Contributory negligence – Plaintiff bank granting further facilities following gross over valuation of factory – Failure on last occasion to obtain agreed additional security – Whether prudent lender test to be applied to each decision separately – Damages reduced by 30%
As bankers since 1975 for a small food processing company, the plaintiffs had a charge over its factory in East London. After 1985 turnover began to decline. As at April 1988, the bank afforded an overdraft up to £300,000 and a medium term loan of £76,000. Following requests for further finance, the bank had the factory revalued by the defendant surveyors who in November 1988 reported a figure of £950,000 – subsequently admitted to be negligent, the true value being nearer £450,000. Over the following 18 months the bank increased its borrowing limits on four occasions (facilities 1-4) commencing with a decision of the branch manager, W, who had dealt with the company and its two directors for many years, to raise the overdraft limit to £450,000 notwithstanding a pessimistic assessment by a junior colleague. W granted facility 2 in March 1989, when he and the area manager approved a total borrowing of £650,000 of which £450,000 was by way of medium term loan; a decision partly prompted by a competing offer from another bank. On December 5 1989, the company obtained facility 3 when W’s successor, having weighed optimistic forecasts from the company’s accountant against a reported loss of £133,000 for the previous year, raised the overdraft limit temporarily to £400,000. On June 4 1990 facility 4 was provided, increasing the total facility to £982,000 against directors’ guarantees secured by a mortgage over a house. After pressing unsuccessfully for execution of the mortgage the bank learned in October 1990 that trading over the previous 18 months had been disastrous. The bank’s receiver sold the factory for £390,000 and realised substantial book debts. The overall loss was £271,000. The defendants claimed that the plaintiffs had been contributorily negligent in approving facilities 2, 3 and 4.
Held The award should be reduced by 30%.
1. Although the supposed value of the factory underlay all four decisions, the defendants had correctly insisted that each required separate consideration in order to determine whether the bank had taken reasonable care to protect its own interests by acting as a prudent lender: see per May J South Australian Asset Management Corporation v York Montague Ltd [1995] 2 EGLR 219.
2. An error of judgment did not amount to negligence, contributory or otherwise, unless it was one that no reasonable well informed and competent professional could have made. The approval of facility 2 was not negligent as the debt level was still sustainable and W had rightly considered the interests of a long standing customer and its 40 employees. On balance the same could be said about facility 3, though that provision clearly went to the limit of prudent lending.
3. In approving facility 4, the bank imprudently allowed the supposed strength of the security to outweigh the borrower’s proven inability to service the loan and eventually repay. The subsequent failure to obtain monthly accounts and complete the house mortgage was manifestly imprudent.
Edward Cohen (instructed by Tarlo Lyons) appeared for the plaintiff; Graham Eklund (instructed by Cameron McKenna) appeared for the defendants.