Bank Liability for Misleading Marketing Materials
09 Dec 2016
In Spencer v Irish Bank Resolution Limited (in special liquidation) ( IECA 346), the Irish Court of Appeal handed down an important judgement that deals with the scope of a lender's duty of care and potential liability for misrepresentation when promoting an investment opportunity to clients. The case concerned the promotion by the bank of a property development scheme, which ultimately proved unsuccessful.
Why is this decision important?
The case is important for the following reasons:
(a) The Court of Appeal held for the plaintiff, even though the High Court had found aspects of his evidence to be "unreliable and frequently inconsistent". It is, therefore, one of those exceptional cases where the appeal court (which does not hear oral evidence) reached a view of a witness's credibility even though it had not heard his evidence directly.
(b) The fact that the lender was, at the time, a licensed bank made the court even more highly critical of the bank's marketing materials. The court made a number of telling observations, some of which are highlighted below.
Summary of facts
The plaintiff invested €2 million in a scheme to develop property in a south London suburb. He invested €1 million of his own money and borrowed the balance from the defendant bank. In making the investment, he relied on certain representations made by the bank in two of its brochures. The first "loose leaf brochure" was less formal than the second which was referred to as the "Black Book".
The court held that a number of the bank's statements relating to development opportunities for the property were untrue and, therefore, negligent misstatements and/or misrepresentations, which induced the plaintiff to enter into the investment. In brief, the documents were found to have been misleading in the following respects:
(a) Statements that the landlord of the properties would support the proposed development were untrue.
(b) References to a particular phase of the development failed to alert the reader that it would not be possible to proceed for five years due to a sitting tenant's rights.
(c) References to two potential developments failed to point out that they were really alternatives. Only one of them could proceed because they both related to the same part of the property, but the bank's documentation failed to make this clear.
The bank sought to defend allegations of misrepresentation on the basis that the loose-leaf brochure was mere "sales talk" designed to stimulate interest in the scheme, that the plaintiff had a 30-day cooling off period and could have exited during this window and, that in any event, the bank's brochures would inevitably be superseded by formal legal documentation. The court rejected all of these contentions.
The court held that the brochures constituted pre-contractual statements, which were actionable misrepresentations. These were of a continuing nature and were never corrected by the bank or corrected to the extent required by law. In a telling passage Hogan J (speaking for the court) observed that it would be "…manifestly unfair and at odds with the principles of good faith upon which the entire law of contract is founded, if those who made specific statements designed to induce others into (sic) enter into contractual relations were later to be allowed to resile from that position and to claim that such statements were not to be taken seriously...".
With regards to the 30-day cooling off period, the court held that a party guilty of misrepresentation cannot avoid liability by attempting to shift the onus of cancelling the contract to the person who has been induced to enter the contract by reason of the misrepresentation.
With regards to the fact that the brochures would be followed by formal contracts, the court noted that the contractual documents would merely be the formal vehicle for the investment and would not alter the underlying commercial terms, nor the fact that the plaintiff was induced to enter into the investment by way of misrepresentations by the bank.
The court held that the misrepresentations which induced the plaintiff to enter into the investment "bring little credit to the bank." The court observed that "the conduct of the bank fell below the standards of responsibility which this Court has every right to expect and demand from the holder of a banking licence and from that of its employees." As already noted, the Court of Appeal was confident holding for the plaintiff even though the trial judge had found aspects of his evidence unsatisfactory.
It would be wrong to conclude that this decision means that regulated institutions owe a greater duty of care than other persons facing similar claims. However, it would also be naïve to suppose that, where a regulated entity is held to account for pre-contractual statements which are alleged to be false, it will not, in practical terms, have to show that it acted with probity and transparency. The Spencer decision sends out a very clear signal in that regard.
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