Liina Tulk considers circumstances where a banking dispute can turn into a professional negligence claim against previous lawyers.

Since 2008 MBM Commercial’s dispute resolution team has built a strong reputation in Scotland as the market leaders in banking and financial disputes. We have therefore had a lot of clients come to us with disputes with their banks and seeking advice on how best to resolve matters and protect their position. While often the cases are limited to the bank and the borrower that is not always the case. There can be other parties involved, such as surveyors and lawyers, and if the matter is looked into in more detail it may become apparent that the real claim is against the client’s previous professional advisers as opposed to the bank. In this blog I will consider some of the more common examples of this happening in practice and the reasons why suing a professional adviser may be preferable to suing your bank.

Suing solicitors for failure to properly advise of the risks associated with a transaction

A couple of years ago a client approached us with a dispute he was having with his bank. In short, the bank had taken advantage of a minor loan to value (“LTV”) breach to force the client into two swaps. While we were initially engaged to advise on how best to resolve matters with the bank, it soon became clear that the client’s previous solicitors appeared to have failed to properly advise the client on the securities that were given by the client when drawing down further funding. In particular, although the loan documents required security over an additional property, that was never insisted on by the bank and never given by the client.

The client had left matters in his previous lawyers’ hands and had assumed that security had been given over the property in question as that had always been the case with previous loans. It therefore came as a huge surprise to the client when he learned that he was in a technical LTV breach because no security had been taken over the relevant property. It does not require advanced mathematical skills to appreciate that if the borrowing increases without equal increase in the value of the securities held then the LTV percentage goes up. That is exactly what happened in the case of Dunvale Investments Ltd v Burness Paull where we helped our client recover the losses that had been incurred as a result of the LTV breach from his previous lawyers.

Suing surveyors for negligent valuations that impact LTV or influence the client’s decision to grant further securities

Another common example we come across is surveyors providing negligent under- or overvaluations which in turn impact the client’s position with its bank.

If the surveyors negligently undervalue the properties that the bank has securities over then that may place the client in a LTV breach. That in turn can allow the bank to charge default interest, call in the borrowing and/or impose additional adverse conditions on the client to remedy the breach.

On the other hand, a negligent overvaluation can lead to the client proceeding with a funding transaction they would not have proceeded with otherwise. An example would be directors of a company granting personal guarantees based on a valuation that subsequently turned out not to be suitable for lending purposes.

When considering claims against surveyors it is important to check who was the surveyors’ client – the bank or the borrower? The terms of the surveyor’s letter of engagement and scope of the valuation report will also be relevant when assessing the strengths of any claim.

Why it can be preferable to sue professional advisers instead of your bank

One of the hurdles that many of our clients come across in their disputes with banks is the lack of an advisory relationship between the bank and the borrower. More often than not the lending documents expressly exclude any liability for any advice provided. That, however, is not the case with lawyers or surveyors a borrower may have instructed to advise on a funding transaction. It is therefore often a lot easier to prove that the client’s previous lawyers or surveyors owed him a duty to provide accurate advice than trying to run a similar case against the bank.

Another thing we have occasionally seen is the dispute becoming fairly personal and the bank being unable to take a step back and consider matters more objectively and commercially. If you sue your professional advisers, then the litigation will to a large extent be conducted by the indemnity insurers who are removed from the dispute and are therefore arguably also able to take commercial decisions more easily.