The High Court has considered for the first time whether "basis clauses" which seek to limit the nature of the lender's relationship with its borrower are unfair (and therefore susceptible to be set aside) in the light of consumer credit legislation. In this briefing, Jolyon Connell and Kate Allass review the important recent decision in Carney v Rothschild and discuss its implications for banks.
Can a customer rely on consumer credit legislation to argue that an agreement between the bank and its customer is unfair, such that loans and associated security can be set aside? This question was considered recently by the High Court for the first time in the case of Carney & Others v N M Rothschild & Sons Limited .
For the purposes of raising funds to invest, Mr and Mrs Carney (together with the other claimants, the Customers) took out loans (the Loans) from Rothschild during 2005 and 2006, each such Loan being secured against the respective Customer's home in Spain. Rothschild's terms and conditions provided amongst other things that: (a) Rothschild was acting only as a lender and was not providing the Customers with any advice about the investments; (b) the Customers were to take independent tax and legal advice; (c) no reliance could be placed on any representations made beyond those contained in the written agreement; and (d) the Customers understood that the independent financial adviser (IFA) they had appointed was acting as an agent for the Customers, not for Rothschild. These types of clauses are known as Basis Clauses, as they set out the basis on which the parties are willing to contract.
The investments under-performed to the extent that they did not generate sufficient returns to enable the Customers to discharge the interest owed on the Loans. The debt of each Customer extended to several hundred thousand Euros and the Customers' homes were therefore at risk as security for the Loans.
The Customers sued Rothschild in England in 2016 seeking the discharge of the security. As many of the ordinary causes of action were by then time-barred under the Limitation Act 1980, the Customers pursued this claim under section 140 of the Consumer Credit Act 1974 (the CCA, claims under which normally benefit from a 12-year limitation period). The CCA states that:
(1) The court may make an order under section 140(B) in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement...is unfair to the debtor because of one or more of the following – (a) any of the terms of the agreement or of any related agreement; (b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement; (c) any other thing done (or not done) by the, or on behalf of, the creditor...;
(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters related to the debtor)...
An order under this section in connection with a credit agreement may do one or more of the following - ...(c) reduce or discharge any sum payable by the debtor...by virtue of the agreement; (d) direct the return to any surety of any property provided by him for the purposes of a security ;..."
In summary then, section 140A(1) CCA says that an agreement between creditor and debtor can be deemed unfair (and set aside) if (i) the terms of the agreement themselves are unfair and/or (ii) even if the terms of the agreement themselves are fair, the relationship between the debtor and creditor is unfair – for example, because it is so one-sided as to limit the debtor's ability to make a choice. Available remedies under section 140(B) CCA include the debt being reduced or written off and/or any security being returned to the debtor.
The judge held in favour of Rothschild and dismissed the claims: neither the terms of the Loans nor the relationship between Rothschild and the Customers was considered to be unfair pursuant to the CCA. As to the terms, the judge considered that these were not unfair because:
(a) the terms were not exclusion clauses (which were more likely to be deemed unfair and invalid) which sought to exclude liability which might otherwise arise. They were basis clauses which sought instead to make it clear that no such liability was ever to arise (rather than arising and needing to be excluded)
(b) those basis clauses were a proportionate and legitimate attempt by Rothschild to limit its exposure to a wider (advisory) role and that attempt was made for sound commercial reasons
(c) as there was already a separate IFA advising the Customers, Rothschild was entitled to assume that the Customers would rely on the IFA (and not the bank) for advice. The terms simply made that position clear, and
(d) the relevant terms were stated clearly and were easily visible within the contractual documents (ie not buried among reams of small print).
As to the relationship, the judge held that this was not unfair either because:
(a) the Customers alleged that Rothschild had been acting as an adviser, which would have increased the likelihood of the relationship being unfair due to the inherent degree of reliance placed on an adviser by the advisee, and had given bad advice. However, the factual evidence indicated that Rothschild was in fact only acting as a lender and not as an adviser (so could not have given any advice – good or bad). In particular, the judge placed particular emphasis on the fact that each of the Customers had an IFA providing independent advice about the investments and also independent lawyers providing legal advice concerning the Loans and the investments. Consequently, the possible inequality of arms between the parties was offset to a considerable extent
(b) the Customers were put under no pressure by Rothschild to enter into the Loans, they did so of their own volition in order to pursue an investment strategy in which the bank performed no advisory role, and
(c) having determined that the need to assess suitability under Mortgage Conduct of Business rules (MCOB) did not apply in this case because Rothschild had not recommended or advised a particular product, in case an analogous duty arose as a matter of common law the judge considered the hypothetical question of whether Rothschild might have acted unfairly by failing to take account of the Customers' ability to repay the loans (ie in breach of MCOB 11). He found on the facts that Rothschild had discharged its duty by considering whether each Loan was affordable on the basis of the financial information provided by the Customers in their application forms, without making further enquiries.
This is a significant judgment for lenders and one which will come as a considerable relief. Had the Customers succeeded in their challenge, it could have exposed Rothschild and other banks to a multitude of possible claims by debtors seeking to rely on consumer credit legislation (either the CCA or its successor legislation) to avoid liability/security under their loans. Instead, lenders are now more likely to be able to rely on their basis clauses within their terms.
Notwithstanding Rothschild's victory in this case, banks should still take caution. While the judge did not consider the relationship between Rothschild and the Customers to be inherently unfair in this case, each case turns on its own facts. Rothschild was able to rely in particular on the fact that the Customers had the benefit of independent advice from a lawyer and, particularly, an IFA. Had that not been the position, the outcome of this case may have been different. Banks and other creditors should therefore proceed with caution, especially when dealing with any customers borrowing to invest without separate professional advisers. In those cases, there is a far greater risk that a lender might inadvertently stray into the (more burdensome) territory of adviser, rather than purely a lender.
When considering whether or not a lender was acting as an advisor to a customer, broadly speaking the court is likely – as it did in this case – to consider three types of evidence: witnesses' recollections (which will have faded and changed over time); contemporaneous documents and correspondence (which may not be conclusive); and the terms of the agreement(s). It is therefore imperative that the lender's terms and conditions spell out clearly what the lender considers the position to be, as it is likely that significant weight will be placed on those terms if ever a dispute arises. Clear, strong and compliant terms should prove of great assistance in the defence of any claim, as Rothschild found in this case.
Clearly this judgment will not change the position for those lenders who also provide within their remit investment advice to customers. Those lenders will still be subject to the existing regulatory obligations placed on those providing investment advice and those regulations may render the basis clauses as invalid. The provision of lending and advice together is also likely to increase significantly the chances of the relationship being considered unfair under the CCA, albeit advice alone will not be determinative of the point and other factors will also be considered.
It is also worth noting that the s140A CCA unfair relationship provisions have broad application and empower a court to make orders in relation to credit agreements within the scope of the CCA. As such, the powers are not limited to regulated credit agreements.
If you require further information about anything covered in this briefing, please contact Jolyon Connell (+44 (0)20 3375 7205), Kate Allass (+44 (0)20 3375 7220) or Grania Baird (+44 (0)20 3375 7443) or your usual contact at the firm on +44 (0)20 3375 7000. You can find further information about our Disputes team here.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, September 2018