Originally published July 1 2005
Negative Credit Rating for Customer Causes Negative Impact for Bank
In Clark v Bank of Nova Scotia 1 the Ontario Court held that if a financial institution provides inaccurate information to a credit rating agency, it will have the same liability as the credit rating agency if the error is not quickly rectified when it is informed of it.
In 1994 Clark applied for a personal loan, which was denied because of a poor credit rating for an allegedly unpaid loan from the Bank of Nova Scotia. Clark subsequently contacted Equifax Canada Inc, a national credit reporting agency, to inform it that this was an error and that he had no such loan with Scotiabank. Equifax assured him that the matter would be investigated and corrected if an error was found.
Between 1994 and 2000 various banks informed Clark of the poor credit entry on his report. Nevertheless, Clark was repeatedly approved for various loan transactions. During this period Clark claims to have contacted Equifax and the bank several times to correct the error, but he only put the complaint in writing in November 2000.
In September 2000 Equifax contacted the bank to investigate Clark's complaint. Shortly afterwards the bank confirmed that the delinquent loan was not attributable to Clark, but to another individual with a similar name, and it notified Equifax of the error. Equifax immediately corrected Clark's credit rating.
In analyzing whether the defendants were liable to Clark, the court referred to a recent decision of the Ontario Court of Appeal dealing with the duty owed by credit reporting agencies to consumers. In that case, the court of appeal stressed the importance of credit and credit reporting in today's society. It held that it was reasonably foreseeable that, if credit rating agencies are negligent in gathering information, their actions could cause credit grantors to deny credit or to charge more than they would do otherwise. Therefore, credit reporting agencies owe a duty to consumers to report their credit information accurately.
However, in this case the court applied the same reasoning to the bank and found it liable on the grounds that it had supplied the erroneous information in the first place. It did not appear to give any weight to the fact that the bank could not have unilaterally corrected the error as it did not have control over the credit rating report. The bank was found to be equally liable with Equifax.
Although the damages in this case were limited to compensation for the distress that the error caused to Clark, the court clearly stated that if there had been evidence of damage to financial reputation that had caused monetary loss, the bank could also have been liable for that loss.
The courts have developed a low tolerance for negligent credit mistakes and it is clear from this case that they will hold financial institutions to the same high standard as credit rating agencies. Therefore, financial institutions must exercise care when reporting credit information and must be quick to fix errors when they are brought to their attention. Furthermore, this case implicitly demonstrates that banks should treat oral complaints just as seriously as written ones. Not only are there compelling business reasons to react quickly to both oral and written complaints, a failure to do so may give rise to source of legal liability.
Lender Bears the Loss in Fraud Scheme
In National Holdings Ltd v Canadian Imperial Bank of Commerce 2 a commercial lender, National Holdings Inc, agreed to provide a mortgage to an individual who fraudulently claimed to be Henry Cowan, the owner of a residential property. The funds were advanced by National to the fraudster's agent, who then issued a cheque to the fraudster in the name of Cowan. The fraudster gave the cheque to a third party who charged the fraudster a fee to cash the cheque through his account at the Canadian Imperial Bank of Commerce. The court found that the bank was not liable to National as National was not the owner of the cheque cashed by bank.
Oral Evidence of Representation Admitted
In Business Development Bank of Canada v Turack 3 the issue was whether an alleged oral representation made by a banker raised a triable issue. The defendant guaranteed a loan made to a company, which subsequently filed for bankruptcy. The defendant claimed that the guarantee was invalid because the Business Development Bank of Canada loan manager involved in the transaction had stated that the guarantee would be relied upon only if the transaction involved fraud. The court held that even though the guarantee contained a 'no representation' clause, which warranted that the parties would be bound by the terms of the written agreement and excluded liability for any pre-contractual presentations, it would allow evidence of the oral representations. As a result of this evidence, the court held that there was a genuine issue for trial as to whether the guarantee was valid.
The court's decision is a timely reminder that even though most standard form loan documents include no representation clauses, these clauses may not always be enforceable.
Limitation Period Commences as Soon as Lender has Right to Accelerate Loan
In Business Development Bank of Canada v Papke 4 the Business Development Bank of Canada advanced money to a company. The loan agreement provided that the bank had the right to accelerate the loan upon a default so that it would be immediately due and payable. In July 1996 the company defaulted, but the bank did not exercise its right to accelerate until October 1996. In October 2002 the bank commenced an action to recover the debt. The British Columbia Court of Appeal held that the six-year limitation period commenced when the bank had the right to accelerate in July 1996 and thus the claim was statute barred. Therefore, those seeking to enforce loan agreements should be careful to calculate the limitation period from the date on which they have the right to call a loan and not when they actually do so.
Independent Legal Advice Not Always Necessary
In Henein v Henein 5 Mrs Henein brought an action to set aside a mortgage made by Mr Henein to the Bank of Nova Scotia against the matrimonial home. First, she claimed that her consent to the bank's mortgage was induced by the fraud and undue influence of Mr Henein, to which the bank had knowledge. Second, she asserted that the bank should also have insisted that she receive independent legal advice. The court held that the bank did not have a duty to insist on independent legal advice because Mrs Henein had legally sworn that she was Mr Henein's spouse and consented to the mortgage. Furthermore, the court did not find that Mrs Henein was under any undue influence. Although she was not enthusiastic about signing the mortgage, she admitted that she knew she was going to the law office to sign a mortgage, and that by signing it she was encumbering the house.
1  OJ 2615 (SCJ).
2  BCJ 560 (SC).
3  OJ 1128 (SCJ).
4  BCJ 1091 (CA).
5  OJ 1921 (SCJ).
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2005 McMillan Binch Mendelsohn LLP