The latest in a recent line of judgments on interest rate hedging product (“IRHP“) mis-selling, Thornbridge Limited v Barclays Bank plc  EWHC 3430 (QB)provides further confirmation of the Court’s approach to mis-selling cases and highlights the significant obstacles that claimants face in succeeding with such claims. Most notably:
- The Court found that Thornbridge Limited (“Thornbridge“) was contractually estopped, as a result of standard form contractual representations, from alleging that Barclays Bank plc (“Barclays“) provided investment advice and recommendations. Further, the Court held that the clauses containing the relevant representations were not subject to the test of reasonableness in the Unfair Contract Terms Act 1977 (“UCTA“) as they constituted “basis clauses” (setting out the basis on which the parties transacted) rather than “exclusion clauses“.
- The Court confirmed that the Hedley Byrne duty not to mis-state does not encompass a positive requirement to explain products. The duty is distinct from an advisory duty which, if undertaken, requires banks to provide advice and information. Significantly, the Court rejected the approach in the recent IRHP mis-selling case: Crestsign Limited v NatWest plc and RBS plc  EWHC 3043 (Ch), which had suggested there can be a limited positive duty to explain products even where a bank had not undertaken an advisory duty.
Thornbridge, a property investment firm, entered into a £5.652 million, 15 year amortising loan with Barclays on 16 April 2008 to fund the purchase of a property. The interest rate payable under the loan was a floating rate referable to Barclays’ base rate. The loan contained a condition requiring Thornbridge to enter into an IRHP which would limit the interest payments for the entire amount of the loan for at least 5 years. Accordingly, on 30 May 2008, Thornbridge entered into a 5 year interest rate swap fixed at 5.68% with an amortising notional amount starting at £5.652 million (the “Swap“). As a result of these arrangements, Thornbridge effectively paid a fixed amount per month (comprising interest and capital), irrespective of interest rate fluctuations, providing protection against rises in interest rates. Subsequently, the parties signed a confirmation of the terms of the Swap (the “Confirmation“) which incorporated the terms of the International Swap and Derivatives Association (“ISDA“) Master Agreement (1992 version).
After the sharp decline in base rate from late 2008, the Swap prevented Thornbridge from taking advantage of historically low interest rates. Thornbridge considered restructuring the Swap in mid-2009 but would have been liable to pay significant break costs (estimated at £565,000 in mid-2009) in order to terminate the Swap. Accordingly, the Swap continued until its expiry in 2013.
Thornbridge advanced two main claims:
- Advice Claim: Barclays provided unsuitable advice to enter into the Swap, and should have instead advised Thornbridge to enter into an interest rate cap.
- Information Claim: Barclays did not provide adequate information on the Swap, and in particular did not adequately warn of the potential break costs, restrictions on the ability to refinance and restrictions upon portability of lending. This claim was based on legal arguments that:
- a. Barclays was subject to a positive duty to provide information about the Swap at common law (which went over and above the duty to take reasonable care not to give inaccurate or misleading information);
- b. Thornbridge was entitled to claim directly for breach of the FSA conduct of business rules (the “FSA Rules“) under section 138D (the successor to section 150) Financial Services and Markets Act 2000 (“FSMA“); and
- c. The relevant FSA Rules were incorporated into the contract between the parties as the terms were stated to be “subject to Applicable Regulations“.
The Court found firmly in favour of Barclays on all issues. The Court held that Barclays did not provide advice nor assume an advisory relationship, and in any event an advice claim would be prevented by contractual estoppel. Further, the information claim failed as the Court rejected each of the legal arguments at 2(a) to (c) detailed in section 1 (Background) above.
Thornbridge made a number of contractual representations in the Confirmation, including that Thornbridge was not relying on any communication by Barclays as investment advice or as a recommendation to enter into the Swap. Accordingly, the Court held that Thornbridge was contractually estopped from claiming the contrary.
As a matter of construction, the Court held that the provisions in the Confirmation were basis clauses rather than exclusion clauses. Accordingly, the clauses were not subject to the requirement of reasonableness under UCTA (although the Court found that even if UCTA applied, there was no reason why the provisions should be held unreasonable).
This was supported by the approach taken in other cases where similar wording had been considered, including Barclays Bank plc v Svizera Holdings BV  EWHC 1020 (Comm). The Court rejected the submission that the test is whether the clause “rewrites history”. The test to distinguish whether such representations are basis or exclusion clauses is “as a matter of construction whether the terms defined the basis upon which the parties were transacting business or whether they were clauses inserted as a means of evading liability“. The Court also held that the fact the contracts were signed some months after the trade was entered into was of no significance.
Common law duty to provide information
The Court found that there is a sharp distinction between advised and non-advised sales, applying Green & Rowley v Royal Bank of Scotland EWCA Civ 1197:
- If a bank undertakes an advisory duty, it will have positive duties to provide advice and information.
- Absent an advisory duty, a bank has “no obligation to explain fully the products which it is trying to sell”. However, where a bank provides information that is “inaccurate or unreasonable“, it has a duty to provide further clarificatory information. Additionally, a bank can expressly undertake a duty to provide information.
The Court expressly rejected the finding in Crestsign that there is a middle ground duty to explain “fully and accurately” the terms of any products for which a bank volunteers an explanation. Crestsign had distinguished Green & Rowley on the basis that the latter case considered this issue in the context of common law duties arising from the FSA Rules. Disagreeing with this approach, the Court in the instant case held that Green & Rowley sets out the extent to which the Hedley Byrne duty extends beyond a duty to take reasonable steps not to mislead and is a clear statement of the extent of the common law duty (although obiter). Crestsign is subject to appeal on this issue (expected April 2016).
The Court concluded that Barclays did not assume an advisory relationship with Thornbridge (see below) and thus the bank’s duty was limited to taking reasonable care not to give inaccurate or misleading information.
Claim for breach of FSA Rules
In line with recent case law such as MTR Bailey Trading Limited v Barclays Bank plc  EWHC 2882 (see also Titan Steel Wheels v Royal Bank of Scotland plc  EWHC 211 (Comm)), the Court readily found that Thornbridge was not entitled to claim for breach of the FSA Rules under section 138D FSMA as it was clearly a corporate entity acting “in the course of carrying on business“.
Again following the approach in Bailey, the Court also rejected an argument that the relevant FSA Rules were incorporated into the parties’ contracts on the basis that the contracts were said to be “subject to” applicable regulations. The provision (taken in context) was clearly intended to deal with potential conflict between regulations and the contract rather than to incorporate all applicable regulations.
Bailey is subject to appeal (expected July 2016) on both of these issues.
When will an advisory duty arise?
In holding that Barclays did not assume an advisory relationship, the Court gave helpful guidance as to the circumstances in which an advisory duty will arise. The Court took a robust approach, looking at the correspondence between the parties as a whole. In particular, it recognised that salespeople can give expressions of opinion on products without undertaking an advisory duty. It endorsed the dicta in JP Morgan Chase Bank v Springwell Navigation Corporation  EWHC 1186 (Comm) that advice must go “beyond the normal recommendations … given in the daily interactions between an institution’s salesforce and a purchaser of its products.”
This case underlines the substantial difficulties claimants face in bringing mis-selling claims in the English Courts. The Court’s decision on contractual estoppel arising from representations in standard form ISDA documentation is likely to discourage many mis-selling claims. The case also highlights the limits on the duties which banks will owe to customers directly at common law. In particular, where a bank does not undertake an advisory duty, it will be subject only to a narrow duty to take reasonable care not to mis-state.
Notably, the Court was willing to depart expressly from the reasoning in Crestsign and took an approach more favourable to the banks on both contractual estoppel (which was in issue in Crestsign, although the Court did not refer to Crestsign on the issue in the current case) and the scope of duties to provide information. Further, the Court’s finding that the timing of signing of the contracts was not relevant for estoppel (and that they could be signed months afterwards) is significant. These elements of the decision are likely to make it more difficult for claimants to establish that representations in ISDA documentation are subject to the reasonableness test in UCTA.