Privy Council: No duty of care owed by a lender to disclose lending policies

A recent judgment handed down by the Privy Council is likely to have wide application to mis-selling claims generally: Deslauriers and another (Appellants) v Guardian Asset Management Limited (Respondent) (Trinidad and Tobago) [2017] UKPC 34. In this decision, the Privy Council has confirmed that in a commercial relationship between experienced lenders and borrowers, the lender will not ordinarily owe a duty of care to disclose information about its internal lending policies or its approach to evaluating loan applications. Nor will it be under a duty to alert a customer to any external influences on its ability to lend further sums, for example regulatory constraints. This will be the case even where a disappointed borrower has made it clear from the outset that it hopes to extend the loan in due course.

The decision will be welcomed by banks and other lenders as limiting the scope of the duty of to provide information. In the instant decision, the context was a loan agreement, but the principle could equally apply to agreements relating to other financial products, such as interest rate hedging products. It may be a helpful antidote to claims brought by customers seeking to expand the duty to provide information to include novel categories of information.

Background

The dispute arose out of a commercial loan transaction for TT$18.6 million (Trinidad and Tobago dollars) advanced by Guardian Asset Management (“GAM”) to Mr and Mrs Deslauriers (the “Borrrowers”), who were property developers engaged in a project known as “Hevron Heights”. The Borrowers gave promissory notes for repayment, and the loan was secured by a demand mortgage over parcels of land belonging to them.

The Borrowers defaulted on their repayment obligations and GAM brought proceedings in Trinidad and Tobago to recover the amount owed. The Borrowers did not dispute the loan or its non-payment, but counterclaimed for losses they said they had suffered as a result of GAM’s failure to make further loans to finance the later stages of Hevron Heights. When the Borrowers sought further lending to complete the Hevron Heights project, GAM refused their application and indicated that there were lending limits which an additional loan would exceed. In consequence, the Borrowers alleged that they were unable to complete Hevron Heights and suffered loss of profits of TT$24 million. The Borrowers contended (amongst other things) that: (a) GAM’s failure to disclose any lending limits to which it was subject amounted to a misrepresentation; and (b) GAM was under a duty of care to inform the Borrowers of any lending limit, and failure to do so amounted to a negligent misstatement.

The Borrowers were unsuccessful at first instance before the High Court of Trinidad and Tobago, and an enforcement order in favour of GAM was made against a property owned by one of the Borrowers. Having unsuccessfully appealed to the Court of Appeal of Trinidad and Tobago, the Borrowers then appealed to the Privy Council.

Decision

The Board of the Judicial Committee of the Privy Council dismissed the appeals in relation to both liability and enforcement.

(1) Misrepresentation

On the facts, the Board had little hesitation dismissing the Borrowers’ claim under the Misrepresentation Act of Trinidad and Tobago (modelled closely on the English Misrepresentation Act 1967). The trial judge, Court of Appeal and the Board all found there was no discussion between the Borrowers and GAM about whether GAM would fund the rest of the Hevron Heights project before the loan was entered into. That finding was fatal to the claim in misrepresentation as any lending limits which affected GAM were simply irrelevant. Silence could not amount to a materially partial or misleading statement and there was no occasion to disclose the lending limits.

There was, further, no evidence before the trial judge that the Borrowers would in fact have been able to complete the Hevron Heights project had the alleged misrepresentation not been made. This was an additional reason why the misrepresentation claim could not succeed.

(2) Negligent misstatement

The Board went on to consider the claim in negligent misstatement, based on an alleged duty of care to inform the Borrowers of any lending limit.

It first set out the parameters of the evidence upon which the Borrowers would be entitled to rely (if a proper basis for a negligent misstatement claim could be made out). The Board noted that, in contrast to the misrepresentation claim (for which only correspondence prior to completion was considered), the Borrowers could rely on correspondence sent and received after the conclusion of the contract. This was because the duty of care (if it existed) would be capable of continuing. This was important to the Borrowers’ claim, because after the loan contract was made, there was correspondence in which it became apparent that the Borrowers were looking for further finance from somewhere. The complaint was that GAM failed to inform the Borrowers as to its lending policies in the course of such discussions.

To establish whether or not there was a duty of care, the Board referred to the principles set down in Hedley Byrne & Co Ltd v Heller & Partners[1964] A.C. 465. The Board held that the duty of care postulated depended upon the relationship between the parties giving rise to an assumption of responsibility by GAM for giving professional advice to the Borrowers. However, the relationship between the parties was between a commercial lender and its highly experienced commercial borrower. It was an arm’s length relationship, in which each sought to further its own commercial interests. It was not a relationship of adviser and client. Accordingly, GAM had no duty to disclose to the Borrowers the lending limits to which it was subject.

In reaching this conclusion, the Board made some important observations about the nature of the relationship between a commercial lender and experienced commercial borrower which are likely to be of wider application:

• It would be very unusual for such a non-advised relationship to give rise to a duty on the part of the lender to advise the borrower about its internal lending policies or approaches to loan applications, still less about any external influences, regulatory or otherwise, which applied to it.

• It would be extremely difficult to envisage such a duty arising, even if the borrower indicated from the beginning that it hoped to borrow more in the future.
• Where the court had found that no such discussions had in fact taken place between the parties, it was quite impossible to construct the duty of care contended for.

(3) Enforcement

The Board also dismissed the appeal against the order for the sale of the property owned by one of the Borrowers, rejecting an argument that the Borrower in question had effectively divested herself of the beneficial interest in the property by way of a Deed of Settlement.

Comment

Whilst this Privy Council decision was on appeal from Trinidad and Tobago, it is likely to have application in English law cases considering whether or not a duty of care can be established in similar circumstances, given the similarities of the two systems. Although Privy Council decisions are technically not binding on English courts, they carry great weight and persuasive value (see our litigation post clarifying the status of Privy Council decisions). One legal point to note is that the Board applied Hedley Byrne, and concentrated on the “assumption of responsibility” principle to establish whether a duty of care existed. It did not refer to the three-fold test (foreseeability, proximity and fairness) or the incremental approach. However, whichever test is applied should produce the same result, and given the Board’s decision regarding the lack of a special relationship between the parties, consideration of the other limbs of the 3-fold test would have been unnecessary in any event.

This decision will therefore be of interest to lenders, borrowers and litigators, most particularly in view of the clarification it gives on the limited scope of a lender’s duty of care to disclose its internal lending policies.