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KBC Bank Ireland plc –v- BCM Hanby Wallace, Supreme Court, 25 July 2013

  • Ireland
  • General

09-09-2013

This Supreme Court’s recent judgment in this matter has raised important issues concerning the application of the defence of contributory negligence, particularly highlighting section 34 of the Civil Liability Act 1961.  The judgment of the Supreme Court (the “Court”), handed down by Fennelly J, allowed the appeal in so far as the 2012 ruling of McGovern J in the High Court failed to make a finding of contributory negligence and remitted the case back to the High Court “for further consideration” of that issue.

1 Background to the Case

KBC Bank Ireland plc (“KBC”) advanced commercial loans to two separate individuals, Mr. John Kelly and Mr. Thomas Byrne.  The Defendant acted as KBC’s legal advisor in relation to the provision of the financing for each of the borrowers and the creation of the necessary security packages for 30 properties. The loans were inter-related in many respects, and a significant feature of the case was that Mr. Byrne was the Solicitor acting for Mr Kelly, where he subsequently borrowed more money from the bank himself.

To enable completion of these transactions, the BCM Hanby Wallace Solicitors (the “defendants”) accepted solicitors’ undertakings from Mr. Byrne, and did not follow the bank’s express instructions to take security over all of the relevant properties.  When called upon, these undertakings were not honoured by Mr. Byrne, resulting in KBC only having validly created security over three of the 30 properties.  When the borrowers defaulted on their repayments this resulted in KBC suffering significant losses as it was unable to enforce against the majority of the intended security. Judgements were obtained by KBC against Mr Kelly for €14,435,747.44 and against Mr Byrne for €9,051,977.50. In the High Court McGovern J. found for KBC and gave judgment for €9,983,585.34 with respect to Mr. Kelly and €7,710,545.16 in respect of Mr. Byrne.

KBC had argued that the defendants had not ensured that the requisite security for the loans was in place, notwithstanding having represented to KBC that all the security was properly in place.  All that was available to KBC was the solicitors’ undertakings from Mr. Byrne, which were dishonoured. KBC also argued that the defendants had no authority from the bank to accept solicitors’ undertakings (in lieu of perfecting the security) and that the defendants were negligent in so doing.

2 High Court Decision

McGovern J found for KBC making findings against the defendants that they had been negligent in the performance of the duty owed of care they owed to the bank, particularly regarding the completion of the security documents on the completion of each loan transaction. The Court found that KBC had relied upon assurances given by the defendants that they would not release the funds being advanced to the borrowers until security was in place. McGovern J. found that there was a fundamental departure by the defendants from their instructions, and he relied upon evidence from a partner in the defendants, where he conceded that KBC would not have permitted the transactions to proceed had it been aware the security was not in place.

Of particular significance in the appeal was the fact that although McGovern J. accepted there was want of care by KBC in its own credit checks and internal procedures, he still found that the proximate cause of KBC’s loss was that the defendants failure to comply with the bank’s instructions and releasing funds to the borrowers, when they knew, or ought to have known, that they were acting against the bank’s instructions. McGovern J. also accepted that although every case must be decided on its own facts that this case was “sufficiently exceptional” to dispose of the defendants’ claim for contributory negligence and he made no findings against KBC.

3 Points of  Appeal

The defendants did not appeal the finding of negligence or the breach of duty and accepted that the concessions made on cross examination by a partner in the defendant firm justified this finding.

The appeal was limited to challenging the High Court’s findings on:

  • contributory negligence; and
  • unusually to asking the Court to supplement its own language in lieu of that of the High Court, in respect of McGovern J’s use of language suggesting dishonesty by the defendants. The argument being that this was not justified by the evidence or allegations made during in the High Court hearing.

The crux of the defendants’ argument in the appeal was that KBC could and should have done more when analysing the borrowers’ financial standing and capacity to repay; and that KBC should have had its own proper internal controls in place for the taking out of adequate security. It was contended that if KBC had taken proper steps it would not have approved the loans, and the defendants would never have been retained. 

4 Supreme Court Decision

The Supreme Court (the “Court”) found that McGovern J had focused solely on causation and the “proximate cause” of the loss. The Court also found that the learned trial judge had erred in his conclusion on the issue of contributory negligence, and that this related to his treatment of the issue of “causation”. The Court concluded that no factual conclusion had been reached by the High Court on whether there had been contributory negligence by KBC. As such it was not appropriate for the Court to determine this matter on appeal and it must be sent back to the High Court for re-hearing. It will ultimately be a matter for the President of the High Court to determine if the re-hearing of the case is by the same judge, McGovern J. or by a new judge.

On the separate issue of supplementing its own language in lieu of that of the High Court, in respect of that of the trial judge where he suggested dishonesty, the Court noted this aspect of the appeal was not advanced on legal grounds. It was however noted that an issue of “justice and fairness” did arise for the individuals behind the firm. The Court concluded that the High Court judgment “cannot and should not be read as attributing any intentional dishonesty or deliberate misleading to any partners or officers of the appellant firm. No allegation of fraud was made at any time.” Although the Court was prepared to provide this clarification, it did so on the express basis that in doing so it was not in any way qualifying “the essence of the serious findings of negligence”.  

In reaching its conclusion on contributory negligence the Court was influenced by the fact that the trial judge had found the bank to be “somewhat careless” in appraising the borrowers and he had also referred to “lapses of the plaintiff”.

The Court was satisfied that on an analysis of the law on contributory negligence that section 34 (1) and (2) of the Civil Liability Act contemplated more than one cause of loss. This was ultimately significant as to apportionment of the loss suffered on determination of the question of contributory negligence.

KBC had placed particular reliance on an earlier decision of Conole v Redbank Oyster Company Limited, but the Court distinguished Conole from the current case on the basis that the defendant in Conole was fully aware of the dangerous condition of the boat, but ignored it. Accordingly, the Court found that Conole was not analogous to the current case as to suggest otherwise was to suggest that the defendants were aware of the financial unsoundness or dishonesty of the borrowers when the bank entered into the lending transaction, which was not alleged.

The Court also considered submissions on the issue of professional negligence and the difficulty of rebounding blame onto the client when a professional person holds themselves out to be an expert in a particular area. Particular reliance was placed by the Court on the English text of “Lender Claims” by Hugh Tomlinson QC; and in particular on the proposition that the position regarding lenders is different (to other professional negligence claims) as a lender is a profit-oriented business, where the claimant lender rather than the defendant (professional adviser) has the superior knowledge. Reliance was also placed on various UK precedents involving lenders who had been found to be contributory negligent for failing to conduct background and/or credit checks against potential borrowers.

The Court accepted the submissions that it was not a matter for the defendants (as a firm of solicitors) to check the financial soundness of the borrowers. This was significant in the finding that the judge was mistaken to absolve KBC of responsibility for contributory negligence by finding that their acts were merely a “causa sine qua non” and not a proximate cause of the loss. It was accepted that the decision of KBC to lend to these borrowers was also an effective cause of the loss suffered by KBC. The Court also accepted that the defendants were entitled to rely on the European Communities (Licensing and Supervision of Credit Institutions) Regulations 1992 (S.I. No. 395 of 1992) (as amended) which placed an obligation on the bank to manage its businesses “in accordance with sound administrative and accounting principles…”. Significantly this would include the provision of internal controls and reporting.

Based on all of the above, the Court concluded that the trial judge had erred in his conclusion on the issue of contributory negligence and that the issue of contributory negligence will have to be reconsidered by the High Court. The outcome of this further hearing will be eagerly awaited by lawyers and bankers alike as it may impact significantly on the expectations that lender clients can reasonably have of their legal professional advisers. In particular, it will add clarity to the responsibility that lenders themselves must bear for their own actions or inactions in conducting credit analysis and making a decision to grant loan facilities with or without impunity.

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