Summary

A bank had owed a duty to business customers who had expressed a wish to change the interest on their borrowings from a variable rate to a fixed rate to explain the financial implications of doing so. That duty had been breached in the instant case.

Facts

The claimants alleged that the defendant bank was liable for misrepresentations and for breaches of the duty which applied when banks gave information about facilities and products to customers.

The claimants ran an organic farming business. They transferred their borrowing to the bank in 2006. In June 2008, they switched the greater part of their borrowing from a variable interest rate to a fixed rate. They did so in two tranches, at 6.71% and 7.52%. In each case, the fix was for a term of 10 years. Like others who fixed the rate of their borrowing before September 2008, they found themselves tied to a far higher rate of interest than the current market rate, once base rate reached 0.5% in March 2009. It was not foreseen that base rate would fall so low or that it would remain at that level for more than eight years. The claimants asserted that the high rate of interest on the fixed-rate loans they had taken out had had a significant adverse effect on their business. The loans were subject to the bank's standard terms and conditions, which provided for both an early repayment fee and what was referred to in cl.2.11 as a "redemption penalty". Clause 2.11 was hard to understand and very onerous in effect. The claimants alleged that the bank had failed to explain the financial consequences which would flow if they tried to get out of the fixed rate before the expiration of the 10 years. They also claimed that the bank had positively misrepresented what the financial consequences would be.

The main issue was the extent of the duty owed to the claimants by the bank.

Held

The relationship between the parties was not an advisory one; no advice had been given by the bank. There was no dispute that the bank owed the claimants a duty of the Hedley Byrne variety to take reasonable care not to misstate any facts on which they could be expected to rely. The issue was whether the bank owed the claimants a greater duty than that. In Crestsign Ltd v National Westminster Bank Plc [2014] EWHC 3043 (Ch), which involved the alleged mis-selling of a swap, an intermediate duty of care was found to have arisen. Such a duty was likely to satisfy the "assumption of responsibility" test where a bank had voluntarily undertaken to adhere to certain principles. The court should be more ready to infer that the bank had assumed responsibility to the customer for adhering to those principles where there were no relevant disclaimers, "basis" clauses or contractual exclusions to contradict that inference. The significant feature of the instant case was that the bank had advertised to the claimants that it subscribed to the Business Banking Code. The fairness commitment in that code included a promise 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 its financial implications. There were no disclaimers, "basis" clauses or exclusions in the terms and conditions which applied between the claimants and the bank which would lead to the conclusion that the bank was not willing to assume responsibility for honouring that promise. In the circumstances, when the claimants enquired about fixing the rate on the two loans, the bank owed them more than a duty not to mislead or misstate. The duty of care which the bank owed was to explain the financial implications of fixing the rate. It was a duty owed only in response to the claimants' enquiries because that was what the bank had signed up to in the Business Banking Code. It was not a duty to volunteer information if not asked. As the deputy judge in Crestsign had said, a "comprehensive tutorial" was not required. What was required was an explanation in plain English of what fixing the rate entailed and the consequences. Essential components of the explanation were: 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. The bank was obliged to provide an accurate description of how the clauses dealing with the early repayment fee and the redemption penalty would operate in the event of an early repayment. Not all of the claimants' specific allegations against the bank were made out. However, it had been shown that the bank had failed adequately to explain the financial consequences of changing to a fixed rate and how cl.2.11 dealing with the redemption penalty worked. Had the claimants been given the correct information, it was likely that they would have asked for a fixed rate for just two years. Viewed at June 2008, the break-cost implications of a two-year fix would have been affordable. In the circumstances, the bank was liable to the claimants for misrepresentations and breach of duty, Crestsign applied (see paras 57, 63, 68, 74, 80-81, 132-133, 185 of judgment).

Judgment for claimants