Scope of duties owed to borrowers by banks and valuers

The recent decision in Rehman v (1) Santander and (2) BNP Paribas is relevant to both banks and valuers in considering the duties owed to borrowers. In a summary judgment application the High Court considered the scope of duties owed by a bank to borrowers when the bank chooses to obtain a valuation report; the entitlement of a borrower to rely on that valuation and the circumstances under which a bank-client relationship may give rise to fiduciary duties.

The first defendant bank (Santander) and the second defendant valuer (BNP) were entitled to summary judgment dismissing claims brought against them by the former directors and shareholders of a nursing home company, and the bank was entitled to judgment on its counterclaim against the claimants under a personal guarantee.

Background

The claimants had been the directors and shareholders of a company which operated two nursing homes. The company was considering refinancing its loan facilities, and entered into discussion with Santander accordingly. Heads of terms were agreed which required: (1) the valuation of the businesses and assets being charged as security; and (2) the provision of personal guarantees by the claimants.

Santander instructed BNP to provide a market valuation of the businesses and assets. BNP's subsequent report, provided a valuation of £3.65 million, an amount in excess to the minimum required by Santander. The report was stated to be private and confidential, and that it could not be disclosed or relied on by a third party without BNP's prior written consent.

Santander made an offer to lend £2 million at a fixed rate, which the claimants accepted, and the claimants signed an "all moneys" guarantee limited to £2 million. In the course of making this offer, Santander disclosed to the claimants that the valuation they received was for an amount of £3.65 million. From the thrust of the claimants’ argument it appears that they maintained that they relied on the valuation in deciding whether to provide the guarantees to the bank.

The company then defaulted and went into administration, then liquidation. Santander demanded repayment under the guarantee, which the claimants resisted by bringing a claim against Santander and BNP.

The Claims

Against Santander, the claimants sought to rescind the guarantee, and claim damages or equitable compensation under the following heads of claim:

1. Santander was in breach of a duty of care to ensure that the valuations were undertaken by a competent valuer (“the Negligence claim”). Albeit, the Court was not required to consider the full details of any precise failing in the valuation.
2. By sending the valuation reports to the claimants, Santander had impliedly represented, fraudulently, or negligently, that the valuations were a true and fair estimate of the nursing homes’ market value, and that the claimants could rely on them without obtaining their own valuations (“the Misrepresentation claim”).
3. Santander was in breach of a fiduciary duty to advise the claimants to obtain their own independent valuations (“the Fiduciary Duty claim”).
4. The guarantee had been discharged because the guaranteed contract had been substantially altered without the guarantor’s consent (“the Guarantee claim”).

The claimants also sought damages against BNP for an alleged breach of duty of care owed to them in respect of the valuations (“the Valuation” claim”).

Finally, Santander brought a counterclaim against the claimants for the sums due under the guarantee (“the Counterclaim”).

High Court Decision

For all five claims brought by the claimants applications for summary judgment were brought and upheld on the basis that the Court held that the claims had no real prospect of success:

The Negligence Claim

The transaction was an ordinary commercial one which did not impose a duty of care on Santander. The fact that a bank obtained a valuation did not establish a duty of care on a bank to ensure that a property is properly valued. It did not matter in this case that Santander had disclosed aspects of the report to the claimants, and it still did not give rise to a duty of care when otherwise it did not exist.

The Misrepresentation Claim

It was held that it would be unreasonable to conclude that, in passing on to the company the result of the valuation it had obtained for its own internal purposes, and then agreeing to enter into the facility agreement, Santander had somehow made a representation about the accuracy or reliability of the valuation or the competence of the valuer.

The Fiduciary Claim

The fact that the claimants had a long-standing relationship with Santander and trusted it did not convert the banker/customer relationship into a fiduciary one. A fiduciary relationship could only arise if it was reasonable to expect the bank to subordinate its interests to those of the customer or prospective guarantor, and that was not alleged.

The Guarantee Claim

There was no real prospect of the claimants showing that the guarantee had been discharged by reason of a material variation within the rule in Holme v Brunskill (1878) 3 QBD 495. The guarantee on its proper construction was an "all moneys" guarantee and the course of dealing between the parties had remained within the scope of that contemplated by the guarantee.

The Valuation Claim

The principle argument made by the claimants was that BNP should have known that their report would be disclosed to them by Santander because BNP was aware of the claimant’s involvement. There was no other evidence provided and the court held that the claimants had no real prospect of establishing that BNP consented to the giving of the valuation reports to them or that BNP knew that Santander was likely to disclose the contents of the report them, on which they may then rely. The Court placed reliance on the presence of the disclaimers concerning reliance in the report and also the application of the decision in Scullion v Bank of Scotland Plc (t/a Colleys), applied.

In relation to Santander’s counterclaim, Santander was entitled to judgment, with the issue of quantum to be assessed (para 95 of the judgment).

Comment

The decisions in this case are positive for banks when faced with disgruntled guarantors who are trying to avoid payment, and provides further assurances in relation to the scope of a bank’s duty of care and fiduciary responsibilities to their borrowers. For valuers, it highlights the importance of understanding the potential use of the valuation report and having effective disclaimers which negate any duty of care owed to non-clients.

Further reading:

Rehman v (1) Santander and (2) BNP Paribas [2018] EWHC 748 (QB).

Scullion v Bank of Scotland Plc (t/a Colleys) [2011] EWCA Civ 693.

Law-Now: Court of Appeal finds no duty of care on buy-to-let rental valuation.