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Lender under no duty to advise borrower about onerous term in loan agreement

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Jade Lay



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25 July 2016

​A lender did not owe a contractual or tortious duty to advise a borrower about a potentially onerous clause in a loan agreement. The clause in question made the borrower liable for the lender’s hedging break costs if the borrower chose to repay the fixed rate loan early (Finch & anr v Lloyds TSB Bank plc & ors [2016] EWHC 1236 (QB)).

The dispute arose out of a ten-year fixed rate loan for GBP 11.6 million that a bank (the Bank) made to the borrower. The claimants (being the assignees of a cause of action formerly vested in the borrower until it entered into administration) brought claims for breach of contract, negligence and negligent misrepresentation against the Bank.

The loan agreement included a term that obliged the borrower to make good any break costs incurred by the Bank as a result of early repayment of the loan. The claimants alleged that it was only after the agreement had been signed that the Bank informed the borrower that this would include costs incurred by the Bank as a result of having to break a swap agreement that the Bank entered into to hedge against the risk of lending at a fixed rate funds that the Bank borrowed at variable rates. These break costs were likely to exceed GBP 1.5 million.

As the borrower would be required to pay these costs on early repayment, the claimants argued that this had prevented the borrower refinancing at a lower interest rate, which was the main cause of the borrower being unable to meet a demand for the repayment of its overdraft. The borrower was consequently placed in administration.

The claimants also asserted that the Bank negligently misrepresented to the borrower that the loan agreement had been tailored to its needs.

Contractual duty of care

The claimants argued that the bank had a contractual duty to advise the borrower of the potentially significant costs that they might incur by repaying early, by reason of s13 Supply of Goods and Services Act 1982 (the SGSA). This provision provides for an implied term in contracts for the supply of services that the supplier will carry out that service with reasonable care and skill. Judge Pelling rejected this argument, stating that even if the claimants had been able to prove the existence of a relevant contract whereby the Bank was to provide a service that included the provision of advice (which they had not done), the only implied term was that this service was provided with reasonable care and skill. In this instance the claimants were not alleging that negligent advice had been given, rather that advice should have been given that was not. S13 of the SGSA therefore did not apply.

Tortious duty of care

The claimants also asserted that the Bank had a duty under common law principles to provide this advice voluntarily to the borrower.

Judge Pelling began by providing a useful summary of the applicable legal principles. The general rule is that banks are not under a legal obligation to provide advice, but if they do then they must do so with reasonable care and skill (Woods v Martins Bank Limited [1958] 1 QB 55; Bankers Trust International Plc v PT Dharmala Saki Sejahtera [1996] CLC 518; and National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 52).

Judge Pelling set out the tests to apply when considering whether a duty in tort is owed in a particular case:

- whether there had been an assumption of responsibility which had been relied on;whether there had been an assumption of responsibility which had been relied on;

- the three-fold test of whether:the three-fold test of whether:

  • the loss was reasonably foreseeable;
  • there was sufficient proximity between the parties; and
  • it is fair, just and reasonable to impose a duty of care; and

- that the duty should be incremental to an established category of duty. The courts are more likely to hold that a duty exists where the facts of the current case are similar to those of a previous case in which a court held that a duty did exist.

To conclude, Judge Pelling noted that when applying the above tests a distinction should be drawn between the provision of advice in the context of a commercial relationship and the assumption of responsibility for that advice and/or any obligation to give advice about certain matters. (JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm)).

It was held that any duty to provide such advice voluntarily would go further than the current authorities. It would also undermine the general principle that there is no legal obligation for banks to provide advice, especially in circumstances where the giving of such advice might be contrary to a bank’s commercial best interests. Although Judge Pelling could not confirm that there are no circumstances in which such a duty could arise when applying the tests, he considered that any circumstances would be exceptional and markedly different from the conventional relationship of banker and customer.

The claimants argued that the use of the phrase “trusted advisor”, which the Bank used in internal marketing and training material, demonstrated a closer relationship than that usually held between a borrower and a bank. Judge Pelling rejected this, finding that this phrase was merely part of a marketing strategy to differentiate the Bank from its competitors. The expression did not have any other significance.

It was particularly difficult for the claimants to argue that a duty arose as the borrower had been represented by solicitors who negotiated the terms of the loan agreement on an arm’s length basis. Judge Pelling concluded that if there had been a breach of contract or duty in relation to the failure to advise it was not by the Bank.

Negligent misrepresentation

The claimants also asserted that the individual acting for the Bank had represented that the Bank would tailor a product to the needs of the borrower but the loan was unsuitable due to the costs of an early exit. Judge Pelling also rejected this argument, holding that: (a) the claimants had failed to establish that the borrower notified the Bank that they intended to repay the loan early; and (b) even if the Bank had been informed, the expression “tailored” meant that the loan offered would be the best that the Bank was prepared to give, taking into account the requirements of the borrower. The Bank was under no obligation to subordinate its own interests to those of the borrower when making any offer.


This is a welcome judgment for lenders, emphasising the difficulty for a borrower to establish that a lender had a duty to provide advice on potentially onerous terms in loan documentation, even if lenders emphasise in their marketing strategy a willingness to co-operate with a borrower to find the best solution for their borrowing requirements. It is even more challenging for borrowers to prove that a lender has such a duty when they are represented by solicitors and financial advisors.

For lawyers it is worthwhile taking note of Judge Pelling’s remark that if there was a breach of contract or duty in relation to the failure to advise the borrower it was not by the Bank. It was the borrower’s solicitors and chartered accountants who should have advised them on the possible implications of this clause. This is a reminder that when acting for a borrower it is important to flag any potentially onerous clauses with regard to the borrower’s individual circumstances.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey, or tel +44 20 3088 3710.