Terms of business protect banks from liability for negligence

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Banks accused of negligent advice and breach of their duty of care in making a loan involving interest rate swaps to a customer have been told they have no case to answer.

The case highlights how a ‘basis clause’ in a contract can protect an organisation against a claim for negligence where an ‘exclusion clause’ (see Brunel News March 2014) would be unsuccessful.

NatWest and Royal Bank of Scotland advanced £3.45 million, linked to a ten year interest rate swap, to family property firm, Crestsign, in 2008. Crestsign initially benefited from the arrangement, but the interest rate swap then became prohibitively expensive as a result of the global banking crisis. Repayments rocketed to over £180,000, on top of 2% interest. Crestsign brought the case against its banks, arguing that they had a common law duty of care when giving advice and that they should have made sure that Crestsign was making an informed decision about the risks involved in the contract.

Tim Kerr QC, sitting as a High Court deputy judge decided that the banks had in fact advised Crestsign about the arrangement and that the advice was negligent. However, he said that there was no liability because Crestsign had agreed that the bank had no duty to advise. “The Risk Management Paper and the two sets of terms of business were unequivocal; they defined the relationship as one in which advice was not being given,” he said.

The case swung on the fact that the relevant clauses were seen to be ‘basis clauses’ rather than ‘exclusion clauses’. The judge decided that basis clauses in the contract prevented Crestsign from saying that the banks had offered it advice. He accepted, however, that the clauses would have been unreasonable had they been deemed to be exclusion clauses with the intention of excluding liability.

James Burgoyne, Director – Claims & Technical, Brunel Professional Risks said, “The judge was highly critical of the banks conduct in this case and said that they had not shown themselves to be ‘worthy of the trust placed in them’ by Crestsign. In finding they had no case to answer however, the case demonstrates the importance of businesses having a well drafted contact and terms of business if they need to defend themselves against claims of negligence.

The case has been reported by The Lawyer magazine and law firm Pinsent Masons.