Gowling WLG's finance litigation experts bring you the latest on the cases and issues affecting the lending industry.
- No duty on lender to advise of onerous clause
- The court determines where the greatest harm lay
- Same 'but for' test of causation but different outcome
- Litigant in person given a second chance
No duty on lender to advise of onerous clause
The High Court has recently considered whether a lender owed a duty of care in contract or tort to advise a borrower of a potentially onerous clause in a loan agreement - and found that it did not.
In Finch v Lloyds TSB Bank PLC, the defendant and a company (B) entered into a 10 year fixed term loan for £11.6 million. The claimant (as assignee of B's cause of action) alleged the defendant had failed to advise B of onerous terms in the loan agreement and, in particular, that it would be liable for the costs associated with repaying the loan early - some £1.5 million. The claimant argued B could not refinance its borrowings without borrowing or paying those additional break costs and, as a result, was unable to refinance at a lower interest rate. This ultimately meant B's business failed and B went into administration. The claimant also alleged the defendant had negligently misrepresented that the loan had been tailored to suit B's needs.
The High Court dismissed the claim. The claimant alleged a breach of the Supply of Goods and Services Act 1982 s13 which implies a term that a supplier will carry out the service with reasonable skill and care. However, the claimant had not pleaded any contract which imposed a duty on the defendant to provide advice. B's and the defendant's commercial interests were diametrically opposed and B had been represented by professional advisors throughout the negotiations. The defendant owed no contractual duty of care to B.
Neither was the defendant under a duty to give disinterested voluntary advice that was or might be contrary to its commercial best interests. The defendant had not been negligent.
The claim for negligent misstatement also failed. B had not told the defendant that it wanted to repay the loan early. The defendant had tailor made the loan to B's requirements as they had been made known to it, but subject to the qualification that it was not required to subordinate its commercial interests to those of B and its investors.
Things to consider
A bank is not under a general legal obligation to provide advice to borrowers, but if it does provide it, it must do so using reasonable care and skill. There would need to be exceptional circumstances for a duty to give voluntary advice to be owed by a bank to a borrower, where the advice relates to terms commercially favourable to the lender and, particularly so, where the borrower has its own legal representation.
The court determines where the greatest harm lay
Where owners of a property were appealing against an order that a creditor had a beneficial interest in their property (following a tracing claim), the court declined to order the sale of that property pending the hearing of the appeal.
In Hawk Recovery Ltd v Hall and others, the claimant was the assignee of a judgment against the defendants in favour of B. B, through various companies and assignees, had been engaged in a number of claims against the defendants who alleged he had a vendetta against them and which had been orchestrated for illegitimate purposes.
The defendants had been made bankrupt on B's petition following an unpaid costs order in another claim. Although they had been discharged, their assets remained vested in their trustee in bankruptcy.
The claimant obtained a declaration that it had a beneficial interest in the property (through the tracing claim) and sought an order for sale. The court refused to order that title to the property be transferred to the creditor or that it was entitled to possession. The claimant appealed. The defendants had obtained leave to appeal against the declaration of beneficial interest and argued that if they were successful in their appeal, an unnamed family friend would lend them the sum required (£75,000) to pay off the bankruptcy debt and so no order for sale should be made at the current time.
The High Court decided that it should wait for the defendants' appeal to be heard before determining whether an order for sale should be made. If such an order were made now, the defendants would have to vacate the property. If they were then successful on their appeal, it would transpire that the claimant in fact had no beneficial interest in the property and no entitlement to an order for sale.
If the defendants' appeal was unsuccessful, the claimant would still have a beneficial interest and the defendants would have to sell the property. Although the claimant was being kept out of his money pending the appel, greater justice was achieved by allowing the defendants to remain in the property pending the hearing of their appeal.
Things to consider
The court took into account the history between the parties in reaching its decision and that the claimant was simply being kept out of its money for a period of time whereas the defendants would have to find a new home which might not be necessary if they were successful on appeal. The harm to the defendants would be far greater than the harm to the claimant if an order for sale was made.
Same 'but for' test of causation but different outcome
The Court of Appeal has held that a lender can recover all its loss on a refinance loan from a negligent surveyor and not just the 'top up' advanced following repayment of the original loan.
We first reported on Tiuta International Ltd (In liquidation) v De Villiers Chartered Surveyors in April 2015, from which fuller details of the case can be seen. In brief, the lender refinanced a loan it had made to a property developer in reliance on a valuation by the defendant (the second valuation). The defendant had also undertaken the original valuation (the first valuation). For the purposes of the application before the court, it was assumed that the first loan was redeemed by the refinancing rather than the original loan agreement being varied. A new agreement and legal charge were entered into. The borrower defaulted.
The lender claimed the second valuation was negligent.
The High Court held, applying the 'but for' test, that the defendant was only liable for the difference between the negligent second valuation and a non-negligent valuation. It was not liable for the loss attributable to the existing indebtedness under the first loan at the time of the refinancing. It was liable only for any loss caused by the additional lending.
The lender appealed arguing that the original loan had been discharged, a new loan created and a new legal charge put in place so rendering the defendant liable for all losses flowing from the negligent second valuation. The defendant argued that regardless of the structure of the transaction, the second loan was in substance just an increase in the amount of the original loan.
By a majority, the Court of Appeal allowed the appeal. The purpose to which the refinancing loan was put was irrelevant to the defendant. A valuer would expect a lender, in reliance upon the valuation, to advance funds up to its full reported value. Also applying the 'but for' test, the defendant was liable for any adverse consequences attributable to any negligence in the valuation which flowed from the lender entering into the transaction.
The refinancing loan paid off the first loan and released the defendant from liability in relation to the first valuation and would be treated entirely independent from the first loan. The refinancing was entered into in reliance on the second valuation. The loss the lender suffered as a result was the amount of the refinancing, less the borrower's covenant (which had no value) and the true value of the security.
Things to consider
The defendant had accepted the instructions, knowing its valuation was to be relied on in the decision whether to make the loan and, had they wished to limit their exposure, they could have sought to do so. It was irrelevant how the lender dealt with the money.
The decision gives some clarity on the approach the court should take where there have been successive loans in reliance on valuations undertaken by the same valuers.
Litigant in person given a second chance
The Court of Appeal has held that the refusal by the court to allow a litigant in person to adduce additional evidence at trial rendered the trial unfair.
In Barons Bridging Finance 1 Ltd (1) Reddy Corp Ltd (2) and Gopee (3) v Barons Finance Ltd (in liquidation), the liquidators of Barons Finance Ltd (Barons) sought to set aside an assignment of Barons' book debts valued at £250,000 to Barons Bridging Finance 1 Ltd (BBF) and Reddy Corp Ltd (Reddy), who in return paid off a £76,500 judgment debt. The liquidators alleged there had been a transaction at an undervalue, a fraud on the creditors and that the deed of assignment had been entered into and fraudulently backdated from immediately before the company's liquidation to nine months beforehand.
Gopee, who had been a director of Barons, represented BBF and Reddy and was a litigant in person (LIP). He alleged that the book debts were worth less than the £76,500 judgment debt as most of the loans to which it related were unenforceable under the Consumer Credit Act 1974.
At the trial, the judge refused to allow Gopee to rely on a fresh witness statement with 104 pages of exhibits or to entertain an application for specific disclosure. The trial took place and in the absence of evidence from Gopee, the judge made adverse findings including that the assignment had been fraudulently backdated and had been at a significant undervalue with the aim of defrauding creditors.
Gopee appealed arguing he had not had a fair trial.
The Court of Appeal agreed with Gopee. It held that as he was a litigant in person, the trial judge should have given him the opportunity to either give evidence in chief and be cross-examined or adduce his new witness statement and be cross-examined on it. The evidence in Gopee's witness statement had indicated he had a strong prima facie case that the book debt was overvalued. The judge's decision had robbed Gopee, BF and Reddy of the opportunity to present their case and so of a fair trial. The judge had relied upon other reported judgments indicating Gopee had a chequered career in the conduct of his companies and had drawn adverse inference without allowing Gopee to give evidence and assess his credibility. The judge's approach had been unduly favourable to the liquidator and the appeal was allowed.
Things to consider
The fact that Gopee was a LIP was a relevant factor considered by the court in this case, whereas in other cases, the courts have taken a much firmer line in that LIPs have received no additional leeway when failing to comply with court orders and rules.
In case you missed it
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