In Thomas v Triodos Bank NV ([2017] EWHC 314 (QB)) the High Court found that a defendant bank owed and breached a duty to explain the financial implications of fixing the interest rate on the claimants' loans. This case is noteworthy as it provides an as-yet rare example of the successful deployment of an argument that a bank owed a mezzanine duty to its customer of the form identified in Crestsign Limited v National Westminster Bank plc ([2014] EWHC 3043 (Ch)) (falling somewhere between a full advisory duty and the standard duty not to make misrepresentations).
The claimants, Mr and Mrs Thomas, ran an award-winning organic farming business and in 2006 transferred their borrowing to the defendant, Triodos Bank. In June 2008 they switched the greater part of their borrowing to a fixed rate in two tranches, in each case for a term of 10 years. Following the drop in interest rates that began in September 2008, the claimants found themselves tied to a far higher rate of interest than the current market rate. As the base interest rate continued to fall, the claimants contacted the bank to enquire about the cost of switching back to paying a variable rate of interest.
The bank's standard terms and conditions provided that on the early repayment of fixed-rate loans, an "extra repayment premium" was payable. The amount of the premium was the difference between the fixed interest rate and the present rate on the sum being repaid over the unexpired term of the loan. The size of the difference between the fixed rate and the low post September 2008 interest rates, combined with the long loan term, meant that this amount was significant, calculated to be approximately £96,000 (as at May 2009).
The claimants claimed against the bank for not explaining in June 2008 the financial consequences that would flow if they tried to get out of the fixed rate before the expiration of the 10-year term and further that the bank positively misrepresented the financial consequences.
On the facts, the court was clear that no advisory relationship existed between the claimants and the bank. It was also uncontroversial that the bank had a duty to take reasonable care not to misstate any facts on which the claimants could be expected to rely (derived from the well-known case of Hedley Byrne v Heller ([1964] AC 465)). However, a contentious point was whether the bank owed an additional 'mezzanine duty' (so called because it would be less onerous than the duty in an advisory relationship, but more onerous than a Hedley Byrne duty not to misstate) to explain the financial implications of fixing the interest rate on the claimants' loans.
The existence of such a mezzanine duty has been the subject of much judicial discussion since the High Court decision in Crestsign, which identified a duty on a bank that embarks on an explanation of financial products that it wishes to sell to take reasonable care to give that explanation accurately and as fully and properly as the circumstances demand. This had been derived from the comments of Justice Mance (as he then was) in Bankers Trust International plc v PT Dharmala Sakti Sejahtera ([1996] CLC 518).
There has been disagreement as to the existence and extent of this duty since Crestsign. Notably, the High Court case of Thornbridge Limited v Barclays Bank plc ([2015] EWHC 3430(QB)) did not consider that Bankers Trust was "authority for a wider or broader duty to provide information in the absence of an advisory relationship". More recently, Property Alliance Group Ltd v The Royal Bank of Scotland Plc ([2016] EWHC 3342 (Ch)) declined to find such a duty on its facts and considered that such a duty would arise based only on the application of general principles to their specific facts. In the meantime, in giving permission to Crestsign to appeal, the Court of Appeal indicated that Crestsign had a real prospect of success in its arguments as to a broad information duty (Crestsign Limited v National Westminster Bank Plc ([2015] EWCA Civ 986)). However, the appeal was later abandoned, leaving no higher authority in this area.
Against this background, the court considered whether such a duty arose on the specific facts of the instant case, finding that it did. Of significance to the court was the fact that the bank had advertised to the claimants that it subscribed to the Business Banking Code (a voluntary code of practice) which included a promise – directed to the customer – that if the bank was asked about a product, it would give the customer a balanced view of the product in plain English, with an explanation of its financial implications. Further, there were no disclaimers, 'basis' clauses or exclusions in the terms and conditions which applied between the claimants and the bank which would lead to the conclusion that the bank was not willing to assume responsibility for honouring that promise. The court held that the scope of this duty, which it referred to as an "information duty", did not require the bank to provide a "comprehensive tutorial", but did require an explanation in plain English of what fixing the rate entailed and the consequences, including the financial consequences of terminating the fixed rate before the end of the period.
Alleged misrepresentations and breaches of duty
The claimants alleged several misrepresentations on the part of the bank, two of which are considered in this update.
One such misrepresentation was said to have occurred during a May 28 2008 telephone call between one of the claimants and Mr Price, the claimants' relationship manager at the bank, in which the court concluded that Price probably did say something along the lines that it would be sensible to think of fixing for 10 years rather than five years or two years, because the 10-year rate was lower. The court considered that such a statement would have amounted to a misrepresentation, because it told only half the story – omitting the critical factors that the longer the period of the fix, the greater the likelihood of the claimants wanting to repay capital before maturity and the longer the unexpired term at the point of repayment, the greater the repayment premium charge. However, the court also considered that if Price's response did not amount to a misrepresentation, it would have amounted to a breach of the information duty that the court had identified, as it failed to give the full picture by explaining the potential downsides to fixing for a longer period.
Another misrepresentation was also said to have occurred on the same day, where the claimants alleged that Price had stated that the repayment premium would reflect only a proportion of the difference between the fixed and present rates. The court was unable to conclude that Price had actually stated this, but did find that Price had stated something that gave that impression. This was insufficient to amount to a misrepresentation, but did represent another instance of Price's failure to discharge the information duty on the bank.
Having identified breaches by the bank of both its Hedley Byrne duty not to misrepresent and also its information duty to explain, the court found for the claimants on liability. A detailed discussion of the quantum consequences followed in the judgment, which is not considered in this update.
This decision is an interesting addition to the post-Crestsign body of case law about the existence and extent of a mezzanine duty. The recent Property Alliance Group case did not identify whether such a duty was a species of advisory duty or provide guidance as to what circumstances would give rise to one. In this vacuum, this case provides welcome clarification. It is also significant in that it demonstrates an example of circumstances where, having failed to establish that a misrepresentation had occurred, the claimants were able to fall back on this duty. The case is also unusual in the court's recourse to extra-contractual documents; previous attempts to do so in this context have usually failed (eg, in Flex-E-Vouchers Ltd v Royal Bank of Scotland ([2016] EWHC 2604 (QB)), where the claimant sought to import the rules of the regulatory regime into its contract).
The fact-specific nature of this case may limit its applicability to other financial mis-selling claims. Deriving the mezzanine duty from a bank's subscription to a code of practice is interesting and of broader application. However, the claimants were fortunate that the bank's terms and conditions included no disclaimers that would have been inconsistent with the existence of such a duty. Most high street banks' terms and conditions contain such clauses.
This case ultimately does not change the fact that the mezzanine duty is a controversial and nuanced topic and would benefit from clarification in the Court of Appeal.
For further information on this topic please contact Chris Whitehouse or Davina Given at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
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