Two syndicated bank loans arranged to finance purchase of commercial property – Plaintiff banks participating in loans – Loans subject to mortgage indemnity guarantee policies arranged by defendant – Borrowers defaulting on loans – Insurers only partially liable to indemnify plaintiffs due to non-disclosure – Plaintiffs alleging defendant liable for shortfall – Preliminary issue whether defendant liable to plaintiffs for failure to discharge duty of disclosure as underwriter of policies – Judgment for plaintiffs.
The proceedings concerned two syndicated bank loans. The purpose of each loan agreement was to finance the purchase by the borrower of commercial property in London. The plaintiff banks each participated in the loans. The loans represented 90% of the valuation of the properties. The defendant was appointed as agent in the loan agreements and was expressed to be responsible for the duties defined in the security documents. Each loan had the benefit of mortgage indemnity guarantee policies issued by an insurer, which covered the amount lent by the banks. In the case of each loan two polices were issued, one for 0-70% of the valuation of the property and one for 70-90% of that valuation. The polices were arranged by the defendant.
Each policy contained a term which described the extent of the insured’s duty of disclosure under the policy. The borrowers defaulted on the loans. The banks suffered heavy losses on realisation of the security. The insurer refused to indemnify the banks under the policies on the ground that they were void for non-disclosure. Legal proceedings were compromised with the insurer indemnifying the banks for only part of the amount insured. The banks issued proceedings against the defendant claiming that it was liable to make good the loss. A hearing of preliminary issues was ordered. The preliminary issue was whether the defendant was liable to the plaintiffs for a failure to discharge the duty of disclosure to the insurer as underwriters of the policies for each loan.
Held Judgment was given for the plaintiffs on the preliminary issue.
I. Although the loan agreement provided that the defendant’s specific duties, obligations and responsibilities were those defined in the security documents, there was nothing in the agreements which precluded a general duty of care arising in relation to the defendant’s duties as agent. Therefore, although the policies were not security documents the defendant was under a general duty of care in relation to them.
2. The banks were not parties to the policies because the policies were granted by the insurer to the defendant as agent for the banks. Therefore, the duty of disclosure as defined in the policies was placed with the defendant alone as the insured. The defendant was accordingly under a duty to take reasonable care in fulfilling the duty of disclosure.
3. The banks were not under a duty of disclosure under the policies at common law to either the insurer or the defendant because the disclosure required was defined in the policies. Therefore the duty was only owed by the parties to the policies which was the insurer and the defendant.
4. The duty of disclosure required was not one that would have been problematic to comply with. Although the wording in the policies was different it required the same, namely for the insured to carry out the investigations and enquiries that would normally be carried out for a loan of 70% of the valuation and for the disclosure of anything which would cause a bank not to make a loan.
5. The banks were not under a duty to exchange information relating to credit risks with the defendant because although it might have amounted to a professional practice it did not amount to a duty of care which the banks were under.
Gavin Kealey QC and David Edwards (instructed by Clifford Chance) appeared for the plaintiff banks; Peter Scott QC and David Railton QC (instructed by Linklaters & Paines) appeared for the defendant.
