No duty to advise on onerous terms of a loan
Lloyds Bank Plc ("Bank") has recently been successful in securing a judgement in its favour in a dispute* concerning liability for hedging break costs. The case is important as it demonstrates the view of the English courts that a "conventional relationship of banker and customer" will not normally give rise to a duty to provide advice which would be at odds with the commercial interests of a bank.
The case in question concerned a fixed interest rate loan agreement entered into in early 2008 for up to £11.6 million and for a term of 10 years to enable the purchase by a group of investors ("Borrower") of a hotel business. Throughout the negotiation process the Borrower was advised by a firm of chartered accountants ("FC") acting as its finance brokers for the purpose of soliciting offers to lend funds and advising the Borrower on the viability of such offers in the context of the Borrower's business plan. The fees payable to FC for the provision of its services comprised a non contingent fee of £15,000 and a contingent fee of 2% of successfully raised funds. In its efforts to win the lending business, the Bank described itself as a "trusted advisor" providing a product tailored to the needs of the Borrower and participated in a number of meetings with the Borrower and its FC where business strategy matters would be discussed. The indicative offer made by the Bank contained a term that an early repayment would be permitted without penalty but would be subject to hedge breakage costs after the first 12 months. A corresponding provision was later included in the loan agreement which was entered into following a period of negotiations during which each of the Borrower and the Bank was represented by its own legal advisors. The Borrower sought to refinance the loan during the summer of 2009 and was informed that it would need to pay in excess of £1 million if it were to prepay the loan early in order to compensate the Bank for losses incurred as a result of it having to break a swap agreement entered into for the purposes of hedging the risk of lending at a fixed rate deposits acquired by the Bank at a variable rate. It was alleged that the inability to refinance the loan at a lower interest rate led to a decline of the Borrower's business. The Borrower was later put in administration following a failure to meet a demand to repay its overdraft.
The key issues which the High Court has considered were: (1) whether the Bank owed a duty (either in contract or tortiously) to advise the Borrower on onerous terms of the loan agreement, in particular the liability for potentially significant hedging break costs if the loan was prepaid before its maturity; and (2) whether the Bank misrepresented to the Borrower that the terms of the loan were "tailored" to the business needs of the Borrower.
The court ruled that there was nothing in the transactional documentation to suggest that the Bank offered (and the Borrower accepted) provision of advisory services in connection with the entry into the loan agreement and further rejected as unarguable the proposition that a contract to advise on the scope or effect of the loan agreement arose out of the closeness of the relationship built between the parties during the negotiation period. The judge held that each party acted in its well understood self-interest which was clearly demonstrated by the fact that all commercial and legal terms of the loan were negotiated between the Bank and the professional advisors of the Borrower.
The judge further rejected the argument that the Bank was under "a duty to give voluntary advice that was or might be contrary to its commercial best interest". The existing authorities do not support the existence of such a duty and the circumstances of the case in question are not "exceptional and markedly different from the conventional relationship of banker and customer" in a way which would give rise to it either. The judge emphasised the significance of the fact that the Borrower retained its own professional advisors whose role was to advise the Borrower on all commercial and legal aspects of the transaction. The use of the description "trusted advisor" cannot be interpreted as anything more than a marketing tool aimed at gaining a competitive advantage for the Bank.
The judge further rejected the allegation that the Bank misrepresented that the loan agreement was "tailored" to the needs of the Borrower where in fact the terms of the loan concealed significant costs of an early repayment which the Borrower claimed to have been its intention from the outset. Insufficient evidence was presented to support the claim that the Bank was actually informed of the intended early exit. More significantly, the court concluded that, even if this intention was communicated to the Bank, the phrase "tailored" could only be construed as a promise to offer lending terms which meet the needs of the Borrower to the extent that the Bank is prepared to do so. The expression cannot be interpreted as putting an obligation on the Bank to enter into business on terms which are contrary to its own commercial interests.
The banks can rest assured that the relationship they have with their customers will not automatically turn into an advisor and client relationship unless specific circumstances exist which demonstrate that an advisory service has specifically been sought by the customer and been accepted to be provided by the bank. This seems to be particularly the case in the context of pitching for new business where the bank would not normally come under a duty to advise on the product it is offering. The judgement should, however, be treated with caution if the bank has a long standing relationship with a customer and is providing services which could be considered as going beyond what a traditional bank and customer relationship would offer. Also it is important to note that this decision related to a business customer who was legally advised at all times and was decided in a court by reference to law and not regulation. Had this been a retail customer and the matter was being looked at by the Financial Ombudsman then the application of the principle of treating customers fairly might have led to another outcome.
*Finch and another v Lloyds TSB Bank Plc and others  EWHC 1236 (QB).