Do banks have a legal duty of care to business customers who default on loans?

The Supreme Court is set to deliver a ruling which could have major repercussions for business banking customers across the country. In a potentially landmark case, the Court will seek to address the issue of whether banks owe customers a legal duty of care if and when they default on loans. 

The matter has arisen following a claim by an entrepreneur, who is locked in a long-standing dispute with the Royal Bank of Scotland. Property developer Oliver Morley has accused RBS Global Restructuring Group of breaches of duty, intimidation and threats of economic duress. These actions, he claims, negatively impacted his business. 

The High Court and the Court of Appeal have so far rejected Mr Morley’s claims. But now the Supreme Court will be asked to consider whether this decision was correct or if duties of care are indeed owed to SMEs who default on loans. If they decide Mr Morley has a case then it will have major implications for the banking sector.

Eleanor Stephens, recovery and insolvency specialist at Harper James Solicitors, offers her expert analysis:

'The question of whether banks owe business customers a duty of care when they default on loans is one that has been touched upon for many years in case law, with cases generally coming down in favour of the banks so far. If Mr Morley can persuade the Supreme Court to look at his matter, dismissed by the Court of Appeal in March, it may provide some clarity to the many businesses that find themselves in a difficult situation as a result of a default on their lending.

Case law against banks have established that banks owe a limited duty of care to customers. However these duties are fairly light, for example against deliberate mis-selling or providing misleading information, and if providing advice, ensuring that such advice is full and accurate. Once a bank brings a company into the restructuring arena, their main duty is to protect the bank's interest in the loan assets, not to protect the customer as a separate entity.

In the case of Oliver Morley, the court agreed that while RBS was providing banking services, including in relation to its restructuring conduct and proposals, these should be provided with reasonable care. But the bank’s obligation to provide banking services with reasonable skill and care comes to an end once the loan has expired, by default or by nature end of term, and at that point the bank’s right to obtain repayment of the loan prevails over any duty to the borrower.

This case will be of particular interest to borrowers who have been transferred by their lending banks into "business support" or restructuring departments, where the directors can lose control of their companies and have little recourse if the business is sent down a path they don't agree with. Often companies, particular in challenging economic climates, find their only option is to take out a loan to allow their company to continue, but they have limited options and limited negotiating capacity when doing so. While these are considered equal commercial transactions, in reality, the ability to change terms or introduce more protection for the consumers are limited.

Lending is only a regulated activity in relation to mortgages and consumer lending, so many loans fall outside of this and claimants against banks in this situation often find that their only recourse is common law. With more and more companies likely to default on their loans in the coming months, it remains to be seen how the banks will react. Ultimately, the banks will need to protect their own position, and any limit on their ability to do this, brought in by an increase in the duties owed to customers, may hinder their future desire to provide credit, and may have a negative impact on business lending in the long term. A balance has to be had between the rights of commercial lenders and their customers, both of whom may welcome clarity if Morley is decided before the Supreme Court in due course.'