the investors and where the potential borrower is represented by solicitors throughout in the arm’s length negotiation of the documentation necessary to carry that bank's offer of facilities into effect.

Another contextual consideration of the case and hurdle to the establishment of a duty of care was that the alleged duty arose before the relationship of banker and customer had come into existence, and in the context of negotiations concerning the terms on which it might come into existence.

Finally, Judge Pelling rejected the claimants’ argument that the use of the phrase “trusted advisor”, used in the Bank’s internal marketing and training material, demonstrated a closer relationship than that usually held between a borrower and a bank. Rather, this phrase was merely part of a marketing strategy to differentiate the Bank from competitors.

Negligent misrepresentation

Judge Pelling rejected this argument, holding that: (a) the claimants failed to establish that the borrower notified the Bank of its intention to repay the loan early; and (b) even if the Bank had been informed, the expression “tailored” meant that the loan offered would be the best that the Bank was prepared to offer, taking into account the requirements of the borrower. The Bank was under no obligation to subordinate its own commercial interests to those of the borrower when making any offer.

Noteworthy/ Novel points

Judge Pelling’s judgment reinforces the difficulty a borrower faces in establishing a duty on a lender to provide advice on potentially onerous terms in loan documentation. This is notwithstanding lenders emphasising in their marketing strategy a willingness to co-operate with a borrower to find the best solution for their borrowing requirements. The challenge borrowers face in proving a duty on a lender is amplified when they are represented by solicitors and financial advisors.

Lawyers, as advisors, will need to bear in mind that where there is a breach of contract or duty in relation to the failure to advise the borrower, it is the borrower’s solicitors and chartered accountants who should have advised them on the possible implications of a clause. When acting for a borrower therefore, it is important to flag any potentially onerous clauses with regard to the borrower’s individual circumstances.