Soon after work started, Hugo began encountering problems with the construction company, whose cashflow had shrunk drastically in the fallout from the COVID-19 pandemic. Eventually, the company abandoned the job, causing delays that cost Hugo hundreds of thousands of dollars.

Hugo complained that the bank had not done sufficient due diligence on the suitability of the construction company. He said it was standard practice in Australia, where he had also undertaken development work, for banks to obtain financial statements from all contractors when financing projects of this size. Had the bank done this, it would have discovered that the construction company was in financial trouble, and Hugo would have been spared the delays and losses he suffered.

Our investigation

We found that the bank was under no obligation to assess the suitability of the construction company Hugo had chosen. Banks are not subject to any general duty to advise or warn a customer about the risks of a transaction. In a commercial, arm’s-length transaction such as this one, it was not the bank’s role to advise Hugo on the wisdom of the project or the risks involved, particularly since he was an experienced developer and borrower who could have sought his own independent advice.

Hugo argued the loan was conditional on the bank's approval of his nominated construction company, and the bank was therefore obligated to fully assess the company's credentials. We did not agree. It was clear the condition was intended for the bank's benefit, namely, to help it assess whether to lend to him. It was in no way an undertaking that it would advise Hugo on the company’s suitability.

Outcome

We did not uphold Hugo’s complaint.