UK: Passing The Buck: The Limit Of Lenders' Duties In Commercial Transactions

Last Updated: 30 May 2018
Article by Ian Peacock
Most Read Contributor in UK, November 2018

In the recent case of Rehman v Santander & BNP Paribas 1, HHJ Klein in the High Court granted summary judgment for Santander (the Lender) and BNP Paribas (the Valuer) thereby dismissing the claims by the Rehmans (the Claimants) alleging negligence, misrepresentation, and breach of fiduciary duty against the Lender, and negligence against the Valuer.

HHJ Klein considered the scope of the duties owed by lenders to customers in commercial transactions.

Background

The claims arose out of the provision of a £2 million loan facility by the Lender to a company that owned two nursing homes (the Company) in 2011. The Claimants were two Directors of the Company but their relative, Mr Shafiq Rehman, represented the Company in its dealings with the Lender.

In order to approve the loan facility, the Lender required a valuation of the Company's assets (being the two nursing homes) and personal guarantees from the Claimants. The Lender instructed the Valuer to value the Company on its behalf. The Valuer provided a valuation report for each nursing home (the Valuations) and a copy was provided by the Lender to Mr Rehman, who in turn provided it to the Claimants. The Valuations stated that they were private and confidential to the Lender and could not be provided to or relied upon by any third parties without the Valuer's prior consent. Following the Valuations, the Claimants and Mr Rehman duly provided "all monies" personal guarantees agreeing to indemnify the Lender in respect of the Company's liabilities limited to £2 million (the Guarantees).

The Company defaulted on the loan facility in 2013 and subsequently went into administration in 2014 and eventually into liquidation in 2016. The Lender did not recover all of its losses from the Company's administrators and therefore demanded repayment of the remainder from the Claimants under the Guarantees. The Claimants refused to honour the Guarantees and made various allegations against the Lender and the Valuer, to which both responded by filing applications for summary judgment on the basis that the Claimants' claims had no real prospect of succeeding. The Lender also counterclaimed for the monies due pursuant to the Guarantees.

Claims against the Lender

The Claimants alleged that:

  1. The Lender breached its duty of care to ensure that the Valuations were undertaken by a competent valuer (the Negligence Claim);
  2. By providing the Claimants with a copy of the valuation, the Lender had misrepresented that the Valuations were an accurate reflection of the Company's value and provided sufficient security for the Company's liabilities to the Lender, and that the Claimants could rely on them without obtaining an independent valuation (the Misrepresentation Claim);
  3. The Lender breached its fiduciary duty to advise the Claimants to obtain their own independent valuation (the Fiduciary Claim);
  4. The Guarantees had been discharged by the operation of the rule in Holme v Brunskill 2 (see below) (the Guarantee Claim).

The Claimants' claims were dismissed and the Lender's application for summary judgment was granted along with its counterclaim. HHJ Klein found that the Claimants were not likely to succeed on any of their claims for the following reasons:

The Negligence claim

The Lender did not owe a duty of care in respect of the selection of a valuer because the valuations it sought were for a routine commercial transaction. The Lender did not owe a duty to ensure that the Valuations were accurate, and the mere fact that the Lender had provided a copy of the Valuations to the Claimants (via Mr Rehman) did not give rise to a duty of care. Given that the Lender did not owe a duty of care to its customer, the Company, it could not owe one to the Claimants.

The Misrepresentation claim

The fact that the Lender obtained the Valuations for its own purposes, provided a copy of them to the Claimants, and then provided the loan facility, did not amount to a representation as to the accuracy of the Valuations. The Claimants therefore had no real prospect of establishing that the Lender's provision of the Valuations to them and/or approval of the loan gave rise to any implied representation as to the Company's value or ability to meet its liabilities.

The Fiduciary claim

Even in the case of a long-standing customer relationship, the mere fact that a customer may trust its lender does not in itself give rise to a fiduciary relationship. Such a relationship can only arise if it is reasonable to expect the lender to prefer the customer's interests over its own. The Claimants had not argued that it would have been reasonable for the Lender to do so in this case and therefore the claim had no prospect of success.

The Guarantee claim

The case of Holme v Brunskill established the principle that if the contract which is the subject of the guarantee (in this case the loan facility) is altered without the guarantor's consent, they will be released from the terms of the guarantee, unless it can be shown that the alteration was "unsubstantial" or one which could not be prejudicial to the guarantor.

There was nothing to suggest that the Guarantees were not "all monies" guarantees upon proper construction and the dealings between the Claimants and the Lender had remained within the scope contemplated when the Guarantees were agreed. There was no evidence to rebut the Lender's contention that the Claimants consented to any alteration of the loan facilities as Directors of the Company. The Claimants therefore had no real prospect of establishing that the rule in Holme v Brunskill applied.

Claim against the Valuer

The Claimants alleged that the Valuer owed them a duty of care in relation to the Valuations because it agreed to the Lender providing a copy of them to the Claimants or it knew that a copy would likely be provided.

The Valuer disputed the Claimants' claims on the basis that the Valuations were private and confidential to the Lender and could not be disclosed to, or relied upon by, the Claimants without the Valuer's written consent, which had not been provided.

It was held that the Claimants did not have a real prospect of establishing that the Valuer consented to the disclosure of the Valuations to them, or alternatively that it knew that the Lender was likely to disclose the Valuations to them. The only evidence offered in support of the Claimants' arguments was Mr Rehman's witness statement which stated that he was "quite sure" that the Valuer had consented to the Lender's release of the Valuations, but there was no evidence that the Valuer had expressly consented to support this statement, and there was no evidence that the Valuer was even aware of the involvement of the Claimants, the Company being the Lender's client and the subject of the Valuations. It could not therefore follow that the Valuer contemplated the Claimants' receiving and/or relying on the Valuations.

In addition, there were disclaimers that limited the Valuer's liability to third parties. The most relevant disclaimer was included in the Valuations themselves and stated that if the Valuations were relied upon by a third party without the Valuer's consent then the Valuer did not accept any responsibility to that third party. Given that this was a commercial transaction, and there was no suggestion that the Claimants were unable to obtain their own valuation, this disclaimer was considered to be reasonable. Accordingly, the Valuer did not owe any duty of care to the Claimants but, even if it had, it would have been negated by the disclaimer.

Summary

Not only were the Claimants' claims against the Lender and Valuer dismissed, they were also liable for the monies owed to the Lender under the Guarantees. The Claimants could not establish that the Lender owed them a duty of care in relation to the use of the Valuer nor did they have a reasonable prospect of establishing their other allegations. Although the Valuer in this case did not owe the Claimants a duty of care, this case highlights the importance of well drafted disclaimers limiting liability to third parties in commercial transactions.

Points to note

  • The only evidence provided by the Claimants was a witness statement from Mr Rehman. The Claimants themselves did not provide any witness evidence and ultimately failed to rebut the evidence provided by the Lender and Valuer. Although this case turned on its own facts, it is a helpful reminder that claimants must not underestimate their own burden of proof if they are to defeat applications for summary judgment: the outcome could have been different had the Claimants been able to support their allegations with tangible evidence or if this had not been a commercial transaction.
  • HHJ Klein stated that the court should not speculate on what evidence might be available if the matter reached trial but rather consider the evidence available at the time of the summary judgment application and any other evidence that could reasonably be expected to be presented at trial. In this case, the burden of proof shifted to the Claimants and they did not persuade HHJ Klein that sufficient further evidence would be available at trial: it was not enough to say that the Claimants wanted to cross-examine potential witnesses at trial in order to support their claims or that there may be evidence at trial which may assist them without such evidence being more than merely speculative. HHJ Klein took the view that, if sufficient evidence was available to support the Claimants' claims, it should have been used to defend the applications for summary judgment.
  • It is a reminder that to defend a claim of summary judgment, a claimant must persuade the court that their case has a real chance of success: the fact that they merely have an arguable case against a defendant is not sufficient.
  • Although this case is fact-specific, the judgment may embolden defendants to apply for summary judgment in order to dispose of cases at an early stage where the claimant offers no persuasive evidence. The case also provides a welcome judgment for valuers who seek to rely on disclaimers to avoid claims from third parties.

Footnotes

1 [2018] EWHC 748 (QB)

2 (1878) 3 Q.B.D. 495

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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