An unfair relationship? Bank’s basis clauses upheld

In Carney v Rothschild, the High Court considered the efficacy of “basis clauses” in the context of a financial mis-selling claim in which it was alleged that an unfair relationship under the Consumer Credit Act 1974 had arisen.

The claimants, four British expats living in Spain, had borrowed funds from the bank, secured against their properties, to enable them to enter into investments designed to reduce the Spanish equivalent of inheritance tax. The investments underperformed and the claimants alleged that the bank had given wrong advice and made serious misrepresentations about the investments and their tax implications, generating an unfair relationship.

The bank maintained that the relevant clauses in the loan agreements were “basis clauses”, namely contractual terms delineating the scope of the parties’ primary relationship as non-advisory and stating the absence of any representations made by the bank.

The judge agreed with the bank that these were basis clauses, which established a contractual estoppel against the claimants. He distinguished basis clauses from exclusion clauses on the grounds that the former do not exclude a liability that would otherwise exist but rather define the parties’ obligations towards each other at the outset. While he accepted that the ability to distinguish such clauses is not often easy, the judge held it would be necessary to have regard to the following (non-determinative) factors: (a) the natural meaning of the language of the clauses in their contractual context; (b) the factual context in which the agreement containing those clauses was made; and (c) the format and location of the clause within the contract.  For his part, the judge did not consider the relative bargaining position of the parties to be particularly relevant.

In the context of unfair relationship claims, the judge held that the issue was not the narrow one of whether a particular clause was exclusionary or not as any clause could, in theory, fall within the relevant provision of the Consumer Credit Act 1974. However, if the relevant clause was not exclusionary, it had to mean its impact for the issue of an unfair relationship was much less than if it were found to have been an exclusion clause and subject to the Unfair Contract Terms Act 1977 and the requirement of reasonableness.

The claim was dismissed, the judge having concluded that the bank had clearly satisfied the burden of showing that there was no unfair relationship.