So when do lenders owe duties to borrowers?

Two recent judgments have provided comfort to lenders when considering the circumstances where duties arise between lenders and borrowers.

Firstly, the Privy Council[1] in a judgment[2] considered whether a borrower could found an action where a (non-bank) lender had not disclosed material lending limits at the time of an original lend to a commercially experienced borrower (Deslauriers case).

Secondly, in a recent judgment[3] the Court of Appeal upheld an earlier High Court judgment[4] in favour of The Royal Bank of Scotland plc (RBS) following a series of claims linked to the assumption of duties to the borrower and the exercise of a revaluation clause following transfer of the borrower into a restructuring unit within RBS (PAG case). The PAG case is of such significance that we have produced a wider briefing note on the judgment for those who are interested (http://talkingfinance.gateleyplc.com/2018/03/15/good-news-banks-rbs-wins-landmark-misselling-case/).

This article focusses on the main points for ASTL members.

Deslauriers case

The facility in question was, in part, intended to fund a property development. Tension arose after the initial loan, due to the lender’s refusal to advance further money for the development. The reason given for the refusal was that making further advances would breach the lender’s lending limit.

The borrower maintained that the lender was always aware of the need for further loans for the development and the failure to disclose the lending limit was a misrepresentation, or a breach of a duty of care to advise them of the lending limit.

The misrepresentation claim failed due to factual findings that there had been no discussion of future funding requirements at the time of the original lend. The duty of care claim was more interesting as, if established, the borrower could rely on correspondence after the initial loan when it was clear that they were looking for additional finance. Existence of such a duty would however require the assumption of responsibility by the lender to advise the borrower about its lending limit.

The court evaluated the relationship, finding the borrower was highly experienced and the relationship was one of mutual commercial benefit. It was an arm’s length relationship in which each party was seeking to further its own interests. It was not a relationship of advisor and client. The court held it would be very unusual for such a relationship to give rise to the asserted duty on the lender.

PAG case

Between 2004 and 2008 Property Alliance Group Limited (PAG) entered into four interest rate hedging products (IRHP) with RBS.

Before the Court of Appeal, the breach of duty arguments revolved around the much debated issue of the adequacy of the explanation of break costs in IRHP. It was common ground that there was a duty on RBS not to misstate and the Court of Appeal confirmed the nature of the responsibility assumed by any party has to be judged in the factual context of the specific transaction, or relationship.

Particularly, the expression of a ‘mezzanine’ or ‘intermediate’ duty referred to in the earlier cases of Thornbridge[5] and Crestsign[6] should be avoided as it misleadingly suggests there is a continuous spectrum of duty – from a duty to not mislead to a full advisory duty.

On the issue of the contractual right to require a revaluation of security, the Court of Appeal held that it was subject to an implied term that the power must be exercised in pursuit of RBS’s legitimate commercial interest, but on the facts RBS had been right to impose a valuation and could recover the costs from PAG.

What can ASTL members take from these cases?

The key points for ASTL members are:

  • When considering allegations of an assumption of a duty of care between lender and borrower, the factual context of the specific transaction and relationship will determine the extent of any duty.
  • The court will require clear evidence of assumption to impose any duty.
  • The notion of a ‘mezzanine’ or ‘intermediate’ duty in such cases is flawed.
  • Provided common place and reasonable contractual rights such as revaluation of security are exercised in pursuit of the lender's legitimate commercial interest, the court will be slow to intervene.

Any questions arising from this article should be referred to Rob Payne (https://gateleyplc.com/people/rob-payne/) or John Williams (https://gateleyplc.com/people/john-williams/) at Gateley Plc.

This article is intended only as a synopsis of certain recent developments. If any matter referred to in this article is sought to be relied upon, further advice should be obtained.

[1] The UK Supreme Court sits as the Privy Council as the highest appeal court for various Commonwealth Countries, including in this case Trinidad and Tobago. The judgments are not legally binding in the English Courts but are highly persuasive.

[2] Deslauriers & Anor v Guardian Asset Management Ltd (Trinidad and Tobago) (Rev 1) [2017] UKPC 34 (9 November 2017)

[3] Property Alliance Group Limited v The Royal Bank of Scotland Plc [2018] EWCA Civ 355

[4] Property Alliance Group Limited v The Royal Bank of Scotland Plc [2016] EWHC 3342 (Ch)

[5] Thornbridge Limited v Barclays Bank PLC [2015] EWHC 3430 (QB)

[6] Crestsign Ltd v National Westminster Bank plc [2014] EWHC 3043