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Lender’s inadvertent disclosure does not assist negligence defence

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23/01/2014

As solicitors acting for banks in professional negligence matters, we often come up against the argument from defendant professionals that the lender would not have acted differently even if it had been properly advised. These defendants, whilst acknowledging their advice fell short of the expected standard, seek to avoid or minimise their liability by arguing that it had no material impact on the lender’s decision to proceed with the advance. To try to support this argument, defendants are increasingly looking to lenders’ policies, seeking to off-load some of the blame.

Escape attempt…
The case of Ward Hadaway v DB Bank UK Ltd [1] was such a case. The lender had instructed solicitors to act on its behalf in relation to a series of buy-to-let loans. The solicitors did so, but failed to advise the lender that these were all sub-sales, with a third party vendor who was not the registered proprietor. The solicitors accepted that they should have reported the true nature of the transactions to the lender, but denied that they were responsible for the loss, alleging that the lender would have proceeded with the advances even if it had known of the sub-sales.

The lender, as part of the pre-action disclosure process, had provided the solicitors with a copy of its underwriting guidelines. Those guidelines referred to a credit policy document which was, by virtue of that reference, technically disclosed. The solicitors demanded sight of the credit policy document but the lender refused, stating that it was commercially sensitive and was a more strategic level document which did not determine how individual cases should be dealt with. The lender contended that the policy document was not relevant to the facts of the case: it related to how the lender ran its business and was relevant to the raising of funds; it did not cover lending decisions, whereas the underwriting guidelines, which were available for inspection, did.

The solicitors argued that they could not know whether the policy document was relevant until they had seen it. They believed that the document might demonstrate that loans which did not meet the underwriting guidelines may still be approved as good business under the policy document and that inspection was therefore crucial to the issue of causation.

…thwarted
The court, presumably looking to prevent a “fishing expedition” [2], refused to order that the credit policy document be made available for inspection, despite the lender’s technical disclosure. Evidence was admitted to the effect that the policy document contained no reference to circumstances in which transactions involving sub-sales might still be good business where they failed to comply with the underwriting guidelines, and even if the document was relevant, it did not fall within CPR 31.6.

WM Comment
Whilst this decision ultimately turned on the specific content of the policy documents and guidelines, it serves as a useful reminder to lender clients that confidentiality is not enough to refuse disclosure and inspection of a document. Lenders must be aware that their lending decisions will be scrutinised, with the obvious implication that defendants will often seek to review commercially sensitive documents with a fine tooth comb.

A pure practice point for all those involved in litigation also arises in this case. Inadvertent disclosure of documents can happen all-too easily when documents that you do not wish to disclose are nevertheless referred to within those that you do. The fact that the lender in this case was allowed to refuse inspection despite its technical disclosure should not give comfort. It may be that the lender was only allowed to withhold inspection because, on the particular facts, the solicitor’s application did not fit strictly within any of the relevant provisions of the Civil Procedure Rules on disclosure and inspection at Part 31.

Finally, defendants should note that mere hopes or beliefs that a document might be relevant or might support their defences or adversely affect their opponents’ claims will not be enough to compel disclosure, and that such attempts to avoid responsibility for negligence will be met with short shrift.

[1] Ch D (Nugee J) 11 November 2013, unreported
[2] CPR Professional Negligence Pre-Action Protocol paras. C5.1 and B4.3