This article describes some of the more common issues we come across involving the agreement – or contract – that governs the business relationship between banks and building societies and their customers.
The contract is usually in writing and consists of what are typically called terms and conditions – such as those which apply to a mortgage or savings account. These terms and conditions are often set out in a standard format that applies to all customers who use the same service or product. They represent the legal basis on which the parties – the firm and the customer – have agreed to do business.
There is a basic legal rule that contracts must be honoured. The presumption is that customers are bound by the terms and conditions that relate to the product or service they have taken up, even if they choose not to read them.
But the legal position is often not clear-cut and there are some well-established exceptions to the rule that all the terms of a contract must be adhered to. These exceptions cater for situations where customers would otherwise be unfairly bound by the contract terms. It must also be borne in mind that
When we look at banking disputes involving contracts, we take into account the firm’s duties under the Banking Codes. We consider relevant statutes, such as the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999. We also consider the Financial Services Authority’s Statement of Practice, Fairness of Terms in Consumer Contracts (published in May 2005). This gives firms an indication of how they can avoid using terms that could be regarded as unfair. It is particularly relevant when we look at terms to do with interest rate variation.
In addition, and very importantly, we are required to decide what is ‘fair and reasonable’ in a given case. This may mean deviating from the ordinary or strict legal position where that is necessary to ensure a fair outcome.
Among the more common issues we come across are the following.
There is a legal rule that a term which is particularly unusual or onerous – and would not be generally known to the customer – is only binding on the customer if the firm has brought it fairly and reasonably to their attention before the contract is made.
We often need to consider this rule in the context of early repayment charges on mortgages. But it also applies to any unusual or onerous contract terms, including those in business banking contracts.
Sometimes the law simply provides that a contract term is unfair.
Examples are terms that
Customers will not be bound by a contract if they did not freely agree to enter into it and the firm was on notice of this.
Examples include situations where
To be enforceable under the contract, a term must first be properly incorporated into it. We sometimes find that firms try to add terms after the contract has been finalised, or to infer terms that could not reasonably be inferred from what the contract says. It may be that, with hindsight, a firm wishes it had included a particular term. But unless that term was properly incorporated into the contract we will not apply it.
Mr W borrowed money from his bank (firm A) to help buy some properties to rent to students, as part of his business. This was a commercial mortgage, and it was at a fixed rate of interest for the first five years.
Eighteen months after taking out the mortgage, Mr W decided that as interest rates had fallen he would repay it and take out a different mortgage with another bank – firm B.
He was shocked when firm A insisted that he would first have to pay a large early repayment charge. He complained, saying he had known nothing about firm A’s right to make this charge, and that the amount demanded was, in any event, unreasonably large.
Firm A rejected Mr W’s complaint. It told him that the charge had been clearly set out and explained in the mortgage terms and conditions and that it was binding on him as part of the contract. It also said that, before Mr W had agreed to take out the mortgage, a member of its staff had explained the early repayment charge to him.
The firm’s right to demand an early repayment charge was an onerous term. So Mr W could only be bound by it if the firm had brought it fairly and reasonably to his attention before he entered into the contract.
We examined the mortgage documents. They did state that an early repayment charge was payable if Mr W repaid the loan in the first five years. And they set out how this charge would be calculated. But the firm had not given this information any prominence. It had placed the information in the small print of its mortgage conditions (on page 5, in clause 24). And it had not mentioned it in any of the other mortgage paperwork (for example, in its mortgage offer letter).
Moreover, we were not satisfied that the firm had explained the charge to Mr W in a face-to-face meeting before he took out the mortgage, as it had claimed.
We concluded that the term concerning the early repayment charge was not binding on Mr W. We ordered firm A to allow him to repay his mortgage without incurring the charge. We also awarded Mr W £300 compensation for the distress and inconvenience he had been caused.
Mr G’s situation was similar to that of Mr W in the previous case (50/1). But the firm in Mr G’s case accepted that it had failed to give due prominence to the early repayment charge in its mortgage terms and conditions or its mortgage letter.
The firm argued that, despite this, the charge was still binding on Mr G. It said it had explained the charge in a notice it sent him just before he drew down the loan. Unhappy with the firm’s stance, Mr G came to us.
As the firm admitted, it had not referred at all prominently to the early repayment charge in the original paperwork that was present when the contract was made. But the contract had been made at the point when Mr G accepted the firm’s mortgage offer by signing and returning the offer letter.
The firm had not drawn Mr G’s attention to the early repayment charge before this point. It was several days after he had signed and returned the offer letter that the firm sent him the notice about the charge. So Mr G was not bound by the term relating to the charge. We upheld Mr G’s complaint and told the firm it should not apply the charge when he repaid his mortgage.
A solicitor, Mr K, ran up a large overdraft with his bank (the firm), in connection with his business. Eventually, because of the size of the overdraft, the firm told Mr K he would have to secure the debt with a mortgage, using his house as security.
As he owned the house jointly with his wife, she would have to agree to – and sign – the mortgage. So the firm arranged – through Mr K – for Mrs K to come to its branch office. In the presence of Mr K, the firm’s official asked Mrs K whether she fully understood what she was agreeing to and if she had taken legal advice. She replied " yes" on both counts. She said her husband, acting as her solicitor, had given her all the legal advice she needed. On that basis, the firm witnessed the couple’s signatures on the mortgage deed.
On a number of occasions over the next twelve months the firm contacted Mr K about his repeated failure to make the required repayments. Eventually, it told the couple that it intended to obtain possession of their house and to sell it, to recover the money that Mr K owed.
Shocked by this news, Mrs K complained to the firm, insisting that it could not do what it proposed. She said she had only signed the mortgage because her husband put pressure on her to do so. She also said she had never been made aware that she could lose her home as a result of her husband’s business debts.
The fact that Mr and Mrs K were a married couple should, in itself, have indicated to the firm that Mrs K might not have been exercising her free will when "agreeing" to the mortgage. And it should have realised that it was not acceptable for her to be advised about the mortgage by her husband. Mr K was clearly not in a position to give his wife impartial advice, since it was his borrowing that the mortgage was intended to secure.
The firm should only have allowed the mortgage to go ahead once it had taken reasonable steps to satisfy itself that Mrs K
So it should have insisted that Mrs K obtained independent legal advice. And it should have obtained written confirmation from the independent solicitor that she had received that advice.
We therefore decided the firm could not enforce the mortgage against Mrs K.
Mrs C complained to the firm on behalf of her adult son, Mr C, who had autism and learning difficulties. She felt the firm had taken advantage of her son by agreeing to give him a loan. She said it should have realised that, because of his medical condition, her son could not have understood the nature of the loan or his legal obligations.
The firm defended its actions. It said it had known Mr C as a customer for many years. There was nothing to suggest he had any difficulty in understanding the firm’s other products (for example, his current account). And, at the time it had discussed Mr C’s loan application with him, it had no reason to think he had any difficulty in understanding the loan.
We were able to look into this complaint because Mr C had given us permission to deal directly with Mrs C.
Both autism and learning difficulties affect individuals in many different ways. It should certainly not be assumed that customers who are autistic or who have learning difficulties are unable to understand financial transactions. They are entitled to have their applications for credit considered in exactly the same way as any other customers.
If, because of his learning difficulties, Mr C had been mentally incapable of understanding the contract, and the firm knew – or ought reasonably to have known this – then the contract would have been voidable. Mr C would not then have been bound by it. However, this was not the case.
The firm was aware that Mr C had been employed in a steady job for many years. Throughout that time he had been a customer of the firm and had conducted his finances without difficulty.
We were satisfied, from what Mrs C herself told us, that her son’s learning difficulties did not prevent him from understanding how ordinary banking products worked. More importantly, we were satisfied that Mr C had fully understood the loan transaction in question, and its implications for him.
The loan repayments appeared to be manageable for Mr C. We did not consider that the firm had taken advantage of Mr C by agreeing to lend to him, as his mother had suggested. We agreed with the firm that it had acted entirely correctly and that there was no reason why Mr C should not be liable for the loan.
Mr V complained to the firm on behalf of his adult son, T. He said the firm should not have given T a loan and credit card because T’s mental disorder had prevented him from understanding the commitment he was making.
The firm rejected the complaint. It said that although T had not been an existing customer when he came into the branch and applied for the credit card and loan, his application had passed its credit scoring process. The firm had no reason to suppose he had been unable to understand what he was doing.
We were able to consider this complaint because T gave us permission to deal direct with Mr V, on his behalf.
Mental illness can take many forms and certainly does not, of itself, mean that a person should not be given credit. But Mr V provided persuasive medical evidence that T had been suffering from a serious mental disorder on the day he obtained the loan and credit card. This disorder affected T’s perception in such a way that he was unable to understand the effects of his actions. So we were satisfied that, at the time in question, T had lacked the mental capacity to enter into the contracts for credit. But we had also to assess whether the firm should have known that.
We were able to establish that – on the same morning that T applied to the firm for the loan and credit card – he had visited several nearby shops. Most of these retailers had declined to do business with him at all because he clearly appeared unwell. One retailer had accepted an order from him but had decided not to act on it because T was "not behaving normally".
We thought it reasonable to expect the firm to have paid at least as much attention to T’s manner and appearance as these retailers did. The firm had not only approved T ’s application for a loan and credit card, but had also allowed him to take some of the credit that same morning – in the form of a large amount of cash.
The retailers had concluded that T was not in a fit state of health to enter into a contract. We thought the firm should have realised that as well. The contracts for credit were therefore voidable.
T had received no benefit from the money he borrowed. Later that same day someone took advantage of his confused condition and stole the cash from him. We told the firm that T was not bound by the loan and credit card agreements and was not liable to repay the debt.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.