Promoting Risky Loans

Generally speaking banks cannot be said to be negligent in concluding a facility with a borrower, or in advancing moneys under it. A bank will conduct due diligence for its own purposes, but it would be remarkable in a commercial context for an English court to treat a bank as being in breach of duty to the borrower because it failed to carry out sufficient enquiry into its capacity to service the debt. This is not undermined in any way by the recent decisions in England, where banks have been held to be contributorily negligent in the actions they have brought against surveyors for negligently valuing property the banks took as security for loans.

When some borrowers defaulted, the banks found that they could not recover fully against the property, which the surveyors had overvalued. In some of these cases the banks' damages against the surveyors have been reduced, on the basis that the banks were contributorily negligent in, for example, One hitter pipe making inadequate inquiries of borrowers, or in lending too high a proportion of the value of the property without taking the status of the borrower into account. Yet these cases say nothing about any duty which banks have to borrowers: the essence of contributory negligence is a failure to take reasonable care of one's own interests and does not necessarily connote any failure to take reasonable care in relation to others.

Exceptionally, if a bank promotes lending which is inherently risky, especially if the borrowers are relatively unsophisticated, the courts are likely to look more sympathetically when things turn sour and borrowers sue. The factual circumstances most likely to generate successful claims are where lenders, in the case of an unusually risky type of facility, have not explained to borrowers the grave risks involved. A good illustration is provided by the raft of litigation in Australia and New Zealand in relation to the foreign-currency loans, which banks promoted to customers in the 1980s. Their advantage was said to be the low interest rates. In a number of these cases the courts have held the banks to be liable, mainly because of a specific statutory requirement that corporations not engage in misleading or deceptive conduct. Borrowers have successfully argued that it was misleading or deceptive conduct for the banks not to explain to unsophisticated borrowers, such as farmers and small business people, that foreign-currency loans entail great risks, and that it was advisable to enter a forward-exchange contract to hedge the exchange risk. Guide Economics.