A Bank Is Not Under Any Contractual or Tortuous Duty to Advise

From the traditional view point, ‘a bank is not under any contractual or tortuous duty to advise on the wisdom of commercial projects for the purpose of which it is asked to lend money’. [1] It is important from the given situation to note the following.

Tom approaches Priory International Bank (PIB) for a commercial loan and he is not an account holder of bank. Sid a bank manager of Priory International Bank (PIB) advises Tom to goes into partnership with Ursula who is a customer of bank, and he will provide a partnership with loan. Therefore, a full description and background about Tom is not completely known by the Sid, he acted arbitrarily or discretionarily, and advised Tom to make a partnership with Ursula, even before understanding as to whether Tom is capable of returning back the Loan amount.

Sid is a leading manager of Priory International Bank (PIB). Any advise from a man of such a stature is bound to have an influence. In this situation Tom is in a position to get influenced by Sid, as he does, and being the leading manager of the bank he advises Tom to go into partnership with Ursula (a customer of PIB), Sid is in a position to influence Tom. Therefore, there are all the makings of a fiduciary relationship made between the two.

In this situation, as Tom heads for the Loan, he gets the assurance from its lead manager that he can go into partnership with Ursula, because Ursula’s finances are ‘as solid as a rock’. Sid does not take any due diligence, neither has he checked if there was any debts on Ursula before commencement of partnership, nor does he give himself enough time to understand as to whether the Loan can be recovered from Tom.

Sid does not check the current financial condition of Ursula and whether she has any debts or not, and he advised Tom to goes into partnership with Ursula. Again, there is evidence to show the presence of negligence on the part of Sid.

Following the series of fact, it becomes clear that Sid, who was the leading manager of Priory International Bank (PIB), was assuming a responsibility, and was surely negligent in advising Tom. Further, it also comes out that Sid was surely in a dominant fiduciary position and therefore he should have acted in a manner wherein he observed the duty of care and skill, before advising Tom, which he failed to do.

In the Cornish v. Midland Bank [2] , it was made clear that if a banking institution seeks to give advise then it has to advise clearly and properly about the borrowings. Drawing from this case, to the given factual situation, Sid, who was acting on the part of Priory International Bank (PIB), failed to advise properly, and did so incorrectly.

Again Magman International Property Ltd v Westpac Banking Corp [3] follows a series of similar cases, one of which was Foti v Banque Nationale de Paris [4] wherein:

“….although the plaintiff approached the bank, already having decided to borrow $3.1m in Swiss francs, the Full Court of South Australia found the bank liable for a $1.1m loss suffered by the plaintiff. This was on the basis of representations made by an assistant manager that the loan would be monitored and that loss minimisation procedures could be instituted if required. This was said to create reliance and a sufficient proximity of relationship to found a duty of care. That duty was breached when the bank later failed to advice of the need for hedging contracts.” [5]

Drawing from this Australian case, it is clear that Tom had approached the bank for advice, this would still not negate in anyway the duty of care and skill Sid had to take while advising Tom.

Further, in Woods v Martin [6] case, J. Salmon held that:

“The limits of a banker’s business could not be laid down as a matter of law; the nature of such a business must in each case be a matter of fact, and on the facts it was within the scope of the bank’s business to advise on all financial matters, and they owed a duty to the plaintiff to advise him with reasonable care and skill in the transactions referred to.” [7]

In the case, Banbury v Bank of Montreal [8] , it has also been stated that:

“If [a banker] undertakes to advise he must exercise reasonable care and skill in giving the advice. He is under no obligation to advice, but if he takes upon himself to do so; he will incur liability if he does so negligently.” [9]

Thus, Sid undoubtedly assumed a duty of care and skill, which he failed to observe, advising without properly updating himself about the subject matter. In fact Sid was not aware of the debts of Ursula before the commencement of partnership, so that he should have either not advised with such conviction or should have updated himself before advising. The fact that he did neither, yet still went on and gave wrong advice to Tom; suggest clearly that he was negligent.

Robert E. Wight and Alan Ward in their article [10] reference Woods v Martins and observe that,

“Salmon J had to deal with two main arguments from the defence. The first relied particularly on Banbury v Bank of Montreal as authority for the proposition that giving financial advice was outside the scope of banking business. Describing that case as turning on its own special facts, his Lordship found that such advice was within the scope of the bank’s business, referring, inter alia, to the bank’s own advertising materials which read: ‘If you want help or advice about investments our managers will gladly obtain for you advice from the best available sources in such matters You may consult your bank manager freely and seek his advice on all matters affecting your financial welfare.’ The second defence was that when the first investment was made, the bank did not owe any duty to the plaintiff, as he was not a customer of the bank at that time. Salmon J held that in circumstances where a bank manager was consulted on financial matters by a potential customer and chose to advice such a person, then the obligation to advice with reasonable care and skill arose.” [11]

In Henderson v Merett Syndicate [12] it was first established that a party which is bound by a contract would be free to go for a claim in Torts and would not be restricted to contractual claim. Therefore, in the factual situation, the fact that Tom was not a customer of Priory International Bank (PIB) carries little relevance. He should have been treated as a potential customer and Sid, the bank manager, assumed a clear duty to give him advice by observing reasonable care and skill.

Further in Hedley Byrne and Co. v Heller & Partners [13] , liability for giving negligent misstatement was assumed to give rise to the negligence.

In the article by Tony Shea [14] it has been stated that,

“Whether or not the bank has broken its contract may depend on the bank’s failure to take reasonable care in selecting the employee concerned. He may be incompetent or dishonest, and the bank should, perhaps, have known this. This would be a direct breach by the bank itself. It is no defence for the bank to argue that it gave proper instructions to carefully selected employees with long and good employment records. Since the bank uses agents (employees) to fulfil its duties, it is liable for the acts of its employees. The acts of the employees are in effect the acts of the bank.” [15]

Thus, in the factual situation not only the manager, Sid, but the Bank may liable in the bank’s case for employing an incompetent person.

Thus, when considering all the factors, there lies a clear case of negligence on the part of Sid, the leading manager, of Priory International Bank (PIB). Once he had started advising, he had a duty to advise Tom properly and clearly, Sid obviously failed to perform, as a result of which Tom relied on the advice given to him. At this point it is also important to note here that Sid was a leading manager of the Bank. [16] Thus, this gives rise to a fiduciary relationship between the two. As a result of such a non observance of the duty of care from Sid’s part there were damages caused to Tom.

In the given situation there would be a contractual right of Priory International Bank to get back the loaned amount from Tom and Ursula. At the same time it is important to note here that Tom and Ursula who are partners would be jointly liable to Priory International Bank. Further, when to comes to the liability Priory International Bank would be liable for the actions of Sid as a result of the principle agent relationship that exist between them which is to say that both Tom and Ursula would need to share the liability for the breach of contract amongst them. Furthermore, since this is a partnership if Priory International Bank chooses to go to the court of law it would have the right to sue Tom and Ursula as because unlike suing a partnership firm is not possible, as partnership firm has no legal identity.

When it comes to negligence Sid who is the manager has committed negligence on various occasions on its part acting as the agent of Priory International Bank. Thus when it comes to liability Priory International Bank (principle) would be ‘Vicariously’ [17] liable for the actions of Sid (Agent) on various counts of negligence in performing its duty.

Second Issue:

In the second scenario the question states as follows:

“Sid advises Vera accurately and in detail of the risks that she will run if she signs a charge over the matrimonial home belonging to her and her husband, Wilf. The bank’s legal officer, Xavier, is present at the meeting and Vera signs a paper to say that she fully understands the advice given. The charge is in respect of a loan to Wilf for a luxury around-the-world cruise with Vera which lasts six months. On their return from the cruise, Wilf’s finances (which have not been managed in his absence) are in a mess and he cannot repay the loan.”

From this given problem it is important to note the following points.

The question provides that the Sid advices Vera accurately and in detail of her risks if she signs a charge over the matrimonial home. It is important to note here that the matrimonial home belongs to both Vera and her husband Wilf. Another important aspect of this problem is that Vera is a Co-guarantor of the loan. Therefore Sid advises in clear terms of the risk which Vera as a co-guarantor would inherit in case if this proposed loan.

In the given problem it is stated that the bank’s legal officer Xavier is present at the meeting. This is an important aspect of the problem as Xavier who is the legal officer would cast an impression that the advice given to Vera by Sid also conformed with a legal advice given to Vera by the bank. This issue will be discussed in detail at a later stage.

It is given in the problem that the charge in respect of the loan ‘The charge is in respect of a loan to Wilf for a luxury around-the-world cruise with Vera which lasts six months’. The duty of a banker is to give loan responsibly. It is important to ascertain that the borrower has the capability of repaying the money that has been lend to him. Again this would be discussed at a later stage.

In Barclays Bank Plc Appellants v O’Brien and another Respondents [18] , Lord Browne-Wilkinson held that,

“ …in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However for the future in my judgment a creditor will have satisfied these requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife’s rights.” [19]

In Royal Bank of Scotland Plc v Etridge [20] , Lord Nicholls of Birkenhead has cited

“Paragraph 12.1(ii) of the Code of Banking Practice and explained that, ‘bank and building societies’ are bound to advice ‘private individual’ who are contemplating to act as a security for another third person. The advices that should be given in are in the form of getting access to ‘independent legal advice before entering into the guarantee or third party security.” [21]

Lord Nicholls of Birkenhead further goes on to state that,

“The practice of the banks involved in the present cases, and it seems reasonable to assume this is the practice of banks generally, is not to have a private meeting with the wife. Nor do the banks themselves take any other steps to bring home to the wife the risk she is running. This has continued to be the practice since the decision in O’Brien’s case. Banks consider they would stand to lose more than they would gain by holding a private meeting with the wife. They are, apparently, unwilling to assume the responsibility of advising the wife at such a meeting. Instead, the banking practice remains, as before, that in general the bank requires a wife to seek legal advice. The bank seeks written confirmation from a solicitor that he has explained the nature and effect of the documents to the wife.” [22]

In Royal Bank of Scotland Plc case, Lord Nicholls of Birkenhead further explained that, the banks should see to it that after a meeting takes place with the wife, she gains proper knowledge of what she would gain as a liability providing security for a proposed loan. However, this does not completely ‘eliminate the risk of undue influence or misrepresentation’ after her gains proper advice with regard to the proposed loan. However, this at least ensures that the wife knows of the real risks associated with the proposed loan. This could be achieved if the banks themselves ‘provide the necessary information directly to the wife’.

Lord Nicholls of Birkenhead has further differed from Lord Browne-Wilkinson (Barclays Bank Plc Appellants v O’Brien and Another Respondents) in the following words:

“I do not understand him to have said that a personal meeting was the only way a bank could discharge its obligation to bring home to the wife the risks she is running. It seems to me that, provided a suitable alternative is available, banks ought not to be compelled to take this course. Their reasons for not wishing to hold a personal meeting are understandable. Commonly, when a bank seeks to enforce a security provided by a customer, it is met with a defence based on assurances alleged to have been given orally by a branch manager at an earlier stage: that the bank would continue to support the business that the bank would not call in its loan, and so forth. Lengthy litigation ensues. Sometimes the allegations prove to be well founded, sometimes not. Banks are concerned to avoid the prospect of similar litigation which would arise in guarantee cases if they were to adopt a practice of holding a meeting with a wife at which the bank’s representative would explain the proposed guarantee transaction. It is not unreasonable for the banks to prefer that this task should be undertaken by an independent legal adviser”. [23]

In this given problem, the bank had an obligation to check whether ‘Undue Influence’ [24] of Vera was taking place by her husband in the event of processing of the loan. Firstly, as mentioned above bank false short of making sure that Vera get independent legal advice and fully understand the risk factors from an independent legal professional. Secondly, it is important to note here that, the bank does not make sure that Vera is not under influence by her husband Wilf in the event of the loan being processed. This is an important fact because, it is very much possible that the husband of Vera, Wilf might pressurise Vera, all cause Undue Influence to obtain such a loan which would be jeopardous to Vera and her legal rights. A husband would be in a situation to influence ‘the will’ of her wife which might result in prejudicing the wife’s rights. Thus, in the given problem the bank should have made sure that such a scenario did not arrives. Therefore, by not asking Vera to take independent legal advice, the bank has failed ascertain whether any Undue Influence have taken place. It is further important to note here that as a liability of the bank, Vera can go to the court of law and defend the action arising out of a breach of contract as a result of Undue Influence being inserted on Vera.

In re Coomber, Coomber v Coomber [25] , Fletcher Moulton LJ held that,

“In my opinion that is not by any means necessary for the purpose of advice. I think that a solicitor best gives advice when he takes care that the client understands fully the nature of the act and the consequences of that act. He is not bound to say “I will advise you to do it”; or “if I were you I would do it”; or “if I were you I would not do it.” Nothing of that kind is necessary for competent and independent advice. All that is necessary is that some independent person, free from any taint of the relationship, or of the consideration of interest which would affect the act, should put clearly before the person what are the nature and the consequences of the act. It is for adult persons of competent mind to decide whether they will do an act, and I do not think that independent and competent advice means independent and competent approval. It simply means that the advice shall be removed entirely from the suspected atmosphere; and that from the clear language of an independent mind, they should know precisely what they are doing.” [26]

Further, Ross Cranston in his book [27] has cited Kingsnorth Trust Limited V. Bell (1986) 1 WLR 119

“…it was held that if a creditor, or potential creditor, of a husband desires to obtain, by way security for the husbands indebtedness, a guarantee from his wife or a charge on property of his wife, and if the creditor entrusts to the husband himself the task of obtaining the execution of the relevant document by the wife, then the creditor can be in no better position than the husband himself, and the creditor cannot enforce the guarantee or the security against the wife if it is establish that the execution of the document by the wife was procured by under influence by the husband and the wife had no independent advice.”

In the given problem it is clear that the bank manager provides accurate and detailed assessment of the risk to Vera. However, a clear assessment of risk is not provided (according to the problem) to her husband Wilf. It is also important to note that Vera signs a paper that she fully understands the advice given to her. However, as the matrimonial home belongs to both Wilf and Vera signatures of both should have been taken by the bank as a form of good lending practice, which they failed to do. Moreover, Sid fails to provide Wilf who is the borrower and the co-guarantor of the proposed loan with adequate details of risk attached in such a lending procedure.

Thus Priory International Bank has the right to sue for damages arising out of a breach of contract as result of the default in the loan repayment. At the same time as discussed above, it should be kept in mind that as a result of the bank not advising Vera to take legal independent advice runs a risk of keeping a window open, where in Vera can came a defence of ‘Undue Influence’ cause by Wilf her husband against a breach of contract of non-payment of loan.

According to the given problem Sid had a duty to explain not just Vera but to Wilf as well of the potential risk involved in the proposed loan. So, firstly, there was a duty in providing Wilf (borrower) with an accurate and in detailed analysis of the risk factors involved in the proposed loan. Secondly, this duty was breached by Priory International Bank as result of not providing the risk analysis to Wilf. Thirdly, as a consequence of this breach in duty the proposed loan was sanctioned to Wilf who failed to re-pay back the borrowed amount and thereby incurring liability for a breach of contract as a consequence. [28] Thus, although Priory International Bank (PIB) can sue to recover the loan amount but it also has a liability of contributory negligence.

Section 4 of the Lending Code 2009 stated that, ‘Before lending any money; granting or increasing an overdraft, or other borrowing, subscribers should assess whether the customer will be able to repay it.’ [29]

Further, Section 1 of ‘The Lending Code 2009’ [30] states that:

“Subscribers will act fairly and reasonably in all their dealings with customers by, as a minimum, meeting all the commitments and standards in this Code. The key commitments are shown below.

Subscribers will make sure that advertising and promotional literature is fair, clear and not misleading and that customers are given clear information about products and services.

Customers will be given clear information about accounts and services, how they work, their terms and conditions and the interest rates that apply to them.

Regular statements will be made available to customers (if appropriate). Customers will also be informed about changes to the interest rates, charges or terms and conditions.

Subscribers will lend money responsibly.

Subscribers will deal quickly and sympathetically with things that go wrong and act sympathetically and positively when considering a customer’s financial difficulties.

Personal information will be treated as private and confidential, and subscribers will provide secure and reliable banking and payment systems.

Subscribers will make sure their staff is trained to put this Code into practice.” [31]

Banking is a professional sector so quality services may be expected from its employees. It is also expected that they should maintain its ‘Duty of Care’ while performing their official services. Lord Denning has also made mention of the Duty of Care by professionals, while discharging their duties. He stated that,

“The law does not usually imply a warranty that he (professional man) will achieve the desired result, but only a term that he will use reasonable care and skill. The surgeon does not warrant that he will cure the patient. Nor does the solicitor warrant that he will win the case…It seems to me that in the ordinary employment of a professional man, whether it is a medical man, a lawyer, or an accountant, an architect, or an engineer, his duty is to use reasonable care and skill in the course of his employment.” [32]

The following are the ingredients which aim to improve quality of services.

In the given problem Sid explains to Vera the risk attached with the proposed loan it is important to note here that Vera is the co-guarantor of the proposed loan the borrower in this case is Vera’s husband Wilf. The problem is silent as to whether Wilf has been updated with the risk factor attached with the proposed loan. What is significant here is that Wilf who is borrowing the money from the bank should be aware of the risk factors attached to the loan which is not the case, as the risk factors are ‘accurately’ and ‘in details’ being explained to Vera (co-guarantor). According to section 4 of the Lending Code 2009, the bank needs to ascertain whether the borrower (Wilf) is in a position to re-pay back the money lend. As seen in the problem the loan taken was for an ‘around the world cruise’. it is reasonable to understand that a person who takes a loan for a world cruise would find it very difficult to re-pay the loan amount as because a world cruise would involve spending but not earning or saving. This fact was never contemplated by the Sid the bank manager before granting the loan to Wilf.

Conclusion:

In the first scenario of the given problem Priory International Bank has a contractual remedy of breach of contract as result of the default in the payment of the loan provided to Tom and Ursula. However, it also has liability in the form of negligence for firstly not doing proper due diligence; secondly, it has a tortuous liability of negligence for the advice it gave to Tom.

In the second scenario again the bank would have a remedy in the form of breach of contract as a result of the default in payment of Wilf. It can firstly go to the court of law to sue Wilf and recover payments from him; secondly, if Wilf is unable to give back the loan amount or arrange for repayment of the loan amount Priory International Bank has the option of going to the court to obtain direction from the court to get back the loan amount from the security which was provided in the form of the matrimonial home. It is important in this situation to note that while on one hand there is a contractual remedy with Priory International bank of a breach of contract and thereby get back the money borrowed to wilf, it also has two major liabilities which are tortuous in nature firstly, the PIB is tortuously liable for committing negligence by not advising Wilf the financial risk involved in the proposed loan; secondly, it is also liable for contributory negligence for providing a loan not keeping in mind the repayment options that will would have to face in future; thirdly, PIB is further tortuously liable in the form of negligence for not asking Vera to take an independent legal advice to better understand the risk involved. As a result of not providing the option of getting independent advice Vera in her defend for a breach of contract can bringing the ground of Undue Influence caused to her.