Lenders’ Duties

Negligent lending I

The long recognised position is that a bank does not ordinarily owe a duty of care to the borrower, nor is generally a fiduciary in making lending decisions. In Kennedy and others v Allied Irish Banks plc and AIB. Finance [1998] 2 IR 48 the Supreme Court reaffirmed this general principle. The headnote summarises the decision of the Chief Justice, with whom the other members of the Court agreed.

That a bank owed no duty, contractual or otherwise, to consider the financial interests of a customer when deciding whether or not to engage in any financial transaction, such as whether or not to make a loan; it was entitled to make the decision exclusively on the basis of its own commercial interests.”

The prospect of a civil claim for wrongful, negligent or reckless lending has been canvassed since the economic crises began. Many lending decisions appear in hindsight, to have been reckless or foolish. Some may seem palpably absurd and lack any reasonable business case.  Across a wide range of lending. wholly unrealistic assumptions about future rises in property price appeared to justify lending on projects and with rates of return, outside historical norms.


Negligent Lending II

The argument is sometimes made that the lender, in the corporate sense, had superior knowledge to the borrower.  This knowledge might be imputed to the lender as a whole so that taking a lender in the broadest corporate sense; it may have acted with knowledge, that the lending was reckless. Alternatively, it might be argued that the lender was an adviser, who owed fiduciary duties of good faith and duties to avoid a conflict of interest.

The imposition of liability for negligent lending or another legal principle, by which the borrower is not liable or is only part liable, has an intuitive appeal.  In a sense, both lender and borrower have taken a risk so that it seems justifiable that the lender should at least take a reduction in repayment or perhaps absorb full liability, in consequence of having been negligent or reckless in making the original loan decision.

Notwithstanding the intuitive appeal of such a result, it would appear unlikely that the Courts will find such a solution through the imposition of civil liability for negligent lending.  The law of contract and tort do not appear to support the proposition of liability for negligent lending in itself.


Negligent lending III

The general principle of law is that a lender and borrower deal as parties at arm’s length.  Where a contract is agreed, it is generally enforceable by its terms, no matter how foolish or reckless they appear with the benefit of hindsight or even at the time.

In Healy v Stepstone Mortgage Funding Ltd [2014] IEHC 134 Hogan J. struck out proceedings brought by the borrower against the defendant, seeking damages and declaratory reliefs for alleged “reckless lending procedures”. He held that there is no legislative or common law basis to ground such a claim and the proceedings are therefore doomed to fail.

“It follows, therefore, that there is simply no tort of reckless lending which is known to the law. In that respect, I entirely agree with the comments of Charleton J. in Grant and those of Kelly J. in McConnon. Since the entirety of the present proceedings is premised on the assumption that there is such a tort, it further follows that the present proceedings are completely unsustainable in law and are doomed to fail.”


Claims based on Negligent Advice I

There may, of course, be circumstances in which, the lender owes and breaches its duty of care under the general principles of liability for negligence. Exceptionally, this may arise in relation to the lending itself, where the bank assumes the role of advisor. More commonly, it will arise where the lending is related to investment is a financial product promoted and advised on by the lender.

In the last 25 years, banks have moved from being mere lenders to providing a wide range of investment and other financial services. In some very particular circumstances, there may be a relationship of client and adviser between the credit institution and customer. Where, for example, the lending is intimately related to a particular financial product, on which the lender has advised or which it has promoted there may be recovery on ordinary principle of negligence where the product has been mis-sold.

In order to succeed in a claim based on negligence, a claimant must show the following

  • that the defendant owed the claimant a duty to take care;
  • that the defendant fell below the standard of care;
  • the failure to meet the standard of the care caused loss or damage and
  • actual loss or damage has been sustained.

Claims based on Negligent Advice II

Liability for economic loss due to negligent advice/misstatement may arise on general principles where the advice or statement had been given to a known recipient for a specific purpose of which the maker was aware and upon which the recipient had relied. The adviser must know, at the time when the advice is given,

  • the identity of the person to whom the advice or information is to be communicated;
  • the purpose for which that person is to be provided with the advice or information; and
  • that the person to whom the advice or information is communicated is likely to rely on it for the known purpose.

The lender will not be liable where information or advice supplied by it to a customer is passed on without the lender’s knowledge to third parties who rely on it.


Claims Based on Negligent Advice III

Even though is not generally part of the lender’s function to advise, if a lending official undertakes to advise, he must exercise reasonable care and skill in giving the advice. Issues may arise in relation to the scope of a lending official’s authority from the lender to give advice on investments. This turns on whether it is part of a lender’s business to advise on investments and if it was, whether the manager or other official had the necessary authority. Where the lender has held itself out as willing to advise, it may be held liable for the official’s negligence.

Whether an official has authority to advise is a matter of fact. It is likely, however, that even where he is not authorised, advising is sufficiently within his ostensible authority to entitle a customer to assume that he is authorised and to found a claim for negligence if he falls short of the standard which the customer would be entitled to expect

Where a lender embarks on an explanation as to the terms and effect of a security document in circumstances where he knew or ought to have known that the person to whom the explanation is proferred would rely on it in deciding whether or not to execute the security, he is likely to come under a duty to that person to take reasonable care not to misstate the position.

If a lender negligently misstates the position, whether by making a positive misrepresentation or by omitting to point out a material fact, it may be liable in damages for negligence. The effect of the award in damages, intended as it is to return the parties to the position they would have been in but for the negligent misstatement, is likely to mean in practical terms, that the lender loses the benefit of the security.


Example of Lender Liability

Irish Permanent Building Society v. O’Sullivan and Collins [1990] ILRM 598 is an example of an exceptional case, in which the lender was held to owe a duty of care to a borrower. The Headnote reads

The defendants applied to the plaintiff’s agent for a mortgage to purchase a house He also operated  as an auctioneer from the same office and using the same staff. Both the plaintiff society and the auctioneering business are advertised outside SC’s office and on his note-paper.  SC recommended a house at Coolick, Killarney, to the defendants, and told the defendants that this house was in good condition and that all that was required to be done to it was wallpapering and painting. The house at Coolick was later discovered to have defects which prevented the defendants from living in the house for any long period, and eventually, the defendants vacated the house completely.

Held by Blayney J.;  SC was negligent in recommending the house to a young couple as their first house and in advising the defendants that the house was in good repair and only in need of wallpapering and painting.  The defendants thought that he was acting in his capacity as manager of the plaintiff society in selling the house. The plaintiff building society knew that SC was acting as their agent and carrying out his auctioneering business from the same office and the plaintiff knew that SC was carrying on these two roles at the same time, and thereby allowed the defendants to believe that SC was acting on behalf of the plaintiff when selling the house at Coolick, and, as a result, the plaintiff society owed a duty of care to the defendants to ensure that they were properly advised about the condition of the house at Coolick. . The plaintiff was in breach of this duty of care owed to the defendants and was liable for the negligent advice given by SC to the defendants in relation to the condition of the house at Coolick.


Fiduciary Duties

The Courts may in exceptional circumstances find that the lender owes fiduciary duties or duties of care to its customer. However, they will not readily do so in the lending context. This is in contrast to investment advice, where the courts are more willing to find a relationship of advisor and client.

In Irish Bank Resolution Corporation Ltd v. Morrissey [2013] IEHC 208 Finlay Geoghegan J. wrote “In my judgment, on the evidence before me, the communications between the Bank and Mr. Morrissey in the years 2000 to 2009 did not include any advice sought from or advice proffered by the Bank or any other steps undertaken which took the relationship outside of the normal commercial relationship of a lending bank and borrowing by an experienced entrepreneur or business person.”

The Courts are more likely to recognise fiduciary duties on lenders, where the lender or an associate is also selling an investment product, typically financed by lending. In Friends First Finance Ltd v. Cronin [2013] IEHC 59 Herbert J. refused summary judgment and sent to plenary hearing the issues of whether the lender had a fiduciary duty to the customer.  The defendant claimed that if he had been informed of the risk, it would have affected his decision to take up the loans and purchase these investment products

“I am satisfied that it is at least arguable that this principle of fiduciary care applies also as between a Credit Institution and a borrower. As was held by Sir Eric Sachs in Lloyds Bank v. Bundy (Ante) at p. 766, citing the decision in Tufton v. Sperni [1952] 2 T.L.R. 516 at 522, “the relationships which result in such a duty must not be circumscribed by reference to defined limits”.

The onus of proof lies on the defendant to establish that in the particular circumstances of this case, such a special relationship of “confidentiality” had arisen between him and the plaintiff. Having regard to the contents of the defendant’s affidavits I could not be satisfied that the defendant does not have an arguable defence on this ground.


Consumer Credit Code I

The introduction of the Consumer Credit Code in August 2006 (it became fully operational in 2007), fundamentally changed the relationship of regulated lenders with consumers.  In this context, consumers include consumers in the conventional sense and businesses (including companies) with a turnover of less than €3,000,000.

The Code transforms the role of a financial institution, from that of a retailer in all but the most basic banking services. See the chapter in these notes on the Code. There are duties to ascertain the customer’s needs and to make a recommendation and justify the recommendation of a banking / financial services product in terms of the customer’s best interests. Moreover, the process must be documented.

The Code has been introduced not so much as substantive law, but as regulatory obligations of the regulated lender. The Code provides for stand-alone enforcement by way of the Central Bank as “policemen”.  It also provides a system of complaint and remedy for consumers to the Financial Services Ombudsman.


Consumer Credit Code II

Where there is a statutory scheme creating rights and obligations, the Courts on occasions, measure the relevant duty of care, with reference to those rights.  This can be seen in the context of Health Safety and Welfare at Work and Road Traffic Rules where in many cases, the detailed legislation defines the duty of care.

The Courts may also impose liability for breach of statutory duty. It is a question of interpretation of the legislation, as to whether a statutory scheme is intended to create civil liability for breach. Where schemes have their own mechanism for enforcement, as is the case with the Financial Services legislation, the Courts are less inclined to imply civil liability for breach of statutory duty.

There have been a number of cases, which have considered the question of whether and to what extent, the civil courts will directly apply the principles in the codes.  Courts have taken differing approaches in different contexts. It appears to be established that the Code of Conduct on Mortgage Arrears must be applied before taking proceedings for possession of the borrower’s residence. In contrast, cases on the Consumer Protection Code have held that the provisions considered, not to be justiciable.

In Freeman v. Bank of Scotland (Ireland) Ltd [2013] IEHC 371 Gilligan J. wrote

“It is apparent from the case law that the status of the Central Bank codes issued under s. 117 and those relied on by the plaintiffs is not absolutely clear and may be dependent on the circumstances of each particular case. I am satisfied that the issues relating to the relevant Codes, their role, and the consequences of any alleged breach are interlinked with the issue of securitisation. It is not for this Court at this point in time to express any view as to the plaintiffs’ prospects of succeeding on this ground. What must be decided at this stage is whether or not the plaintiffs’ claims are of sufficient substance that it is appropriate to allow them to proceed with the action.”

 


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015