The High Court has confirmed the effectiveness of contractual carve-out by bank of duty of care and advisory relationship and that a bank did not owe a fiduciary duty

by Reed Smith
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Facts

Barclays Bank plc acted as agent and offshore security trustee under a Facility Agreement, whereby a syndicate of lenders, including Barclays Capital, lent US$45 million in late 2007 to Svizera, a Dutch company, with Maneesh, its Indian parent company, acting as guarantor.

Following a payment default under the Facility Agreement, Barclays served an acceleration notice on Svizera, but the balance remained outstanding. Barclays then served demand against Maneesh under the guarantee, but the demand was not satisfied.

Barclays issued a claim, on behalf of the lenders, against Svizera and Maneesh for US$35 million outstanding under the Facility Agreement, together with fees, costs and interest. It was important for Barclays to obtain a final judgment on the merits from the English High Court in order to enable it to enforce against assets of Svizera and Maneesh over which Barclays did not have security, in addition to those assets over which that it already held security. In their defence and counterclaim, Svizera and Maneesh pleaded a number of different arguments, including, inter alia, that Barclays misrepresented that it would obtain an INR/USD currency swap for Svizera to be entered into at the time of the Facility Agreement and that Barclays was in breach of an advisory duty. Barclays denied that any representation was ever made and relied upon a series of contractual terms and estoppels to defeat the breach of duty claim.

Held

Mr Justice Flaux upheld Barclays’ claim under the Facility Agreement in full and rejected Svizera and Maneesh’s defences and counterclaim in their entirety and held that Barclays is entitled to recover in full the sums claimed.

He rejected the defendants’ evidence that there had been any representation in respect of an INR/USD currency swap; there was no documentation to suggest this had been the case and the judge did not accept that any such oral representations had been made either. Indeed, the judge commented in his judgment that Barclays’ witness had provided “honest and straightforward” evidence and, in contrast, was highly critical of the defendants’ witness’ evidence, commenting that he did not regard him as a satisfactory witness and on several occasions referring to the evidence given as being untruthful.

On the alleged duty of care and advisory relationship, the judge commented that the defendants’ case was “completely hopeless on a number of levels”. He found that, on the facts, Barclays had not given any advice, but in any event, as a matter of law, there would not have been an advisory relationship or any duty of care. The judge referred to Grant Estates Ltd v Royal Bank of Scotland plc [2012] CSOH 133 in which Lord Hodge laid down a number of propositions in relation to a delictual or tortious duty of care. Mr Justice Flaux held that the application of those propositions to the present case undermined any case in negligence: (i) the contractual, legal relationship between the lenders and the defendants expressly excluded any advisory relationship or duty and no such duty could be inferred; (ii) it was “inherently unlikely” that Barclays would have undertaken an advisory relationship as it did not provide an advisory service at that time; and (iii) in any event, certain provisions of Barclays’ mandate letter would have constituted a contractual estoppel precluding the defendants from alleging reliance on any advice (even if they had done so). Finally, the judge also rejected the notion that there had been any “genuine misunderstanding” between the parties. Moreover, in relation to a last minute allegation made by the defendants just prior to the start of the trial, Mr Justice Flaux held that Barclays did not owe any fiduciary duty to the defendants.

Implications

Lenders can take comfort from this confirmation by the Court of the effectiveness of the usual contractual terms between lender and borrower relating to the nature of their relationship. The case also reminds lenders to continue to exercise care and to document carefully any oral discussions with their borrowers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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