Carney & Ors v NM Rothschild & Sons Limited  EWHC 958 (Comm) is a recent case where the High Court rejected claims of an unfair relationship arising between a lender and two borrowers under s.140A of the Consumer Credit Act 1974 (the “Act“).
This decision will be of interest to financial institutions which (unusually) bear the reverse-burden of proving that a relationship is not unfair under the Act. The decision shows the forensic approach the courts will take to assess whether the particular relationship is unfair, which involves consideration of the elements of the causes of action which are alleged to have contributed to the unfairness. It highlights the numerous and specific elements of an unfair relationship claim which may be challenged by a lender. It also adds further weight to the growing body of case law which illustrates the difficulties claimants face in trying to establish the existence of an advisory relationship in an ordinary financial institution – customer relationship (see our recent banking litigation e-bulletin).
This was the first case (so far as the court was aware) to consider the efficacy of so-called “basis clauses” (under which parties agree the basis of their relationship, typically about whether it is advised/non-advised) in relation to an unfair relationship claim. The court gave guidance as to how clauses of this kind should be assessed under the unfair relationship provisions by reference to other regimes (such as the Unfair Contract Terms Act 1977, “UCTA“). The court noted that the assessment under the Act was not the same as that which would be conducted under other such regimes because of the “different and wider exercise” set out in the unfair relationship provisions of the Act. However, it said that a clause found to fall outside of the UCTA regime (i.e. a true basis clause) should have “much less” impact on the issue of the unfair relationship under the Act than an exclusion clause which is held to be unreasonable under UCTA.
The court’s approach to basis clauses will be of particular interest to institutions and finance lawyers alike, as it supports the status quo, namely that such clauses can form the basis for a contractual estoppel which can be useful in negating the existence of various duties. Those drafting such clauses should take some comfort from the court’s guidance that basis clauses falling outside of UCTA are less likely to fall foul of the unfair relationship regime under the Act. The decision therefore closes a further avenue to claimants bringing such claims.
The claimants (the “Borrowers“) were two couples of British expatriates resident in Spain. They entered into loan agreements (the “Loan Agreements“) with NM Rothschild & Sons Limited (the “Bank“).
The purpose of the loans was to advance funds to the Borrowers for the purpose of investing in a fund. The underlying investment was in notes issued by Barclays Bank plc (the “Issuer“) which in turn represented investments into three highly rated funds. The Issuer gave a capital guarantee on the notes so that at maturity, the Borrowers would receive approximately 100% of the capital invested in order to repay the loans. The purpose of the scheme was to avoid adverse tax consequences which could arise if the Spanish version of inheritance tax (“ISD“) applied to the Borrowers’ properties. Other lenders had, prior to the Bank’s involvement, expressed an interest in providing loans in connection with the scheme but did not participate. The loans to the Borrowers were secured by these investments and unencumbered properties in Spain.
The constituent parts of the scheme, being the notes and the loans were separate. An independent financial adviser, Henry Woods Investment Management (the “IFA“), was responsible for promoting the scheme to investors. There was a dispute (see below) about the nature and extent of the role of the Bank in its dealings with the Borrowers prior to the making of the Loan Agreements and the investment.
There was a relatively complex fee structure which, insofar as is relevant, meant that the fund charged an 8% fee (paid out of the loan monies), of which 4% went to the IFA. The only fee charged by the Bank was a 0.5% set-up fee in relation to the loans; the Bank made its money on the spread of interest rates.
The investments underperformed. In part, the High Court commented that this appeared to have been caused by the financial crisis of 2007-2008, and due to a desire on the part of the Issuer to deal with the investments conservatively so as to ensure that it would not have to use its own funds to repay the guaranteed amount. There were various related proceedings in Spain.
The sole cause of action advanced by the Borrowers was pursuant to s.140A and s.140B of the Act. Specifically, the Borrowers alleged that an unfair relationship arose between them and the Bank in relation to the Loan Agreements. The principal relief sought was the cancellation of the existing indebtedness owed to the Bank and the discharge of the related security. As part of that unfair relationship claim, the Borrowers alleged that incorrect advice was given as to the suitability of the scheme and misrepresentations made by (or on behalf of) the Bank to the Borrowers in relation to the scheme and its efficacy in relation to tax.
The Bank denied the entirety of the claim brought against it, although it accepted that it owed a duty not to mislead or misrepresent, and that it was subject to the regime under the Act. The Bank denied that any advice was given or any actionable representations were made (and if they were made, denied that they were wrong or false). The Bank relied on various clauses in the Loan Agreements defining the scope of its relationship with the Borrowers (which it said was not in any sense advisory), the absence of any representations made by the Bank and the absence of any reliance by the Borrowers. These same basis clauses were relied on by the Borrowers as factors (among others) which they alleged showed the relationship was unfair.
Law on unfair relationships
The substantive claim (i.e. whether incorrect advice was given or misrepresentations made, making the relationship unfair) fell to be considered under s.140A(1)(c) of the Act because it concerned things done or not done by the Bank prior to the making of the Loan Agreements. Claims as to whether the nature of the clauses of the Loan Agreements themselves (i.e. the basis clauses) contributed to the unfairness, fell to be considered under s.140A(1)(a) of the Act. Section 140B provides for the type of relief available where an unfair relationship claim has been made out.
The court completed a detailed review of the relevant legal principles in relation to unfair relationship claims, the key aspects of which are listed below.
- The court relied on Lord Sumption’s leading judgment in Plevin v Paragon  UKSC 61 on the effect of s.140A of the Act in determining that the court’s role, in assessing the relationship between the parties, was in fact “more than an exercise of discretion” and would require a “large amount of forensic judgment“.
- The court noted that the advice and misrepresentation elements of the unfair relationship claim could have been separate causes of action in themselves. Significantly, the court therefore proceeded on the basis that the “same elements as are required by the cause of action should be shown when such matters are raised as constituting an unfair relationship. Otherwise, there is a danger that the analysis of their significance or otherwise becomes blurred and uncertain“. However, the court noted that the burden of proof was on the creditor to prove that the relationship was not unfair.
- On causation, if the debtor would have entered into the relevant agreement in any event, the court said this “must surely count against a finding of unfair relationship“.
- The fact that there has been no breach of a relevant regulatory rule may be “highly relevant” but was “not determinative” in the court’s view. By contrast, if the conduct on the part of the creditor would have amounted to breach of such a rule, but the rule did not apply, that “can be relevant“. The court concluded that it could consider the conduct of an agent in this respect too.
- The court noted that (so far as it was aware) this was the first case in which the efficacy of basis clauses in relation to an unfair relationship claim had been tested. The court stated that the assessment of the unfairness or otherwise of basis clauses was not the same exercise as that which would be conducted under UCTA, the Misrepresentation Act 1967 or the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR“). This was because of the “different and wider exercise” set out in the unfair relationship provisions of the Act. As such, a term may not be unfair under the UTCCR, but still give rise to an unfair relationship, although the court noted in the present case that it did not matter much which unfairness or unreasonableness regime was relied upon. However, the court said that as a matter of “common sense“, a clause which is found to fall outside of the UCTA regime (i.e. a basis clause) should have “much less” impact on the issue of the unfair relationship than an exclusion clause which is found to be unreasonable under UCTA.
In the context of assessing whether there was any unfair relationship, the court considered each element of the advice and misrepresentation causes of action in turn.
Breach of advisory duty
The court addressed two questions on this issue: whether the Bank actually gave advice; and if in doing so, it assumed the role of an adviser:
- First, the court concluded that overall the Bank “did not give any material advice“. The reality of the Borrowers’ evidence at trial was to the effect that the Bank’s representative had made misrepresentations as part of a sales pitch, rather than giving negligent advice.
- Second, the court commented that it was “quite impossible” to see how the Bank had assumed an advisory role. The Loan Agreements and an article included in the IFA’s newsletter (setting out details of the scheme) clearly pointed to the fact that the Bank had not. Moreover, the court commented that “importantly” there was already the IFA whose job it was to advise on the scheme and specifically the investment. The Borrowers’ attempts to downplay the significance of the role played by the IFA were rejected. The Bank did not receive any commission for any advice, whereas the IFA received 4%.
Consequently, while accepting that someone could have more than one adviser, the court found there was no basis for that finding in the present case. The court also found that the relevant clauses of the Loan Agreements made clear that the Bank was acting as lender only and not assuming an advisory role, which had the effect of negating the existence of any advisory duty (if there was one).
The question then arose as to whether the clauses were susceptible to judicial control, for which the court said a useful starting point was to consider whether such clauses would be regarded as exclusion clauses for the purpose of UCTA and s.3 of the Misrepresentation Act 1967. The court set out a number of factors for determining this. The court considered the question was multifaceted and that none of the factors was necessarily determinative. With these factors in mind, the court found that the clauses in question were basis clauses and not exclusion clauses and therefore (in keeping with other recent decisions) not susceptible to judicial control under UCTA, on the basis that:
- The language was not expressly that of exclusion of liability.
- There were other clear indications that this was not an advisory relationship. In particular: (a) the IFA’s article in its newsletter; and (b) the terms of certain confidential reports produced by the IFA for (and signed by) the Borrowers, stating that the IFA was acting as adviser and the fact that the Bank did not provide investment, tax or legal advice.
- The clauses could not sensibly be described as artificial or “rewriting history”; rather they affirmed it.
- The clauses were not to be found within a mass of standard terms as one might see in a typical consumer contract.
Even if the relevant clauses were exclusion clauses, the court concluded that they were “manifestly reasonable“. The court highlighted that the question in the instant case was unfairness rather than reasonableness, but held that – on the facts – the analysis and the result should be the same. In particular, the court stated that the clauses were a proportionate and legitimate attempt by the Bank to limit its exposure to a wider role for sound commercial reasons.
Consequently the court concluded that there was no “advice-based element of unfairness“.
The court forensically analysed whether each of the 49 alleged representations had been made by the Bank. The court concluded that the alleged representations had either not been made (by the Bank, at least) or were – to the extent that they were made – not false. Even if the misrepresentations had been made by the Bank, the court concluded that the evidence suggested the claims would have failed on causation and the court expressed doubt as to whether the alleged representations had been relied upon.
The court went on to consider the effect of clauses in the Loan Agreements which stated that no representations had been made. Taking a similar approach as it did in relation to the advice claim; the court found that these clauses were basis clauses which established a contractual estoppel. Citing Crestsign Ltd v National Westminster Bank Plc  EWHC 3043 (Ch), the court noted that these clauses served the “the useful function of removing a grey area as to what might or might not be a representation, [which] is very apposite here where many of the alleged representations were given orally in a quasi-social setting and where differences of emphasis could make all the difference“.
Again, the court considered that the clauses in question would be found to be reasonable for the purpose of UCTA even if they were found to be exclusion clauses. If the clauses were reasonable for the purpose of UCTA, then there was no reason to suggest that they would be unfair for the purpose of s.140A of the Act.
Unfairness on other grounds
The Borrowers also relied on a number of other (unspecified) clauses which were said to be unfair and other points of unfairness. The court rejected all such arguments. In particular, the court considered the Borrowers’ argument to the effect that, even if there was no positive misrepresentation by the Bank, it failed to warn the Borrowers of certain risks. For example, the Borrowers said that the Bank had not warned against the risk that the investment returns might not cover the interest due. However, there was no advisory duty on the Bank (in contrast with the IFA) and there was no “mezzanine” duty. This element therefore did not lead to any unfairness.
Accordingly, the court considered that the Borrower had clearly satisfied the burden of showing that there was no unfair relationship and the claims failed.
The decision will be welcomed by financial institutions which, unusually, have the burden of proof in unfair relationship claims. There is now clear guidance on the approach that the courts will take in such cases. The decision also follows a number of other recent mis-selling cases that cumulatively illustrate the difficulty for claimants that allege, in ordinary lender-borrower relationships, that financial institutions owed an advisory duty in relation to the product or scheme in question. Moreover, this is another case in which basis clauses have been found to be effective in negating the existence of an advisory duty of care.