Could a lender owe a higher duty of care to its customers rather than one simply not to misstate facts, even where no advisory relationship exists?
A recent case, Philip Thomas, Helen Thomas v Triodos Bank NV  EWHC 314 (QB), has highlighted that, even where there is no advisory relationship, a lender may owe its customers a higher duty of care than just ensuring that the correct information has been conveyed.
Philip and Helen Thomas (the “Claimants”) ran an award-winning organic farming business and transferred their borrowings to a new lender, Triodos Bank NV (the “Bank”) via two variable rate loan agreements, one for £300,000 to repay their existing borrowing with NatWest and the other for £1,150,000 to fund the purchase of a farm, Bidwell Barton.
In June 2008, the Claimants became concerned about the increased interest rate levels and discussed their concerns with the Bank, enquiring about the possibility of fixing the interest rates. The Claimants questioned the financial penalties they would incur if they fixed the interest rates and then chose to redeem the loans early.
The Bank had subscribed to a Business Banking Code, in which the Bank had promised that if the Bank was asked about a product, it would give the customer a balanced view of the product in plain English with an explanation of the financial implications of that product.
Despite the commitments made by the Bank in the Business Banking Code, the Claimants’ questions were left unanswered by the Bank. The Claimants then decided to enter into two fixed rate loans both for a period of ten years, one at a fixed interest rate of 6.71% and the other of 7.52%. These fixed rate loans were subject to the Bank’s standard terms and conditions which provided an express clause for an early repayment fee and a redemption penalty.
Due to the financial crisis that hit in autumn 2008 and the subsequent falling base rate, the Claimants found themselves tied into a far higher interest rate than the current market level and which consequently had a significant adverse effect on their business. They thus brought a claim against the Bank, alleging that:
- the Bank had failed to explain the financial consequences which would follow if they tried to redeem the fixed rate loans before the ten year expiry date; and
- the Bank had positively misrepresented what the financial consequences would be.
Lenders typically owe their customers what is known as a “Hedley Byrne duty of care”, which is a duty to take reasonable care not to misstate any facts on which the lender’s customers could be expected to rely. The issue in this case was whether the Bank could owe a higher duty of care than one merely not to misstate facts.
In considering this issue, the Court referred to the case of Crestsign Ltd v National Westminster Bank plc  EWCH 3043 (Ch) in which it was held that a lender can owe a higher duty of care where it has voluntarily undertaken to adhere to certain principles. In such circumstances, the lender will be considered to have assumed responsibility to its customers to comply with those principles.
In reviewing the terms of the Bank’s Business Banking Code, the Court noted that there were no disclaimers, “basis” clauses or exclusions which would have applied to demonstrate that the Bank was not willing to assume responsibility for honouring its promise to explain its products to its customers. Given the Claimants had enquired about the financial penalties they would incur if they wished to redeem the loans early, and given the Bank had subscribed to the Business Banking Code, the Court held that the Bank owed them more than a duty not to mislead or misstate, they also owed a duty of care to explain the financial implications of fixing the rate. The Bank was therefore liable to the Claimants for misrepresentation and breach of duty.
The Court did take time to clarify the duty of care and stated that the Bank was not under a duty to volunteer information or indeed to provide the Claimants with a “comprehensive tutorial” about the financial implications of redeeming the loans early. The Bank was, however, required to explain to the Claimants:
- that the rate could be fixed for a period;
- where the available fixed rates could be found;
- what those rates represented;
- the effective rate that would be payable; and
- the financial consequences of terminating the fixed rate before the end of the period.
Jonathan Porteous, head of Stevens & Bolton’s banking and finance practice, comments: “Lenders need to be aware of increased duties of care if dealings with customers are subject to a code of practice that contains fairness commitments. In any case, we would advise lenders to answer questions customers have in a way that is fair and not misleading. It should be noted that this does not extend to volunteering information, teaching customers about banking matters or providing financial advice. There may be practical issues where customers ask open-ended questions. Our team can advise on any grey areas.”