31 May 2018

Basis clauses – an unfair relationship?

Linkedin

The High Court has rejected a claim by borrowers against a bank under s140A and 140B of the Consumer Credit Act 1974 (“CCA”) alleging that there was an unfair relationship arising from (inter alia) the terms of loan agreements, which agreements included ‘basis clauses’. The decision is the first reported case to consider the efficacy of basis clauses in this context, but is also of broader interest in relation to the steps that banks can take to ensure that basis clauses are enforceable and therefore ultimately offer the intended protection.

Background

The claimants (C) were two British couples resident in Spain. In 2005/6 they each borrowed substantial sums from the defendant bank (D), to fund investments in an attempt to mitigate Spanish inheritance tax. Each couple received advice on the investments from an IFA (whom C do not appear to have sued). The loans were secured against the investments themselves and C’s Spanish properties. 

The loan agreements contained a number of ‘basis clauses’ purporting to set out the basis upon which C and D were doing business, for example: 

  • Clauses making clear that D was acting as finance provider only and was not giving advice and that independent advice should be sought by C; and

  • Clauses providing that the loan agreement was the entire agreement between the parties, that D had not made any pre-contractual representations to C and that C had not relied on any such representations.

The investments underperformed and, in 2016, C brought proceedings against D under s140A and 140B of the CCA, alleging that there was an unfair relationship between C and D arising from: (i) misrepresentations and/or a breach a duty on D to advise; and/or (ii) the terms of the loan itself. C sought the removal of their indebtedness and discharge of the security. 

Decision

The burden in an unfair relationship claim is on D to disprove the allegation that there was an unfair relationship. The Judge held that D had done so for, amongst others, the following reasons:  

  • The bank had not given any advice (still less false advice) and had not assumed any duty to provide advice. Nor had it made any actionable misrepresentations. “Sales pitches” given by representatives of D constituted marketing rather than advice. Both couples had paid for and received advice from an IFA.

  • C were contractually estopped by the basis clauses from claiming D had a duty to advise or that they had relied on advice/misrepresentations. Even if the basis clauses had been exclusion clauses, they were reasonable and therefore enforceable.

  • As the basis clauses were fair/reasonable, they did not give rise to an unfair relationship.

Comment

The cause of action and remedies afforded by s.140A and 140B of the CCA are subject to the broad discretion of the Court; under s.140A(2)) the court “shall have regard to all matters it thinks relevant”. C’s case relied heavily by analogy on the position under the Unfair Contract Terms Act 1977 (“UCTA”). C argued that the reasonableness of the basis clauses under UCTA was a useful starting point in the unfair relationship analysis and that there was no great difference between fairness under CCA and reasonableness under UCTA (the Judge also commented that the test of fairness in other legislation (e.g. the Consumer Rights Act 2015) could also be relevant). The decision is therefore of broader interest in relation to the question of whether basis clauses can be impugned under UCTA.

When, if ever, is a basis clause an exclusion clause?

UCTA applies to exclusion clauses.  On the face of it, basis clauses are not concerned with excluding liability, but with making clear that there was no duty and no relevant advice or representation in the first place. However, the Judge cited Toulson J in IFE v Goldman Sachs [2007] 1 Lloyds Rep 264 at [68]-[69]: "a party cannot by a carefully chosen form of wording circumvent the statutory controls on exclusion of liability for a representation which has on proper analysis been made". Having considered all the facts, the Judge held that the basis clauses here were “plainly not exclusion clauses”. Broadly the Judge’s reasoning was that: 

  1. The natural language of the terms did not suggest exclusion of liability;

  2. The factual context in which the agreement was created is relevant. The Judge did not think that the basis clauses were an artificial attempt to rewrite history or depart from reality (rather, the Judge considered that they reflected the true pre-contractual position);

  3. The clauses providing that D had no duty to advise reflected the true position apparent from the parties’ dealings and the involvement of the IFA; and

  4. The clauses providing that there were no advice/representations served to remove the uncertainty arising from the fact that the alleged advice/representations were said to have been given in informal settings (a cocktail party and a lunch).

When are basis clauses reasonable?

If a clause is an exclusion clause, then reasonableness applies under UCTA. The Judge considered this test relevant but not definitive and found that a clause is more likely to give rise to an unfair relationship if it falls foul of UCTA. The Judge held the clauses were “manifestly reasonable” under UCTA. Broadly, his reasoning included that:

  1. The clauses were clear, there were sound commercial reasons for including them and they were a proportionate and legitimate attempt by D to limit its exposure;

  2. C had a choice in entering into the loan, and were advised on it by the IFA, a fact which the Judge described as “compelling”. The bank was entitled to assume that C were relying on the advice from the IFA; and

  3. The basis clauses providing that D had no duty to advise were supported by the facts. D had in fact given no advice to one of couples, whilst the other couple had already decided to enter into the loan before they had any contact with D.

Practical considerations

The enforceability of basis clauses typically contained in loan agreements is vital. The decision hints at steps a bank lending to consumers in particular might take to insulate such clauses from (a) an unfair relationship claim and/or (b) an attempt to impugn them under (for example) UCTA. It is noteworthy that the burden of proof in an unfair relationship claim is on the lender. Accordingly, it would be advisable to bear the following in mind in order to ensure as far as possible that basis clauses are enforceable: 

  1. Obtaining confirmation that borrowers are taking advice from an IFA can be very helpful. This will be more compelling if obtained separately from the terms of the loan agreement, particularly where the agreement is standard form and not specifically negotiated.

  2. Notwithstanding the presence of an entire agreement clause, the analysis by the Judge under UCTA/CCA took into account the background to the loan agreements, including previous dealings between D and C. A major consideration was whether the background facts supported the basis clauses (i.e. if the clause stated there was no duty or no advice or no reliance, did the facts support and reflect that?). As to this:

    2.1 The factual allegations centred in part on what was or was not said at a cocktail party and a lunch, which D had attended for marketing purposes. This highlights the dangers of such occasions, which are unlikely to be recorded in writing. It could come down to C’s word against D’s employees, recollected many years after the event. There is clearly a high degree of risk in relying on such recollections.

    2.2 It may well be impractical for a bank marketing its lending to consumers to avoid all such informal situations, but the risk may be mitigated if D makes clear at all other times in all other correspondence with the borrower that it is not acting in an advisory capacity and that the borrower should seek appropriate financial, tax and/or legal advice and rely solely on that advice. If that is done, and can be evidenced (i.e. because it is in writing), it will strongly influence a decision as to both: (i) the enforceability (or fairness) of the basis clauses; and (ii) whether there is an unfair relationship.

Case details: Carney and Ors v N M Rothschild & Sons Limited [2018] EWHC 958

Linkedin

KEY CONTACT

Edward  Davis

Edward Davis
Partner

T:  +44 20 7809 2327 M:  Email Edward | Vcard Office:  London

Sue Millar

Sue Millar
Partner

T:  + 44 20 7809 2329 M:  + 44 7825 625 898 Email Sue | Vcard Office:  London

Paul Hollands

Paul Hollands
Senior associate

T:  +44 20 7809 2083 M:  +44 7780 483 493 Email Paul | Vcard Office:  London