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High Court rules no advisory relationship between bank and customer

Executive summary of findings

There is a long line of mis-selling cases where claimants have alleged that banks have provided advice relating to the sale of various financial products. TLT (led by Partner Paul Gair, Associate Laura Hawker and Assistant Jessica Mills) has recently acted for Lloyds Bank PLC (Lloyds) in a high profile case (which featured on the BBC's Panorama programme) where the claimants raised (amongst numerous arguments) a novel interpretation of a claim of this nature in the context of a fixed rate loan. In Stephen Frederick Finch and Omnia-Chem Limited v Lloyds TSB Bank PLC, the claimants did not (in contrast to cases such as Thornbridge and Crestsign) allege that advice had been given, rather they alleged that Lloyds had offered to provide advice to the borrower, Bredbury Hall Limited (the Company) and that the Company accepted the offer. The alleged breach was the Bank's failure to subsequently provide advice. HHJ Pelling QC's judgment is firmly in Lloyds' favour, rejecting the claim on each of the six grounds raised by the claimants. 

Background

The claimants were the assignees of the Company, which owned the Bredbury Hall Hotel and Country Club in Stockport (the Hotel). The claimants claimed that Lloyds failed to properly advise, or misadvised or made a misrepresentation to the Company, when it entered into a fixed rate loan on 31 January 2008 to help finance the purchase of the Hotel by the Company (the Loan Agreement). In December 2013, the debt owed by the Company to Lloyds, both under the Loan Agreement and an associated overdraft, was assigned by Lloyds to Promontoria Holdings 87 BV (Promontoria). The Company was unable to repay the overdraft when it was subsequently called in, leading to the Company entering administration on 18 March 2014. This constituted an event of default under the Loan Agreement, resulting in the full indebtedness becoming immediately repayable. 

Various individuals provided guarantees to Lloyds as security for the Company’s debt. Mr Stephen Finch, one of the claimants, provided a guarantee limited to £450,000. Mr Finch and four colleagues provided a further guarantee, limited to £300,000.

Promontoria issued proceedings to recover the sums due under those guarantees on 24 June 2014. On 10 November 2014, Mr Finch and one of his other companies, Omnia-Chem Ltd, took an assignment from the Company’s administrators of its claims against Lloyds. Those assignees took over proceedings that had originally been issued in the Company’s name on 21 February 2014, and served the Particulars of Claim against Lloyds on 25 November 2014 (thereafter amended in February 2016). 

The claims

The four grounds and HHJ Pelling QC's key findings can be summarised as follows:

(1) The claimants alleged that Lloyds owed an advisory duty (in tort and/or in contract) to the Company and that Lloyds breached that duty by failing to advise the Company of the risks of a break clause contained within the Loan Agreement prior to the execution of that agreement or, alternatively (ground no. 2), that Lloyds owed a continuing advisory duty following the conclusion of the Loan Agreement, which it breached by failing to advise on the risks of the break clause. 

HHJ Pelling QC found that Lloyds owed no contractual duty to give advice to the Company and was not obliged to advise the Company on the existence or effect of the break cost clause. He noted that the proposition that Lloyds was under a tortious duty to provide advice which may be contrary to its commercial best interest went beyond existing case law. Whilst he did not rule out circumstances where such a duty could arise, he considered they would be exceptional and markedly different from the conventional relationship of banker and customer. Such exceptional circumstances did not arise in this case, not least because the Company had its own legal and financial advisers and the use of phrases such as "trusted adviser" by Lloyds were in a marketing context only and were not themselves sufficient to import a duty of care. 

(3) As an extension of their duty of care arguments, the claimants alleged that Lloyds negligently misrepresented to the Company that the Loan Agreement was "tailored" to its needs and the requirements of its management team (in particular in circumstances where two of the Company's investors wished to exit the Company within five years).

HHJ Pelling QC found that Lloyds did not negligently misrepresent to the Company that the Loan Agreement would be "tailored" to its needs, finding that the investors never told Lloyds that they wished to exit within five years; and in any event that the Loan Agreement offered was tailored to the Company's needs because it met its requirements for the amount and term while also including a capital repayment holiday as requested.

(4) The claimants alleged (although never pursued with any great vigour) that Lloyds had promised the Company that it would support it in funding a final tranche of deferred consideration and that it failed to uphold that promise.

HHJ Pelling QC found that there was no collateral agreement with the Company to lend it any additional funds beyond those set out in the Loan Agreement. 

A further claim was pursued (by way of late amendment to the Particulars of Claim) that Lloyds (through its Relationship Director) had fraudulently misrepresented to the Company that it required a certain level of hedging for credit sanction (100% as opposed to 50%). That claim was dropped during trial with the claimants accepting they had no basis to challenge Lloyds' position that the Relationship Director was entitled to seek agreement that the Company hedge in excess of the minimum terms set by Lloyds' credit team.

In addition to finding that the claimants failed to establish any breach by Lloyds in respect of any of the claims put forward, it was found that the claimants' case would have failed on causation because they had failed to demonstrate that an alternative product would have been available to the Company.  

The guarantee claim

The guarantors' main defence to the guarantee claim was an allegation that Lloyds had represented that the guarantees would be discharged if the LTV dropped below 70%. 

The guarantors sought to rely on a desk top valuation which was carried out at the instruction of the Company to show that the LTV had dropped below 70%. However, HHJ Pelling QC found that the valuation report was not one the Bank could reasonably have been expected to act upon given it was not addressed to the Bank and that, in any event, the guarantees were subsequently affirmed on various occasions including signed overdraft facility letters and amendments to the Loan Agreement. Accordingly the guarantee claim brought by Promontoria succeeded. 

Conclusion

This case is the latest positive judgment in favour of a bank in a mis-selling case, where a claimant, with the benefit of hindsight, has sought to allege that the bank in question owed a duty to provide advice as to financial products. While the facts of this case were specific to it (given the Company had its own financial and legal advisors), HHJ Pelling QC's findings, in particular relating to the duty to advise, are equally applicable and helpful to a bank facing allegations that it offered, in the course of negotiations based on the use of phrases such as the bank being a "trusted advisor", to provide advice to its customer.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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