Lyons and Anor v Financial Services Ombudsman

JurisdictionIreland
JudgeMr. Justice Hogan
Judgment Date14 December 2011
Neutral Citation[2011] IEHC 454
CourtHigh Court
Date14 December 2011
Lyons & Murray v Financial Services Ombudsman & Bank Of Scotland PLC
[2011] IEHC 454
BETWEEN/
JOHN LYONS AND PATRICK MURRAY
APPELLANTS

AND

FINANCIAL SERVICES OMBUDSMAN
RESPONDENT

AND

BANK OF SCOTLAND PLC
NOTICE PARTY

[2011] IEHC 454

[No. 22 MCA/2011]

THE HIGH COURT

Abstract:

Administrative law - Fair procedures - Bank borrowings - Oral agreement - Dispute - Error of law - Financial Services Ombudsman - Central Bank Act 1942 as inserted by s. 16 Central Bank and Financial Services Authority of Ireland Act 2004

Facts: The appellants borrowed a series of sums in the region of Eur 17 million from Bank of Scotland (Ireland) Ltd. They sought to appeal a decision of the Financial Services Ombudsman (FSO) who rejected their complaint pursuant to s. 57CL(1) Central Bank Act 1942, as inserted by s. 16 Central Bank and Financial Services Authority of Ireland Act 2004. They contended that the FSO erred in law in rejecting the necessity for an oral hearing in order to determine certain factual issues between the parties. A dispute had arisen between the appellants and the Bank on oral agreement on the servicing of the loans. The Court considered the purpose of the FSO and how it differed from a Bank, given that an adverse finding of the FSO could create a form of issue estoppel preventing re-litigation.

Held by Hogan J. that the Court would allow the appeal pursuant to s. 57CM(2)(b) of the Act of 1942. The Court further remit the appellants complaint to the Ombudsman for re-hearing in accordance with s. 57CM(2)(c). The Ombudsman's decision was vitiated by a serious error negating as it did the constitutional right to fair procedures. The essence of the appellants' case had not been properly evaluated in the absence of an oral hearing.

Reporter: E.F.

1

1. This is an appeal pursuant to the provisions of s. 57CL(1) of the Central Bank Act 1942 ("the 1942 Act") (as inserted by s. 16 of the Central Bank and Financial Services Authority of Ireland Act 2004) taken by the appellants (who are two businessman) against a decision of the Financial Services Ombudsman ("the FSO") dated 12 th January 2011 which rejected their complaint against the notice party (or, more strictly, its immediate predecessor, Bank of Scotland (Ireland) Ltd.) ("the Bank"). The fundamental ground of appeal is that the FSO erred in law in rejecting the necessity for an oral hearing in order to determine certain factual issues between the parties.

2

2. I will presently outline in more detail the nature of the dispute between the appellants and the Bank. It suffices for the moment to say that the appellants borrowed a series of sums in the region of €17m. in total from the Bank (and its immediate predecessor, ICC Bank) for the purposes of property acquisition, principally in the Limerick, Tipperary and Clare regions between 1999 and 2008. They say that they could only have serviced these various loans from the rental income from these properties on an interest only basis and at the agreed rate of 1.25% (or, in the some cases, figures approximating to 1.5% or 1.8%) over the cost of funds. They maintain that this fact was well known to the Bank and that the parties had reached an oral agreement to this effect, the actual terms and conditions of the various written agreements between the parties notwithstanding. The appellants insist that the various representatives of the Bank orally indicated in a series of meetings - which principally took place between 2004 and 2008 - that they would facilitate such an arrangement, but that this could not be put in writing as this would breach Central Bank guidelines. This viewpoint is also substantially supported by a written statement supplied by the appellants' chartered accountant who was present at many of the relevant meetings with the Bank. It is only fair to say that the existence of any such oral agreement is steadfastly denied by the Bank and its representatives. The bank officials in question have all supplied written statements denying the existence of any such agreement.

3

3. Matters came to a head in the period between July, 2008 and February, 2009. The appellants contend that in July 2008 the Bank informed them that the applicable interest rate was to be increased to a rate which the appellants contended would push them into default. In effect, the appellants say that they budgeted to pay a sum of €550,000 on an interest only basis to the bank and that this sum continues to be paid. They further contend that at a meeting in February, 2009 two named representatives of the Bank repudiated the oral agreement.

4

4. There is presently something of a stand-off between the parties. The appellants say that they have not committed any act of default and that they continue to pay a sum of approximately €550,000 annually to service the mortgage debt on an interest only basis. The Bank maintains that as there was no such agreement, the appellants are now in default. Counsel for the Bank, Mr. Fanning, informed me at the hearing that it contends that the sum of €1.9m.is now due from the appellants and that, but for the existence of the complaint to the FSO which had given rise to the present proceedings, the Bank would have issued proceedings in this Court to recover the said sums.

The complaint to the FSO
5

5. On 1 st November, 2009, the appellants through their then solicitors made a complaint to the FSO pursuant to s. 57BX(1) of the 1942 Act (as amended). By decision dated 12 th January, 2011, the FSO determined that the complaint was not substantiated for the purposes for the purposes of s. 57CI(2) of the 1942 Act.

6

6. At the heart of the present appeal is the contention that the FSO failed to hold an oral hearing in respect of these complaints.

7

7. At first blush it may seem surprising that a complaint of this nature would come within the remit of the FSO, rather than being the subject of litigation in the Commercial Court. After all, the object of the FSO is that declared by s. 57BK(1), namely, to deal with: -

"complaints made under this Part by mediation and, where necessary, by investigation and adjudication."

8

8. Section 57BC(4) goes on to provide that the FSO, when discharging its functions, is required:

"to act in an informal manner and according to equity, good conscience and the substantial merits of the complaint without regard to technicality or legal form."

9

9. Section 57BA defines a "complaint" for this purpose as meaning a:-

"complaint made by a consumer under this Part about the conduct of a regulated financial service provider."

10

10. The term "consumer" is in turn defined by the same section as meaning:-

a "(a) a natural person when not acting in the course of, or in connection with, carrying on a business, or

(b) a person, or group of persons, of a class prescribed by Council regulations."

11

11. The Council in question here is the Financial Services Ombudsman Council established by s. 57BC. The appellants here were plainly carrying on business, so that they did not fall within the definition of consumer for the purposes of paragraph (a) of the definition. It is, however, accepted that they fall within the definition contained in paragraph (b) in light of the provisions of the Central Bank Act 1942 (Financial Services Ombudsman Council) Regulations 2005 ( S.I. No. 190 of 2005)("the 2005 Regulations"). Article 2(1) of those Regulations provide that:-

"The following classes of persons are prescribed by Council as consumers for the purposes of subsection (b) of the definition of "consumer' in Section 57BA of the Central Bank Act 1942 (as amended by Section 16 of the Central Bank and Financial Services Authority Act of Ireland Act 2004).

1

A person or group of persons, but not an incorporated body with an annual turnover in excess of 3 million euro. For the avoidance of doubt a group of persons includes partnerships and other unincorporated bodies such as clubs, charities and trusts, not consisting entirely of bodies corporate."

12

12. In effect, therefore, the consequence of the 2005 Regulations is radically to expand the scope of the jurisdiction of the FSO to categories of cases beyond retail banking simpliciter to a point beyond which, some might think, it might sensibly or appropriately bear. It means, for example, that loans negotiated by a syndicate of businessmen running to hundreds of million Euros could well be the subject of a complaint to the FSO. Whether this definition of "consumer" as effected by the 2005 Regulations is, in fact, intra vires, s. 57BA or, if it is, whether the section would survive a constitutional challenge in the light of Article 15.2.1 of the Constitution having regard to cases such as Laurentiu v. Minister for Justice [1999] IESC 47, [1999] 4 I.R. 26 and John Grace Fried Chicken Ltd. v. Catering JLC [2011] IEHC 277 are matters which fall outside the scope of this statutory appeal.

13

13. This entire debate nonetheless raises what counsel for the Bank, Mr. Fanning, correctly described as an existential question. What, after all, is the purpose of the FSO and, perhaps, more specifically, how does its functions differ from those of the courts? In Koczan v. Financial Services Ombudsman [2010] IEHC 407, having referred to the powers given to the FSO by s. 57BK(4), I observed:-

"The Ombudsman's task, therefore, runs well beyond that of the resolution of contract disputes in the manner traditionally performed by the courts. It is clear from the terms of s. 57BK(4) that the Ombudsman must, utilising his or her specialist skill and expertise, resolve such complaints according to wider conceptions of ex aequo et bono which go beyond the traditional limitations of the law of contract. This is further reflected by the terms of s. 57CI(2) which provide that-"

2 '(2) A complaint may be...

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