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Article | FI Observer

A Bank’s own commercial interests, in times of volatility

Financial, Executive and Professional Risks (FINEX)
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By Claire Nightingale | May 27, 2021

Lenders may look to their Civil Liability policies where they face claims alleging failings in their provision of services.

We noted in our article “Volatility : Lenders Duties in an economic downturn”1, that banks often do well defending claims in the English Courts, and that might give some comfort to both banks and their insurance partners in the light of potential claims arising out of the current economic position.

Our comment was made in the context of claims made by a property developer (who had failed to repay the bank upon expiry of his loan agreement) in relation to the negotiations with the bank’s restructuring unit about the repayment of his facilities during the global financial crisis. The bank had been successful at first instance.

We now have the benefit of a judgment of the English Court of Appeal in this case2, which again underlines that a bank is entitled to negotiate in its own commercial interest in the course of a restructuring between commercial parties.

Looking in the case in more detail:

  1. 01

    A Bank’s duty of care

    This topical issue of whether a statutory duty of care should be imposed on financial services providers will be the subject of further deliberation by the Financial Conduct Authority3. In the meantime, in this case the claimant had argued that an implied contractual duty to exercise reasonable skill and care in negotiating the restructuring with the claimant arose under section 13 of the Supply of Goods and Services Act 1982, even after the loan had expired. But the Court of Appeal said no: at that juncture the service provided under the loan agreement (being the provision of funding) was at an end, and the Court did not accept that an implied term in the loan agreement had any part to play in the parties’ relationship. Instead, the parties’ relationship was governed by the express terms of the mortgage and the equitable principles applicable to that relationship. Any term implied in the original Loan Agreement could not come to the claimant’s aid (although, in this case, it would not have assisted in any event as the Court also considered there had been no breach of the duty by the bank).

  2. 02

    Duty to act in good faith

    Similarly the Court of Appeal did not accept that the bank was subject to an implied contractual duty under the loan agreement to act in good faith in its negotiations with the claimant.

  3. 03

    Intimidation and economic duress

    The Court of Appeal held that the restructuring agreement concluded was the result of a robust negotiation between commercial parties, each of which had legal advice and was well able to look after itself in that negotiation. Also, it was notable that the restructuring agreement concluded was one that the claimant had wanted and had originally proposed. As such the claim for intimidation economic duress failed.

And what of insurance?

Lenders may look to their Civil Liability policies where they face claims alleging failings in their provision of services, either before the Financial Ombudsman Service or the Courts, for example; claims alleging that a lender’s actions or failures have led to a customer’s insolvency (see the Morley example above). Such claims may face legal hurdles, not least in respect of causation – having to demonstrate that it was the Bank’s actions, rather than the economic environment, which led to insolvency. In any event, the legal costs of defending such actions can be substantial. Civil liability policies generally cover, subject to policy terms and conditions, the costs of defending actions, as well as damages or settlements. They may also cover the costs of responding to regulatory investigations which can also be expensive.

Footnotes

1 https://www.willistowerswatson.com/en-GB/Insights/2020/07/lenders-duties-in-economic-downturn

2 https://www.bailii.org/ew/cases/EWCA/Civ/2021/338.html

3 https://www.fca.org.uk/publications/feedback-statements/fs19-2-duty-care-and-potential-alternative-approaches#revisions

Author

Global Head of FINEX Financial Institutions Claims Advocacy & TPL

Contacts

GB Head FINEX Financial Institutions

Susan Finbow
Global Head of FINEX Financial Institutions

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