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Claims against banks for negligent credit references? The possible impact of the Durkin decision

Can you give me a reference?

Professionals in all walks of life are frequently asked to give references in respect of people or organisations. A negligently given reference may cause the recipient who relies on it or the person the subject of it to suffer pure economic loss in respect of which they will want to recover damages. In Durkin v DSG Retail Limited [2014] 1 W.L.R. 1148, the Supreme Court has, in a couple of short paragraphs, given a timely reminder of the pitfalls than may await anyone, in particular banks and other lenders, who gives a negligent reference.

Mr Durkin’s missing modem

The Durkin case is generally of little interest to professional negligence specialists. It concerned Mr Durkin’s 15½ years of litigation seeking redress in relation to a laptop that he had bought from PC World in 1998 with the assistance of a debtor-creditor-supplier agreement with HFC Bank plc under section 12(b) of the Consumer Credit Act 1974. The decision principally concerned whether a restricted-use credit agreement under section 12(b) of the 1974 Act contained an implied term to the effect that, a debtor, on rejecting goods and thereby rescinding the supply agreement for breach of contract, could also rescind the credit agreement with the bank. Mr Durkin succeeded in the Supreme Court on his Consumer Credit Act arguments.

However in addition to the Consumer Credit Act arguments Mr Durkin also succeeded in his contention that the bank, knowing of his assertion that the credit agreement had been rescinded, had been under a duty to investigate that assertion in order reasonably to satisfy itself that the credit agreement remained enforceable before reporting to the credit reference agencies that he was in default. The Supreme Court found that the bank, by making no inquiries before intimating the default to the agencies, and having accepted without question PC World’s position that Mr Durkin had not been entitled to rescind the contract of sale, had acted in breach of its duty of care to Mr Durkin. Mr Durkin had been properly awarded £8,000 for the damage to his credit.

Remembering Hedley Byrne v Heller

Banks being held liable for providing negligent references is hardly news. In Hedley Byrne v Heller & Partners [1964] AC 465 a merchant bank gave a favourable (but negligent) credit reference about one of its customers which was relied on by the recipient of the reference who then lost money. Had the reference not been given in terms that stated it to be made "without responsibility" the House of Lords unanimously held that the bank would have been liable in the tort of negligence for the recipient’s financial loss.

The Hedley Byrne decision established that a duty of care is owed to the recipient of a negligent reference where there had been (i) an assumption or undertaking of responsibility by the bank towards the recipient; and (ii)reliance by the recipient on the exercise by the bank of due care and skill. It applies to any professional who has assumed responsibility to another person (regardless of the existence of a contractual relationship), where that person relies on the professional to exercise due skill and care in relation to such conduct.

Hedley Byrne did not however concern the duty of care, if any, owed to the subject matter of the reference.

Spring and claims against financial services professionals

The subsequent decision of the House of Lords in Spring v Guardian Assurance [1995] 2 A.C. 296 made clear that an employer or quasi-employer owed a duty of care to the subject of a reference when providing a reference to another employer.

The decision in Spring led to many employees or self-employed agents in the financial services industry bringing claims against their former employers in respect of allegedly negligent references. Myself and others at Hardwicke were heavily involved in that swathe of negligent reference cases – see by way of example Legal & General v Kirk [2002] I.R.L.R. 124 and Kidd v Axa Equity & Law [2000] I.R.L.R. 301. The result was that greater care was taken in the financial services industry in relation to the giving of references and more generally references tended to become blander or companies refused to give references or to limit them to confirmation of the period of employment.

Durkin – What it decided and the likely impact

So what will be the impact of the Durkin decision?

It is perhaps surprising that there have not been more examples of individuals suing banks and other lenders in relation to information provided to credit reference agencies. The sharing of such information is often carried out in an automated fashion with little examination of the reasons why a person may appear to be in default under a finance or other credit agreement.

In a first instance decision last year, Gatt v Barclays Bank [2013] EWHC 2 the deputy high court judge had to consider whether a duty of care was owed to the wife of the account holder (and subject of the reference). He held that:

“Given the importance of credit rating in the modern world and the analogies (more than just semantic) between job references and credit references, I would have no great difficulty in recognising such a duty owed by a bank to its customer to whom the reference related; indeed for the reasons above stated it is likely also to be a contractual duty. Whether the duty extends to the spouse of the person given the credit reference is a much more difficult question. In the ordinary case, the answer is almost certainly not. But on the facts of this case, where to the Bank's knowledge she was a joint holder of the same account and a co-director of the family business which largely depended on her husband's credit, so that both proximity and foreseeability of damage are present, I conclude that such a duty was owed to CG as well as MG.”

The claim failed because the reference had not been negligently given.
Durkin raises the possibility of a significant number of claims being brought against banks and lenders for allegedly negligent credit references which have affected adversely the recipient’s credit. This aspect of the claim was dealt with very briefly by Lord Hodge who delivered the opinion of the Supreme Court:

“HFC, knowing of Mr Durkin's assertion that the credit agreement had been rescinded, was under a duty to investigate that assertion in order reasonably to satisfy itself that the credit agreement remained enforceable before reporting to the credit reference agencies that he was in default. HFC could readily foresee that registration of a default could damage Mr Durkin's credit: it said so in its letter of 22 July 1999. As it knew that Mr Durkin's assertion of rescission of the sale agreement was unresolved, it had the options of (i) saying nothing to the credit reference agencies or (ii) if it chose to notify them, incurring the duty to him to take reasonable care to ensure that the notification was accurate (cf Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 , 486, per Lord Reid). HFC made no inquiries before intimating Mr Durkin's alleged default to the credit reference agencies. …[I]t should not have intimated the default without a reasonable basis for the belief that it had occurred. In so doing it acted in breach of its duty of care to Mr Durkin.”

The duty on a bank faced with a disputed issue is to make reasonable inquiries. It cannot simply accept the word of a retailer. A defaultcan only be reported to a credit reference agency if the bank has reasonable grounds for believing that a default has occurred. If the debtor or borrower has not contested the underlying alleged default, it would seem that the bank could not be criticised for making the initial reference. However, if a borrower then chooses to contest the alleged default upon discovery that their credit rating has been affected,the bank may well then be under a duty to consider the matter once more and, if appropriate, to qualify or withdraw its reference.

Lessons for alleged debtors and banks

The lesson for parties involved in a dispute involving a loan or finance for a purchase is that they should (i)make quite clear to the creditor that there is a dispute; (ii)set out in detail the grounds for that dispute; and (iii)indicate to the bank that no reference to any credit reference agency should be made until the dispute is resolved.

So far as banks and other lenders are concerned,they should be reviewing their procedures so that computerised automated references are not made when a dispute has been begun.When a dispute about a loan or other financial transaction is raised the same should be subject to a reasonable investigation before a reference is made to a credit reference agency. Obviously, what is ‘reasonable’ will depend on the circumstances and this may prove to be the subject of future litigation. However,it cannot simply rely on the report from the retailer or other party to the transaction.

Mr Durkin’s damages of £8,000 were general damages for the injury to his credit. On the facts, he failed in his claim for damages allegedly suffered as a result of his adverse credit rating.However, it is clear that such claims are now possible and could be substantial.

As with Spring sadly the net result may well be less information being provided to reference agencies which will hamper banks and others in carrying out necessary credit checks. This may in fact make loans even harder to come by.