Banking law

By Simon Sugar, barrister, 36 Bedford Row, London

Bankers duty of care

Sara Frost v James Finlay Bank Ltd [2002] EWCA Civ 667

In this case, F wanted to sell her home.

She was advised that to maximise the sale price she ought to refurbish the property.

She approached the bank for a loan to assist with the refurbishment.

Before making an offer the bank obtained a survey.

The survey indicated that the property was basically sound, but there was some evidence of minor movement to one side of the house and it was possible that some localised stabilisation may be required.

However, the surveyor did not have any reasons to anticipate a significant problem.

The bank did not supply F with a copy of the survey.

Following the survey, the bank offered F a loan of 250,000 for two years, secured by a first charge over the property.

The facility letter contained the bank's standard conditions.

Condition 2.2 provided that the lender shall be required to be satisfied with the insurance cover of the borrower and will utilise the services of its insurance services division in this connection.

The reference to the bank's insurance services division was a reference to JFFS, a subsidiary insurance company owned by the bank.

The property was initially insured by Eagle Star for a reinstatement value of 340,000.

The equivalent valuation in the surveyor's report valued the property at 500,000.

JFFS invited F to use its broking services and sent her a proposal form for cover with Ecclesiastical Insurance, insuring the property for 500,000.

F completed the proposal form but failed to send it to JFFS before completing the loan.

The loan was completed without new insurance having been effected, leaving the property substantially underinsured.

The bank was concerned about the level of insurance cover and instructed JFFS to effect temporary insurance cover of 500,00 over the property immediately.

Thereafter, the bank received the proposal form completed by F and sent it to JFFS, which effected a policy of insurance with Ecclesiastical.

The builders carrying out the refurbishment discovered structural damage.

The refurbishment ceased while F pursued a claim against Ecclesiastical.

F's claim against Ecclesiastical was only resolved after many years and after litigation.

In the meantime, the debt to the bank had risen substantially, leading the bank to take possession of the property, which was eventually sold after the refurbishment was completed.

F was left owing a substantial sum to the bank.

F claimed that the bank owed her a duty of care having assumed the responsibility of an insurance broker and that the bank breached its duty in failing to ensure that the survey was brought to F's notice before she changed insurers.

Mr Justice Hart accepted this argument and concluded that but for the change of insurers the repairs to the property would have been completed some 20 months earlier.

F was entitled to damages representing the loss flowing from the 20 months' delay in completing the refurbishment.

The bank appealed.

The main issue for the Court of Appeal was whether the bank owed F a duty of care.

The court held that on the facts of the case there was no assumption of responsibility by the bank of the functions of an insurance broker and no duty of care arose.

F argued that the bank imposed upon her and carried out on her behalf a requirement that she change her insurers from Eagle Star to Ecclesiastical and that in so doing the bank offered and carried out the skilled services and duties of an insurance broker.

The Vice-Chancellor, Sir Andrew Morritt, held that the imposition of a requirement to change insurers was not the same as giving advice or rendering services.

The giving of advice or the rendering of services gives rise to an assumption of responsibility under ordinary principles.

The mere imposition of a requirement to change insurers did not give rise to any assumption of responsibility and thus no duty of care.

Furthermore, the court held that there was no such requirement imposed in any event.

This case attracted considerable national publicity.

While F should be afforded a great deal of sympathy, the imposition of a duty of care upon the bank on the facts of this case would have considerably extended the law and imposed a harsh duty on the bank.

The case serves to reaffirm the difficulties involved in rendering a bank liable for failing to advise.

Unless a bank gives advice or itself performs the relevant services, no duty of care will arise based upon an assumption of responsibility.

Car Crash Line Limited v Branton Edwards (a firm) [2002] EWCA Civ.

634

This case concerns the availability of restitutionary remedy in respect of an unenforceable regulated agreement under section 127(3) of the Consumer Credit Act.

Those of us practising in the area will be familiar with a whole raft of recent appellate cases on the Consumer Credit Act.

This is yet another such case albeit that it is an appeal from a case management decision and has procedural and not substantive importance.

In this case the defendants, a firm of solicitors, were being sued for negligence.

The claimant operated a business providing car hire to people involved in car accidents, who were required to pay for the car hire out of the proceeds of third-party litigation.

The defendant firm was, it is said, required to advise the claimant upon its documentation.

The agreements the claimant entered into with its clients were regulated consumer credit agreements and were unenforceable under section 127(3) of the Act.

Therefore, the claimant issued professional negligence proceedings against the defendants.

The defendants argued that although the contracts were unenforceable, the claimant ought to mitigate its loss by bringing a claim for a restitutionary remedy, and sought a preliminary issue to determine the point.

The first instance judge dismissed the application for a preliminary issue and relied on two cases: Dimond v Lovell [2000] 2 WLR 1121 and Wilson v First County Trust [2002] QB 74.

In Dimond, Lord Hoffmann stated that a restitutionary remedy was not available where a contract was unenforceable as a consequence of the operation of section 127(3) of the Consumer Credit Act.

In Wilson, the Court of Appeal held that section 127(3) was incompatible with article 6(1) of the European Convention on Human Rights and article 1 of the first protocol and made a declaration of incompatibility.

The appeal in Wilson is scheduled to be heard in the House of Lords this October.

The first instance judge refused to order the trial of a preliminary issue because he was bound by Dimond and because the declaration of incompatibility did not allow him to depart from the accepted interpretation of section 127(3).

The Court of Appeal upheld that decision.

More importantly, Sir Christopher Staughton expressed the minority view that it was preferable that the resolution of the case, or at least part of it, should await the decision in the House of Lords and the potential introduction of an amendment to the Act.

While the outcome and potential consequences of their Lordships' decision in Wilson are awaited, it would be wise to continue to claim restitutionary remedies in relation to any contract unenforceable under section 127(3) and seek to argue the issue after the resolution of Wilson and its consequences.