High Court Confirms Rules on Banks' Duty of Care in a Lending Relationship

The recent case of Kotonou v NatWest Bank1 dealt with the relationship between a bank and business customers to whom it had made loans.

Summary of facts

Mr Kotonou was director of a company called Olympic Resourcing & Services Plc (ORS). ORS borrowed £500,000 from NatWest. The loan was made on the basis that security was provided in the form of a letter of credit provided by Barclays. In order to provide the letter of credit ORS had entered into a separate agreement with other funders. The letter of credit had an expiry date. This date was extended a few times but then was not extended any further. NatWest did not call on the letter of credit while it was valid. Sometime after the expiry of the letter of credit NatWest required repayment of the loan. ORS was unable to repay the full loan. Instead, ORS paid back £75,000 and Mr Kotonou provided a personal guarantee to NatWest for the remainder. In due course ORS went into liquidation and the personal guarantee given by Mr Kotonou to NatWest was called upon.

The issue in this case

There have been various proceedings in relation to these matters, but this case relates specifically to Mr Kotonou's claims that NatWest owed a duty of care both to ORS and to him personally in relation to the securities which NatWest had recourse to, thus putting in issue the enforceability of the personal guarantee he had given to NatWest.

Mr Kotonou argued that NatWest should have called upon the letter of credit while it was valid (and that a letter of credit had similar status to cash), and that a failure to have done so amounted to a breach of a duty of care owed to ORS and to him personally. Thus, the personal guarantee he had given to NatWest subsequently was unenforceable.

A High Court master had struck out Mr Kotonou's claim, and this was an appeal from that decision. claim.

The existing law – general principles

In China & South Sea Bank v Tan 2, a Privy Council case, the court held that in that case where the bank, the creditor, had three sources of payment, the debtor, the surety and the sale of the mortgaged shares, the creditor was entitled to make his own decision as to how to pursue those sources, whether to pursue one or all, together or successively. It owed no duty of care to any of the parties involved in the lending contract in terms of how it reached a decision on how to recover its debt.

The Court of Appeal confirmed these principles as applying to England & Wales in Silven v RBS:

"A mortgagee...