Banks and other lenders must serve their clients with reasonable care and skill – but they are not obliged to act against their own economic interests. The Court of Appeal resoundingly made that point in the case of a commercial real estate developer who borrowed £75 million on the eve of the 2007 property crash.
After he failed to repay the money, the developer arrived at a compromise with the lender, a high street bank, whereby £10 million of the loan was written off. Certain properties in his portfolio were transferred to a subsidiary of the bank at a price that was well above their market value. Remaining properties were retained by the developer on payment of £20.5 million to the bank.
The developer later launched proceedings, alleging that the bank had breached its duty to provide its services with reasonable care and skill. He claimed that the bank had acted in bad faith in coercing him to enter into the compromise. He said that unlawful pressure placed upon him amounted to intimidation and that the compromise agreement was voidable for economic duress.
Rejecting his claim, however, a judge found that the bank was in no way at fault in its conduct of commercial negotiations, which were carried on at arm’s length and with the benefit of legal advice on both sides. The developer was not coerced into the agreement and the bank had acted in good faith throughout. He had in any event affirmed the agreement and, for five years, had taken no steps to set it aside.
Dismissing his appeal against that outcome, the Court observed that the developer needed no lessons in commercial negotiation skills. The duty that the bank owed to him did not extend to an obligation to advise him how best to resist its attempts to get as much money out of him as it could.
Everything the bank did was rationally connected to its commercial interests and its objective throughout was to recover as much of the loan as possible. Acquisition, via its subsidiary, of part of the developer’s portfolio was only ever a second-best means of achieving that objective. The developer had persuaded the bank to accept the compromise despite its reluctance to do so.