Must a lender brief a borrower on lending limits?

A recent lender favourable Privy Council decision has put lender duties back in the spotlight, an area in which we have seen a lot of focus in recent years, particularly in the context of misselling claims.

Claims can be for breach of a statutory duty, or for breach of contract, but claims can also arise from statements made in the selling process, or a failure to disclose certain information. These claims could be for misrepresentation, negligent misstatement or fraudulent misrepresentation.

The Deslauriers case considered whether a lender is required to disclose lending limits and policies to a commercially experienced borrower and whether a failure to do so could result in a claim for misrepresentation or negligent misstatement.

The Deslauriers case

Following appeals in the courts of Trinidad and Tobago, the Deslauriers case was brought before the Privy Council, which has the power to consider decisions from overseas territories. The case concerned a facility which, in part, was intended to fund a property development in Trinidad and Tobago. The lender’s refusal to advance further money to the borrower was challenged but the lender claimed that making further advances would result in lending limits being exceeded.

Before the loan was agreed, the lender, a non-bank, was asked to explain the differences between borrowing from itself and from banks. The borrower believed that the lender had failed to tell it about any internal or external lending limits or policies that might affect the availability of additional loans to fund future phases of the development. The borrower maintained that the lender was aware of the need for further loans.

The borrower claimed that it was entitled to damages because the lender’s failure to disclose the information relating to the lending limits it was subject to amounted to misrepresentation, and that the lender was under a duty to inform the borrower of any lending limits. Failure to do this amounted to a negligent misstatement.

Misrepresentation

After looking at the pre-contractual correspondence, the court found that there had been no misrepresentation. The analysis of correspondence also led the court to conclude that the borrower had not clarified that they would need to borrow more money in future.

Negligent misstatement

The borrower, in its claim for negligent misstatement, was able to rely on correspondence sent between the parties after conclusion of the contract. But to prove negligent misstatement it was necessary for the borrower to demonstrate that a duty of care, owed to it by the lender, had been breached.

The court evaluated the relationship between the parties and held that, as the borrower was highly experienced in dealing with lenders, the relationship was one of mutual commercial benefit. It was an arm’s length relationship in which each party was seeking to further its own interests. Given the borrower’s experience, it would be difficult to argue that the relationship was one existing between a professional advisor and client.

Consequently, the borrower’s claim for negligent misstatement failed. The lender did not owe the borrower a positive duty of care regarding disclosure of lending limits and policies, and therefore no duty to avoid negligent misstatement about these restrictions was breached. The court also stated that even if the lender was aware of the borrower’s desire for future borrowings, this would not support the argument of a breach of duty of care.

Conclusion

Privy Council decisions, although having the force of law in the UK, are not legally binding in English courts but they are considered to be highly persuasive. The persuasive nature of this case is likely to be bolstered by the fact that the decision relating to negligent misstatement was based on English law.

This decision provides comfort to lenders as it offers clarity on the scope of a lender’s duty to disclose information, in particular internal lending policies.