High Court dismisses IRHP mis-selling and unlawful means conspiracy claims against bank

May 11, 2022

The High Court has dismissed claims brought by a business against a bank alleging the mis-selling of interest rate hedging products (IRHPs) and an unlawful means conspiracy regarding the transfer of the business to the bank’s internal restructuring unit: CJ And LK Perks Partnership & Ors v Natwest Markets plc [2022] EWHC 726 (Comm).

This decision continues the trend of past IRHP mis-selling decisions, in which the court has refused to impose additional obligations on banks that were providing general dealing services on an execution-only basis (see blog posts here). It highlights the difficulty for customers in bringing mis-selling claims in circumstances where the bank has provided accurate information and stated clearly that it is not providing advice on a transaction.

In the present case, the court was satisfied that the bank had not breached its duties towards the customer. The bank had provided full explanations of the costs and risks involved with each of the IRHPs. The bank had underlined in the contractual and non-contractual documentation that it was not assuming a duty to provide advice to the customer in relation to the IRHPs. The court also found that the defaults on loan repayments and the likelihood of the customer’s insolvency were genuine and compelling reasons for the bank’s decision for the transfer of the customer’s business to its restructuring group.

We consider the decision in more detail below.

Background

In 1999, the defendant bank (the Bank) provided finance to a Scottish legal partnership (the Partnership) and two companies (together, the Claimants) for (i) the expansion of a chain of chiropractic clinics across Scotland and North-East England,  and (ii) the acquisition of  commercial property. In 2007, the facilities were consolidated into a £2m variable interest rate loan. One of the conditions of the loan required that the Partnership enter into an IRHP (the 2007 swap). This would provide the Partnership with protection from any increase in interest rates. However, the Partnership would not be able to benefit from any decrease in interest rates, as there would be a corresponding increase in the payments due to the Bank under the swap.

Between 2008 and 2009 interest rates fell rapidly to reach a low of 0.5% in March 2009, placing the Partnership in a less advantageous position than it would have been if its only commitment had been to pay a floating rate under the loan. Following a cashflow crisis, in 2009 the existing loan was restructured into a new package, under which the Partnership entered into a new IRHP with costs for breaking the 2007 swap “blended in” (the 2009 swap). Following a default on loan repayments, in November 2009 the Bank transferred the management of the Claimants to its Global Restructuring Group (GRG). At the Bank’ request, the Claimants engaged the services of an independent business consultant who assisted with the negotiation of further restructuring, which concluded in mid-2011. The Claimants continued to suffer from financial difficulties and went into administration in 2013.

In due course, the Claimants commenced legal proceedings against the Bank regarding: (i) the alleged mis-selling of the 2007 and 2009 swaps (the Mis-selling Claim); and (ii) an alleged conspiracy concerning the conduct of GRG following the transfer of the management of the Claimants to GRG in 2009 (the Conspiracy Claim).

The Bank denied each of the claims and brought a counterclaim for the sums outstanding under the loan.

Decision

The court found in favour of the Bank and dismissed each of the claims. The court said that the Claimants had failed to establish liability in relation to their various causes of action. Since the claims failed, the Claimants were liable in principle for the sums owed to Bank.

The key issues which will be of broader interest to financial institutions are summarised below.

1) Mis-selling Claims

The Claimants argued that the Bank: (i) failed to explain the risks involved and advise properly in respect of both the 2007 and 2009 swaps; and (ii) in relation to the 2007 swap only, made a negligent misrepresentation at a meeting in October 2007 that interest rates were going to rise, when the Bank was in fact aware that a fall in base rate was imminent.

Misrepresentation

The court found that there had been no misrepresentation by the Bank.

The court said that, on the balance of probabilities and in light of the documentary evidence: (i) it could not make a finding that the representation relied upon (i.e. the direction of interest rates) was made in 2007 or at any time; and (ii) the claim would have also failed on causation as the Claimants would have entered into the swap if the relevant misrepresentation had not been made.

Failure to explain

The court found that there had been no breach of duty by the Bank.

Duty not to misstate and to give advice fully, properly, and accurately

The court noted that, as per Hedley Bryne v Heller [1963] UKHL 4, there may be factual circumstances arising out of the position of the defendant in relation to the claimant, combined with the defendant’s conduct or omissions that give rise to an assumption of responsibility and the imposition of a tortious duty. This is a duty not to carelessly make a misstatement. What amounts to a misstatement will depend on the factual circumstances of the relationship and identification of the matter for which the defendant has assumed responsibility.

The court also highlighted that, as per Bankers Trust International plc v PT Dhamala Sakti Sejahtera [1996] CLC 518, that if a bank does give an explanation or tender advice then it owes a duty to give that explanation or tender that advice fully, accurately and properly. However, how far that duty goes will depend on the precise nature of the circumstances and of the explanation or advice which is tendered.

2007 swap

The court rejected the Claimants’ arguments that the Bank failed to explain the risks of the applicable break costs, the impact of a “Contingent Obligation” on future lending decisions, restrictions on property sales and fees charged by the Bank.

The court noted that the documentation provided to the Claimants clearly highlighted the risks of the 2007 swap. There had been a meeting in October 2007 to discuss the advantages and disadvantages of the different types of IRHPs, the potential for breakage costs, the mechanics of how a breakage cost would be calculated, and a recommendation that the Partnership seek independent advice before proceeding.

On the basis of the above, the court said it did not consider that there had been any misstatement in the information provided by the Bank in relation to break costs, nor any tortious duty which required more detail as to the size of possible break costs to be provided. Also, the key person acting on the Claimants’ behalf was capable of understanding financial matters including the consequences of the swap as explained to him.

2009 swap

The court said that, on the evidence, the Bank had sufficiently explained the substantial break costs for breaking the 2007 swap and the lengthening of the swap period. The court also highlighted that it did not consider that the Claimants would not have acted any differently if given any further details on the risks.

Failure to advise

The court found that there had been no breach of duty by the Bank.

Duty to provide advice

The court noted that, as per Fine Care Homes Ltd v National Westminster Bank PLC [2020] EWHC 3233 (Ch), the ultimate question was “whether the particular facts of the transactions, taken as a whole and viewed objectively, show that the bank assumed a responsibility to advise the customer as to the suitability of the transaction“.

The court also pointed out that, as per London Executive Aviation Ltd v RBS [2018] EWHC 74 (Ch), even if advice was given by the bank, whether such advice was of a kind to attract a duty of care on the bank would depend on a number of factors including: (i) the sophistication or otherwise of the claimant; (ii) the presence or absence of a written advisory agreement; (iii) the availability of advice from other sources; (iv) the indicia of an advisory relationship; and (v) the contractual documentation and agreed basis of dealing.

2007 and 2009 swaps

The court said that any single instance of advice given by the Bank in respect of swaps was not sufficient to attract a duty of care. The court highlighted: (i) the general absence of any advisory language in the Bank’s communications with the Claimants; (ii) the Bank’s recommendation to the Claimants that they seek independent advice prior to proceeding; (iii) both the contractual and non-contractual documentation made it clear that the Bank was providing an execution-only service and was not acting as an advisor to the Partnership; and (iv) the contractual documents contained the Partnership’s agreement that it had made its own decision to enter into the swaps and had not relied on any advice from the Bank when doing so.

The court said that, since the claim failed irrespective of the effect of the contractual documents, it was not necessary to consider in detail the parties’ arguments in relation to the validity of the terms relied upon. In any event, the court would have reached the same conclusion as Fine Care Homes, which confirmed that the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel (so that no duty of care to advise the customer as to the suitability of the IRHP arose) and that this clause was not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 when relied upon in the context of a breach of advisory duty claim.

2) Conspiracy Claim

The court found that the Bank had not engaged in an unlawful means conspiracy. In the court’s view, there were genuine and indeed compelling business reasons for the Claimants’ transfer to GRG.

Test for unlawful means conspiracy

The court recalled that the test for conspiracy, as per Lakatamia Shipping Co Ltd v Nobu Su and others [2021] EWHC 1907 (Comm), requires (i) a combination or understanding between two or more people; (ii) an intention to injure the claimant, for which intention to advance economic interests at the expense of the claimant is sufficient; (iii) unlawful acts carried out pursuant to the combination or understanding; and (iv) loss to the claimant suffered as a consequence of those unlawful acts.

Transfer to GRG

The court said that the Conspiracy Claim failed on the grounds that: (i) there was no relevant combination; (ii) individuals at the Bank including the consultant did not act unlawfully; and (iii) there was no intention on the part of the Bank to cause loss.

The court noted that the two core reasons for the transfer to the GRG were: (i) the inability of the Claimants to generate sufficient turnover and profit to repay its debt over an acceptable time frame; and (ii) a concern that the Bank had a security shortfall in respect of its lending to the Claimants.

The court said there was no evidence whatsoever that the transfer to GRG, and the 2011 restructuring, was driven by an ulterior motive on the part of the Bank, or was part of an internal conspiracy within the Bank, to profit from and at the expense of the Claimants. On the contrary, the court concluded that given the actual default on loan repayments and the likely insolvency of the Claimants, the Bank had a “commercially reasonable and rational basis” for the transfer to GRG and what became the 2011 restructure.

Moreover, the court found no evidence that the consultant furthered the Bank’ interests to the detriment of the business. The court pointed out that the consultant had worked positively in favour of the Claimants a number of times.

Accordingly, for all the reasons above, the court found in favour of the Bank and dismissed the Mis-selling and Conspiracy Claims.

Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Katie-Scarlett Wetherall
Katie-Scarlett Wetherall
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High Court upholds contractual terms setting out basis of relationship in dismissing breach of duty claim relating to introduction to third party investment schemes

October 28, 2021

The High Court has upheld certain contractual terms which set out the basis of the parties’ relationship in dismissing a breach of duty claim by an investor and his associated companies against a chartered accounting firm in relation to losses alleged to have been suffered as a result of their introduction by the firm to various tax and FX trading investment schemes: Knights v Townsend Harrison Ltd [2021] EWHC 2563 (QB).

The decision is a reassuring one for financial institutions faced with claims alleging that they owe a duty of care to their clients when introducing them to third party investment schemes and are consequently responsible for any losses suffered as a result. It highlights the difficulties for claimants in establishing that a financial institution owed them a duty of care in relation to any third party investment schemes which they may have been introduced to as to part of their business relationship, especially where there are clear contractual terms in place at the outset stating that the financial institution has not assumed any responsibility to provide advice in respect of the investment schemes.

In the present case, the court found that the terms of business and limitation of liability letters provided by the firm to the investors contained clear wording that the firm: (i) was not giving a recommendation on a particular investment or type of investment; (ii) was not providing advice as to the success or risks of the investment; (iii) understood that the investor was relying on third party/independent financial advice as to the investment; and (iv) understood that the investor had read the contractual terms relating to their business relationship and acknowledged them, so there were no circumstances in which the firm reasonably foresaw that the investors would rely upon it or its advice.

We consider the court’s decision in more detail below.

Background

In 2011, an individual and his associated companies (the claimants) engaged a chartered accounting firm (the defendant) as their accountant. This relationship was documented through various engagement letters (which incorporated the defendant’s standard terms of business) and limitation of liability letters (the Limitation of Liability Letters).

The claimants subsequently brought a breach of duty claim against the defendant seeking damages in respect of losses alleged to have been suffered as a result of the defendant having introduced the claimants to various tax and FX trading schemes. The claimants’ case was that the defendant owed certain common law duties of care to the claimants and had acted in breach of these duties of care.

The defendant denied that it owed any common law (or contractual) duty of care to the claimants or that the claimants were entitled to and did rely on the defendant. The defendant’s case was that although it was the claimants’ accountant, it was a mere introducer of the tax schemes and FX trading scheme to the claimants.

The defendant placed particular reliance on its terms of business and Limitation of Liability Letters, in which the defendant contended that it was not providing, and could not provide, advice in relation to the tax schemes or FX trading scheme.

Decision

The court found in favour of the defendant and dismissed the claim for the reasons explained below.

Duty of care principles

In its consideration as to whether there was a duty of care, the court highlighted the following key principles:

  • Establishing the requisite duty required two things, namely that: (i) the defendant had actually given what could properly be described as advice; and (ii) in doing so, the defendant had assumed responsibility for its advice or the duty of care had arisen by reason of one of the other familiar tests for establishing a duty of care at common law (as per Carney v Rothschild Investments [2018] EWHC 958 (Comm)).
  • The assumption of responsibility test was the appropriate test to apply because the other tests had been relegated in importance by the Supreme Court in a number of recent decisions, and the closer the relationship is to one of contract, the more likely that test is likely to assist. There are essentially two elements to it, namely whether the: (i) defendant reasonably foresaw that the claimants would rely on its advice; and (ii) claimant did in fact reasonably rely on the advice (as per Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465). This test requires a “special relationship” between the claimant and defendant, i.e. where one party has assumed or undertaken a responsibility towards the other (as per Henderson v Merrett Syndicates Ltd [1995] 2 AC 145).
  • The disclaimer in the Limitation of Liability Letters should not be approached as if it were a contractual exclusion (as per Hedley Byrne). Rather, it is to be regarded as one of the facts relevant to answering the question of whether there had been an assumption of responsibility by the defendants for the relevant statement. The question must be answered objectively by reference to what a reasonable person in the position of the claimant would have understood at the time that he finally relied on the representation (as per McCullagh v Lane Fox & Partners [1996] PNLR 205).
  • As a matter of contract law it is possible for parties to a contract to give up any right to assert that they were induced to enter into the contract by misrepresentation, provided they make their intentions clear, and a clause to this effect, if properly drafted, may give rise to a contractual estoppel (as per Peekay v ANZ [2006] EWCA Civ 386 and Cassa di Risparmio v Barclays Bank [2011] 1 CLC 701).
  • The principles relating to contractual estoppel were less readily applicable where an adviser, albeit in the context of a retainer, advises in respect of the entry into a contract with a third party. However, this point did not arise for consideration on the facts of the present case; the court did not consider that contractual estoppel would arise in circumstances where the existence of the Limitation of Liability Letters would not in and of themselves have precluded the existence of a duty of care.
  • In circumstances where a Limitation of Liability letter of the kind used in the present case is not received back for some time after the relevant advice has been acted upon, then that may be a factor relevant to the objective consideration by the court as to whether or not there had been an assumption of responsibility, and whether any assumption of responsibility has in fact been negatived by the existence of the Limitation of Liability letter. However, this will depend upon the individual circumstances of the case. The key issue is, as per McCullagh, what a reasonable person in the position of claimants would have understood as to the defendant’s position so far as an assumption of responsibility was concerned from the fact that the Limitation of Liability letters had been sent to them, at the time that they committed themselves to the tax schemes.
  • It may be that, on appropriate facts, a relationship of reliance exists even though the accountant does not in fact provide affirmative advice so as to give rise to that relationship – provided that relationship of reliance is not negatived by other considerations such as appropriately worded Limitation of Liability letters. Thus, there may be circumstances in which an accountant in introducing a client to a tax scheme in the context of an ongoing professional relationship may owe a duty not to introduce an unsuitable client to an unsuitable tax scheme. Although obiter, the position was expressed to be different in the context of a banker and customer relationship; the court suggested it may be less likely such a relationship of reliance exists in that context.
  • There may be circumstances in which the nature of the relationship was such that it was incumbent upon the accountant to proffer advice in relation to the tax scheme and the implications of entry into the same. However, this would all be dependent upon showing that the circumstances were such that the accountant had assumed responsibility for such matters. This would in turn depend upon whether the accountant reasonably foresaw that the client would rely upon him in respect of these matters, and whether the client did, in fact reasonably rely on the accountant.

Application of duty of care principles to the present case

The court held that the claimants had failed to establish the existence of a common law duty of care.

Tax Schemes

As to the claimants’ introduction case, the court commented that there was no support in the expert evidence for the proposition that these type of tax schemes were of the type that ought not to have been introduced by a general practitioner accountant acting reasonably in any event. Further, the tax schemes in question were underpinned by legal advice from eminent leading tax Counsel. In the circumstances, it could not fairly be said that the introductions to the tax schemes ought not to have been made. The court also said that it could not be fairly said that the claimants were unsuitable persons to at least introduce to promoters of tax schemes of the kind available. There were cogent reasons for the claimants to consider tax planning and the claimant investor involved demonstrated a significant level of sophistication and that he was not risk averse with regard to investments.

As to the claimants’ advice case, the court commented that the defendant did generally encourage the claimants to give consideration to the tax schemes. However, on the evidence it was unable to conclude that the defendant went further and advised the claimants that they had nothing to lose in entering the schemes, or that the only real risk was that there might be a liability for corporation tax. The court was not persuaded that the defendant had assumed a responsibility to advise in respect of these matters. The 2011 engagement letter and the defendant’s standard terms of business made it clear that the defendant would not recommend a particular investment or type of investment. Also, the relevant Limitation of Liability Letters explained in clear terms, amongst other things, that the defendant could not advise as to the success or otherwise of any tax planning strategy and the risks involved, and required the claimants to confirm that they were relying solely on the relevant scheme provider’s advice. The fact that the claimants received such advice from another party was another factor pointing against the defendant being subject to an advisory duty of care. The court also said that it did not consider that the circumstances were such that it could properly conclude that the defendant was on notice that the claimants were not relying on the advice of the scheme providers; the claimants had signed the declarations saying that they had read and understood the relevant documentation. Even in circumstances where there was no evidence in relation to one of the tax schemes in question that a Limitation of Liability Letter had been signed, the nature of the relationship as between the defendant and the claimants in respect of the introduction to the tax schemes was well established by then as being one under which the defendant had made clear that it was assuming no responsibility towards the claimants in respect of the introductions and the provision of advice thereof. So these were not circumstances in which the defendant reasonably foresaw that the claimants would rely upon it or its advice, or in which the claimants did reasonably so rely.

FX Trading Scheme

The court commented that it did not consider that any binding and enforceable agreement had been concluded for the defendant to carry out any form of due diligence in relation to the FX trading scheme. There was also insufficient certainty as to what was to be involved. The court said that in the circumstances it was unable to conclude that the defendant had assumed responsibility to carry out a due diligence exercise of the kind that the claimants now contended ought to have been carried out that would have been concerned with the legitimacy and bona fides of the FX trading scheme. The relevant events took place against a background under which the claimants accepted that the defendant was not permitted to advise in respect of specific investments, could provide no warranty in respect thereof, and had sought to make it clear that it accepted no responsibility for the provision of any advice and more generally in respect of the FX trading scheme in the Limitation of Liability Letters sent prior to the claimants actually committing themselves to the FX trading scheme, albeit that the Limitation of Liability Letters were not signed until thereafter. The court also noted that the fact the claimants did not immediately hold the defendant responsible demonstrated that they placed no reliance upon the defendant to provide the due diligence of the kind that it was now alleged that the defendant ought to have carried out.

Accordingly, the court dismissed the claim.

Rupert Lewis
Rupert Lewis
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Nihar Lovell
Nihar Lovell
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Nic Patmore
Nic Patmore
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High Court considers First Tower judgment in the context of no-advice clauses and confirms UCTA does not apply

December 9, 2020

The High Court has dismissed the latest interest rate hedging product (IRHP) mis-selling claim to reach trial in Fine Care Homes Limited v National Westminster Bank plc & Anor [2020] EWHC 3233 (Ch).

The judgment will be welcomed by financial institutions for its general approach to claims alleging that a bank negligently advised its customer as to the suitability of a particular financial product (whether an IRHP or otherwise). While there are some aspects of the decision which hinge on the unsophisticated nature of this particular claimant, the touchstone of when it can be said that a bank owes a common law duty to advise, the content of that duty and what a claimant must prove to demonstrate that the advisory duty (if owed) has been breached, will be of relevance to similar claims faced by banks in relation to other products or services.

The aspect of the judgment likely to be of greatest and widest importance to the financial services sector, is the court’s analysis of how the doctrine of contractual estoppel should be applied in these types of mis-selling cases.

The question in this case was whether the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel, so that no duty of care to advise the customer as to the suitability of the IRHP arose. In good news for banks, the court determined that clauses stating that the bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction (precisely the sort of clauses which are typically relied upon to trigger a contractual estoppel), were not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 (UCTA) when relied upon in the context of a breach of advisory duty claim.

This may appear an unsurprising outcome, given the Court of Appeal’s decision Springwell Navigation Corpn v JP Morgan Chase Bank [2010] EWCA Civ 1221. However, certain obiter comments by Leggatt LJ in First Tower Trustees v CDS [2019] 1 WLR 637 could be read as conflicting with Springwell in relation to the effect of so-called no-advice clauses and the application of UCTA in relation to them.

In the present case, the court emphasised the clear distinction made in First Tower between, on the one hand, a clause that defines the party’s primary rights and obligations (such as a no-advice clause), and on the other, a clause stating that there has been no reliance on a representation (a “non-reliance” clause). It said that the Court of Appeal’s decision in First Tower was limited to the effect of non-reliance clauses given the nature of the clause at issue in that case. First Tower confirmed that where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act 1967 will be engaged and the clause will be subject to the UCTA reasonableness test. In contrast, the clauses at issue here were not non-reliance clauses, but rather clauses that set out the nature of the obligations of the bank, and therefore were not subject to section 2 of UCTA.

Contractual estoppel has regularly been relied upon by banks defending mis-selling claims to frame the obligations which they owe to customers, particularly in circumstances where claimants have sought to argue that, notwithstanding the clear terms of the contracts upon which the transactions were entered into, the banks took on advisory duties in the sale of financial products which turned out to perform poorly. The decision in Fine Care Homes will therefore be welcomed by financial institutions, particularly against the backdrop of the First Tower decision. While in many circumstances, no-advice clauses would be likely to meet the requirements of reasonableness under UCTA in any event (as was the outcome in the present case), removing a hurdle that must be cleared in order to rely on such clauses is clearly preferable from the bank’s perspective, adding certainty to the relationship.

Background

In 2006, the claimant (Fine Care Homes Limited) took out a loan with the Royal Bank of Scotland (the Bank) to finance the acquisition of a site in Harlow on which it intended to build a care home (the land loan). The claimant also intended to borrow further funds from the Bank to finance the development of the site (the development loan), although ultimately the parties were unable to reach agreement on the terms of the development loan.

In 2007, the claimant took out an IRHP with the Bank, as a condition of the anticipated development loan. The IRHP was a structured collar with a term of five years, extendable by two years at the option of the Bank (which was duly exercised).

In 2012, the IRHP was assessed by the Bank’s past business review (PBR) compensation scheme (which had been agreed with the then-Financial Services Authority (FSA)) to have been mis-sold. In 2014, the claimant was offered a redress payment by the Bank’s PBR.

The claimant did not to accept the offer under the PBR and pursued the following civil claims against the Bank at trial:

  1. Negligent advice claim: A claim that the Bank negligently advised the claimant as to the suitability of the IRHP, in particular by failing to tell the claimant that the IRHP would impede its capacity to borrow, or that novation of the IRHP might not be straightforward / might require security.
  2. Negligent mis-statement / misrepresentation claim: A claim that the information provided by the Bank regarding the IRHP contained negligent mis-statements or misrepresentations in the same two respects as the negligent advice claim.
  3. Contractual duty claim: A claim that the Bank was subject to an implied contractual duty under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable skill and care when giving advice and making recommendations, which was breached in the same two respects as the negligent advice claim.

Decision

The court held that all of the claims against the Bank failed, each of which is considered further below.

1. Negligent advice claim

The court’s analysis of the negligent advice claim was divided into three broad questions: (i) did the Bank owe a duty of care to advise the claimant as to the suitability of the IRHP; (ii) could the Bank rely upon a contractual estoppel to the effect that the relationship did not give rise to an advisory duty; (iii) if there was an advisory duty in this case, was it breached by the Bank in the two specific respects alleged by the claimant?

(i) Did the Bank owe a duty of care?

It was common ground that the sale of the IRHP was ostensibly made on a non-advisory rather than advisory basis, but the claimant alleged that the facts nevertheless gave rise to an advisory relationship in which a personal recommendation was expressly or implicitly made. In this regard, the claimant relied on the salesperson at the Bank being held out as being an “expert” (as an approved person under FSMA); that he advised the claimant to buy the particular IRHP and that the Bank therefore assumed a duty of care which required it to ensure that the IRHP was indeed suitable.

As to whether the Bank owed an advisory duty on the facts of this particular case, the court referred in particular to two substantive trial decisions considering a claim for breach of an advisory duty in the context of selling an IRHP: Property Alliance Group v RBS [2018] 1 WLR 3529 and LEA v RBS [2018] EWHC 1387 (Ch). The court highlighted the following key points from these cases:

  • A bank negotiating and contracting with another party owes in the first instance no duty to explain the nature or effect of the proposed arrangement to the other party.
  • As a point of general principle, an assumption of responsibility by a defendant may give rise to duty of care, although this will depend on the particular facts (applying Hedley Byrne v Heller [1964] AC 465).
  • In the context of a bank selling financial products, in “some exceptional cases” the circumstances of the case might mean that the bank owed a duty to provide its customer with an explanation of the nature and effect of a particular transaction.
  • There are a number of principles emerging from the cases as to the way in which the court should approach this fact-sensitive question. In particular, the court must analyse the dealings between the bank and the customer in a “pragmatic and commercially sensible way” to determine whether the bank has crossed the line which separates the activity of giving information about and selling a product, and the activity of giving advice.
  • However, there is no “continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end”. Rather, the question should be the responsibility assumed in the particular factual context, as regards the particular transaction in dispute.
  • Assessing whether the facts give rise to a duty of care is an objective test.

On the facts, the court did not consider that this was to the sort of “exceptional case” where the bank assumed an advisory duty towards its customer. The court highlighted the following factual points in particular, which are likely to be of broader relevance to mis-selling disputes of this nature:

  • The court noted that it is quite obviously not the case that in every case in which an IRHP is sold by an approved person (as it will inevitably be) a duty of care arises to ensure the suitability of the product.
  • The claimant was unable to point to anything at all in the exchanges between the Bank and the claimant which contained advice to buy the IRHP. The court rejected the claimant’s argument that the Bank’s presentation of the benefits of IRHP products in general could amount to advice to buy any specific product. Referring to the decision in Parmar v Barclays Bank [2018] EWHC 1027 (Ch), the court confirmed that if a recommendation is to give rise to an advised sale, it must be made in respect of a particular product and not IRHPs in general. Although Parmar was decided in the context of a statutory claim under s.138D FSMA, the court found that the principle applied equally to a mis-selling claim of this type (see our blog post on the Parmar decision).

Accordingly, the court found that the Bank did not owe an advisory duty in relation to the sale of the IRHP.

In reaching this conclusion, the court rejected any suggestion that the rules and guidance set out in the FSA/FCA Handbook could create a tortious duty of care where one did not exist on the basis of the common law principles (applying Green & Rowley v RBS [2013] EWCA Civ 1197). The relevant context in Green & Rowley was whether the (then-applicable) Conduct of Business rules and guidance (COB) could create a concurrent tortious duty of care, but the court in this case extended the same reasoning to the Statements of Principle and Code of Practice for Approved Persons (APER). The court stated that APER code could not carry any greater weight in relation to the content of the common law duties of care than the COB rules.

(ii) Could the Bank rely upon a contractual estoppel?

The court found that the Bank was entitled to rely on its contractual terms as confirming that the relationship between the Bank and the claimant did not give rise to a duty of care to advise the claimant as to the suitability of the IRHP, and that the claimant was estopped from arguing to the contrary by those contractual terms.

The terms of business included the following material clauses:

“3.2 We will provide you with general dealing services on an execution-only basis in relation to…contracts for differences…

3.3 We will not provide you with advice on the merits of a particular transaction or the composition of any account…You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information only and do not amount to advice, an assurance or a guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete…”

The court rejected the claimant’s argument that these clauses were subject to the requirement of reasonableness under UCTA.

In reaching this conclusion, the court referred to the decision in First Tower Trustees v CDS [2019] 1 WLR 637, which considered the effect of a “non-reliance” clause (a clause providing that the parties did not enter into the agreement in reliance on a statement or representation made by the other contracting party). First Tower confirmed that, where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act will be engaged and the clause will be subject to the UCTA reasonableness test.

However, the court in Fine Care Homes found that clauses 3.2 and 3.3 in the present case were different from non-reliance clauses, being clauses that set out the nature of the obligations of the Bank. The court highlighted that the judgments of both Lewison LJ and Leggatt LJ in First Tower, clearly distinguished between a clause that defines the party’s primary rights and obligations, and a clause stating that there has been no reliance on a representation. In respect of the former, First Tower provided the following articulation of the position:

“Thus terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of [the 1977 Act]. Otherwise, every contract which contains contractual terms defining the extent of each party’s obligations would have to satisfy the requirement of reasonableness.”

In First Tower, Lewison LJ had gone on to refer to Thornbridge v Barclays Bank [2015] EWHC 3430 (a swaps case) which considered a clause stating that the buyer was not relying on any communication “as investment advice or as a recommendation to enter into” the transaction. In First Tower, Lewison LJ explained that this clause defined the party’s primary rights and obligations, and was not a clause stating that there had been no reliance on a representation.

Applying this reasoning to the present case, the court found that clauses 3.2 and 3.3 (stating that the Bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction), were primary obligation clauses that were not subject to the requirement of reasonableness in UCTA (or, by parity of reasoning, COB 5.2.3 and 5.2.4).

Had UCTA applied, the court said that it would in any event have found the clauses reasonable, noting that some of the claimant’s objections effectively asserted that it could never be reasonable for a bank selling an IRHP to a private customer to specify that it was doing so on a non-advisory basis – which the court did not accept.

(iii) If an advisory duty was owed, was it breached by the Bank?

Although it was not necessary for the court to consider the specific breaches of duty alleged by the claimant (given its findings above), the court proceeded to do so for the sake of completeness.

The court applied Green & Rowley, confirming that the content of the advisory duty (if owed) “might” be informed by the COB that applied at the time of the sale (here COB 2.1.3R and COB 5.4.3R) and the APER code. However, the claimant did not in fact identify any specific respect in which the FCA framework had a material impact on the claimant’s case.

By the time of the trial, the claimant’s case was narrowed to two quite specific allegations concerning what it should have been told by the Bank in relation to two key issues: (1) that the Bank negligently failed to explain to the claimant that the Bank’s internal credit limit utilisation (CLU) figure for the IRHP, would affect the claimant’s ability to refinance existing borrowings / borrow further sums (from the Bank or another lender); and (2) that the Bank should have warned the claimant that novation of the IRHP might require external security to be provided.

The arguments on these allegations were fact-specific, and ultimately the court found that there was no evidence to support them.

2. Negligent mis-statement / misrepresentation claim and contractual claim

The claims on these alternative grounds also failed, given the court’s finding that what the Bank told the claimants was correct, in respect of the two complaints identified.

Consistent with the position found in Green & Rowley, the court noted that the content of the Bank’s common law duty in relation to the accuracy of its statements was not informed by the content of the COB rules or APER code (in contrast with the advisory duty, where the content of the duty might be informed by the FCA framework).

Accordingly, the claim was dismissed.

John Corrie
John Corrie
Partner
+44 20 7466 2763
Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nic Patmore
Nic Patmore
Senior Associate
+44 20 7466 2298

High Court rejects the first IRHP mis-selling claim brought by private persons under Section 138D FSMA

June 13, 2018

The High Court has rejected the first interest rate hedging product (“IRHP“) mis-selling claim brought by private persons under section 138D of the Financial Services and Markets Act 2000 (“FSMA“) in the recent case of Ramesh Parmar & Anor v Barclays Bank plc [2018] EWHC 1027 (Ch).

The decision will be of particular interest to financial institutions defending claims relating to the mis-selling of financial products generally, and in particular to statutory claims brought by private persons. The court considered a number of factors which may make for useful comparisons with other cases, in particular in relation to its assessments that there was no advisory relationship and that there was no breach of the Conduct of Business Sourcebook (“COBS“) Rule 10 (which applied on the basis that it was a non-advised sale). The factors of potential wider application are discussed in the decision section below. Insofar as two of the claimants’ complaints were found to amount to technical breaches of other COBS Rules, the court’s decision that no loss flowed from those breaches and therefore the claims still failed, is instructive.

Significantly, the court took a more narrow approach to the use of basis clauses to define the bank/customer relationship as “non-advisory“, than has previously been adopted by the courts in the mis-selling context (and in financial markets transactions generally). The courts have consistently found that basis clauses are outside the scope of the Unfair Contract Terms Act 1977 (“UCTA“) (and s.3 Misrepresentation Act 1967), as they do not attempt to exclude or limit liability, but rather give rise to a contractual estoppel, which prevents the parties contending that the true state of affairs was different to that agreed in the contract: Crestsign Ltd v National Westminster Bank plc & Anor [2014] EWHC 3043 (Ch). However, in the instant case, the court held that UCTA was irrelevant, because COBS 2.1.2 applied and went further than UCTA to “prevent a party creating an artificial basis for the relationship, if the reality is different“. The court therefore held that the bank would not have been able to rely upon the basis clause if it had in fact given advice.

Given the court’s ruling that the defendant bank did not give advice, its conclusions on this issue were obiter dicta and therefore do not have precedent value, but may be persuasive in future cases. However, the court’s suggestion that COBS 2.1.2 goes further than UCTA is ripe for challenge. It is widely accepted that an attempt to alter the character of a relationship retrospectively through the use of basis clauses is unlikely to avoid the scrutiny of UCTA. Indeed, in Crestsign itself, the claimant submitted that it would be “rewriting history or parting company with reality” to define the relationship as one in which advice was not given. However, the court in that case (properly in our view) highlighted that the line that separates provision of information from giving advice may be a fine one, and this may lead parties to legitimately define their relationship to avoid disputes afterwards, with “no violence” being done to history or reality. With this in mind, there is an argument to be made that COBS 2.1.2 does not go any further than UCTA, and as such the bank should have been able to rely on the basis clause if it had crossed the line into giving ‘advice’.

Additionally, and in keeping with other recent authorities, the court held that there was no specific requirement for the bank to disclose its internal credit limits at the point of sale under the COBS Rules for the purpose of demonstrating the breakage costs (see our banking litigation e-bulletin). However, there was a second aspect of the complaint relating to non-disclosure of the internal credit limit considered in this case: the impact of the internal credit limit on the claimants’ future borrowing ability. This aspect caused the court more concern. The court commented that there could be factual situations where disclosure would be required under the COBS Rules if the limit would have a significant impact on future borrowing, although this was not the case on the present facts. However, the court does not seem to have been referred to the Privy Council decision in Deslauriers & Anor v Guardian Asset Management Limited [2017] UKPC 34, in which the contrary conclusion was reached (see our banking litigation e-bulletin).

Background

The claimants were longstanding clients of Barclays Bank plc (the “Bank“) and ran a small disposable gloves business and a small residential property investment business.

The claimants had no prior experience of IRHPs. However, in May 2006, prior to taking out a third loan with the Bank, the claimants indicated to the Bank that they were interested in taking out a fixed rate loan. The Bank no longer offered fixed rate loans. Instead, the Bank suggested that the claimants could enter into an IRHP to manage their interest rate risk.

The Bank provided a number of different presentations over three years which gave information on a variety of IRHPs (including swaps, caps, collars, enhanced collars and structured collars). Following discussions between the Bank and the claimants, in April 2009, the claimants entered into two ten-year interest rate swaps at a fixed rate of 3.48% (the “Swaps“). Relevant details of the presentations and discussions are considered further in the decision section below.

In October 2012, after the past business review into the sale of IRHPs had been announced by the FCA, the claimants made a complaint about the Swaps. The claimants met the criteria of non-sophisticated retail classified customers and were assessed as eligible for the review. However, the review ultimately concluded that the Bank had met the necessary standards at the point of sale and therefore no redress was due. The claimants subsequently commenced proceedings.

Claim

The claimants initially advanced various causes of action, including allegations of breach of various common law duties of care and fiduciary duties in connection with the underlying sale of the Swaps and/or the conduct of the past business review by the Bank (among others). However, the claimants abandoned these claims and instead focused on a sole cause of action: a statutory claim under s.138D FSMA for several alleged breaches by the Bank of the COBS Rules. The claimants claimed that – but for the alleged breaches of COBS – they would have entered into two interest rate cap products, each for a term of five years at a rate of 4.5%.

Decision

The principal issues which arose for consideration were:

  1. Was the sale advised or non-advised?
  2. Did the Bank fail to comply with either COBS Rule 9 (if it was an advised sale) or COBS Rule 10 (if it was a non-advised sale)?
  3. Could the Bank rely on ‘basis clauses’ in its contracts with the claimants?
  4. Did the Bank comply with various other COBS Rules?

The court cautioned that each case will turn on its own facts and so the findings made may provide limited assistance in any subsequent case. However, there are a number of points of potentially wider application which arise from the court’s discussion of these issues, which are explored in further detail below.

  1. Was the sale advised or non-advised? 

    The court stated that, in order for the sale to be advised, there must be “a value judgement“, “an element of opinion” or “advice on the merits” on the part of the Bank, in keeping with the principles established in Rubenstein v HSBC [2011] EWHC 2304 (QB) and Zaki & Ors v Credit Suisse (UK) Ltd [2011] EWHC 2422 (Comm). The court noted that the test was an objective one, namely, having regard of all evidence in the factual circumstances of the case: “has there been advice or simply the giving of information?” (as per Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB)).The court concluded that the sale was non-advised and that COBS Rule 9 was not engaged in the circumstances. In reaching that conclusion, the court relied on the following factors:

    • The fact that the claimants had a relationship of trust with their relationship managers at the Bank did not mean that the relationship managers were dealing with the claimants as advisers.
    • The absence of an external independent adviser did not necessarily mean that the Bank’s representative was giving advice to the claimants.
    • References in the presentations provided to the claimants to “Barclays Capital’s unrivalled depth of expertise and providing strategic FC to Corporate Risk to the UK Market Place” and the words “Corporate Risk Advisory” beneath the Bank representative’s name, by themselves did not mean that the Bank was giving advice to the claimants in relation to the IRHPs.
    • Generally, to constitute a recommendation, the recommendation must have been made in respect of a particular product (and not interest rate management generally). The fact that the claimants were given information as to the pros and cons of various IRHPs by a specialist in the field authorised by the FCA to do so, in itself did not make the Bank’s representative an adviser, particularly as he did not promote one IRHP over the other.
    • The use of phrases such as “bespoke“, “our more popular solutions“, and “tailoring the protection” in literature or communications did not mean that advice had been given.
    • It was clear from the evidence that the claimants’ decision to enter into the Swaps (rather than the cap product) was not based on a recommendation from the Bank’s representative, but was because the claimants did not wish to pay a premium, having considered all the information available.
  2. Did the Bank fail to comply with either COBS Rule 9 (if it was an advised sale) or COBS Rule 10 (if it was a non-advised sale)? 

    As the court found that there was no advisory relationship, it was not strictly necessary to consider the effect of COBS Rule 9 and whether the Swaps were suitable. However, the court went on to do so, and found that even if COBS Rule 9 had been engaged, the Swaps would have been suitable for the claimants in the circumstances.The court therefore considered compliance with COBS Rule 10 (the obligation to assess the appropriateness of the product), which applied because the court held that the sale was non-advised. The claimants alleged that the Bank was in breach of this rule by failing to carry out an adequate fact finding exercise, so as to ensure the claimants had the necessary understanding of the risks involved in relation to the IRHPs. The court rejected this claim and found that the fact-finding exercise carried out by the Bank had been sufficient, despite the Bank conducting the exercise incrementally.

  3. Could the Bank rely on basis clauses in its contracts with the claimants?The Bank took the position that even if it had been found to have given advice, it could rely on certain ‘basis clauses’ in the contractual documentation. The Bank submitted that similar or near identical clauses to those in the present case had been considered by the court in mis-selling cases, and repeatedly found to be ‘basis clauses’ rather than exclusion clauses, and therefore beyond the remit of UCTA (for example, in Crestsign). The Bank submitted that there was no distinction to be drawn between the words used in s.3 UCTA and those used in COBS 2.1.2. The latter prevents any attempt by a firm “in any communication relating to designated investment business seeking to (1) exclude or restrict; or (2) rely on any exclusion or restriction of; any duty or liability it may have to a client under the regulatory system“.

    The court rejected the Bank’s submission on this issue and instead found that UCTA was irrelevant. The court held that COBS 2.1.2 went further than s.3 UCTA, in that it “prevent[ed] a party creating an artificial basis for the relationship, if the reality is different“. Accordingly, had the Bank in fact given advice, the Bank would not have been able to rely on the disclaimers in the contractual documentation in question or any similar statements in the presentations provided to the claimants to negate this. Such clauses would be void under COBS 2.1.2.

  4. Did the Bank comply with various other COBS Rules? 

    The other aspects of the claimants’ claim centred on allegations that the Bank had failed to provide sufficient information to the claimants in relation to three principal matters, and thereby failed to comply with various other COBS Rules.Potential magnitude of break costs

    The claimants argued that the presentations provided by the Bank failed to give a sufficient explanation of the potential magnitude of break costs. The court rejected this argument, instead finding that the Bank provided the claimants with both qualitative and quantitative illustrations of potential break costs and the documentation made it clear that break costs would depend upon market conditions at the time of termination. Further, on the evidence before the court, the claimants clearly understood the nature, effect and possible magnitude of break costs.

    The court did, however, find that the following wording in the presentations was misleading: “cancelling the contract may result in either a breakage cost or a breakage gain. The principles of the calculation are the same as for traditional fixed rate loans“. The court accepted the claimants’ submission that the principles were in fact wholly different. The court held that this amounted to a breach of COBS Rules 2.2.1, 4.2.1, 4.5.2 and 14.3.2. However, the claimants had not in fact been misled and therefore no loss flowed from those breaches.

    True value of the cap product in comparison to the Swaps 

    The claimants argued that in the presentations provided to them, and in their discussions with the Bank’s representative, the Bank failed properly to identify the true value (in terms of potential future gains and offset of the initial premium) of the cap product in comparison to the Swaps.

    The court found that the Bank failed to state in the written presentations that there could never be a break cost in relation to the cancellation of a cap. It held that this flaw amounted to a breach of COBS Rules 4.5.6 and 14.3.2. However, as the claimants were well aware of the fact that a cap would not involve break costs (from discussions with the Bank) by the time they decided to enter into the Swaps, no loss flowed from the breach.

    Disclosure of the existence of the Bank’s internal credit limit 

    The claimants argued that the Bank should have disclosed the existence of its credit equivalent exposure (“CEE“) limit in relation to the Swaps, and its potential impact on the claimants’ ability to obtain further borrowing in the future. There were two distinct aspects of this complaint: (a) disclosure of the CEE limit would have effectively demonstrated the potential breakage costs; and (b) the CEE limit imposed a hidden fetter on the claimants’ credit and therefore their ability to borrower further sums.

    In keeping with the Court of Appeal’s recent decision in Property Alliance Group Limited v The Royal Bank of Scotland plc [2018] EWCA Civ 355 (see our banking litigation e-briefing), in which the Court of Appeal found that there was no obligation on the defendant bank to disclose its internal credit limit at the point of sale, the court held that it was not necessary for the Bank to disclose the existence of its CEE limit to meet its obligations under the COBS Rules in this case. The Bank could discharge its COBS obligations to explain potential breakage costs by giving adequate examples, and discussing them with the client (as in the instant case).

    The court said that the decisions in PAG (and five other first instance authorities) as to why there was no obligation to make such disclosure, were instructive. This was notwithstanding the fact that those cases were not specifically concerned with whether or not there had been compliance with the COBS Rules. In PAG, it was found that the CEE equivalent could not have been expected to have been revealed, as it was the product of the subjective view of the lending bank about possible movements in interest rates in the future and the length of the outstanding term of the swaps at the time of the break.

    However, the impact of the CEE limit on the claimants’ future borrowing ability caused the court more concern. The court understood that the CEE was not a credit line capable of being utilised by a customer, but was a factor taken into account when the Bank determined whether to grant the customer further lending. On the evidence, the CEE in the instant case had no impact whatsoever on the claimants’ ability to borrow further funds from the Bank. However, the court commented that there may be other factual situations where the CEE limit could have a significant impact on future borrowing and should be disclosed in order for the financial institutions in question to comply with the COBS Rules.

Conclusion

This is largely another welcome decision for financial institutions involved in IRHP (and other mis-selling) claims. In particular, it highlights the relative similarity in the approach of the court in considering claims brought by private persons and other persons that do not qualify under s.138D FSMA. There is still no single reported case involving allegations of the mis-sale of IRHPs in which a claimant has succeeded at full trial. Although obiter, it remains to be seen whether the court’s comment on the need to disclose the CEE will be followed in future decisions.

John Corrie
John Corrie
Partner
+44 20 7466 2763
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948
Nic Patmore
Nic Patmore
Associate
+44 20 7466 2298

High Court rejects unfair relationship claim concerning allegations of breach of an advisory duty, misrepresentation and efficacy of basis clauses

May 31, 2018

Carney & Ors v NM Rothschild & Sons Limited [2018] EWHC 958 (Comm) is a recent case where the High Court rejected claims of an unfair relationship arising between a lender and two borrowers under s.140A of the Consumer Credit Act 1974 (the “Act“).

This decision will be of interest to financial institutions which (unusually) bear the reverse-burden of proving that a relationship is not unfair under the Act. The decision shows the forensic approach the courts will take to assess whether the particular relationship is unfair, which involves consideration of the elements of the causes of action which are alleged to have contributed to the unfairness. It highlights the numerous and specific elements of an unfair relationship claim which may be challenged by a lender. It also adds further weight to the growing body of case law which illustrates the difficulties claimants face in trying to establish the existence of an advisory relationship in an ordinary financial institution – customer relationship (see our recent banking litigation e-bulletin).

This was the first case (so far as the court was aware) to consider the efficacy of so-called “basis clauses” (under which parties agree the basis of their relationship, typically about whether it is advised/non-advised) in relation to an unfair relationship claim. The court gave guidance as to how clauses of this kind should be assessed under the unfair relationship provisions by reference to other regimes (such as the Unfair Contract Terms Act 1977, “UCTA“). The court noted that the assessment under the Act was not the same as that which would be conducted under other such regimes because of the “different and wider exercise” set out in the unfair relationship provisions of the Act. However, it said that a clause found to fall outside of the UCTA regime (i.e. a true basis clause) should have “much less” impact on the issue of the unfair relationship under the Act than an exclusion clause which is held to be unreasonable under UCTA.

The court’s approach to basis clauses will be of particular interest to institutions and finance lawyers alike, as it supports the status quo, namely that such clauses can form the basis for a contractual estoppel which can be useful in negating the existence of various duties. Those drafting such clauses should take some comfort from the court’s guidance that basis clauses falling outside of UCTA are less likely to fall foul of the unfair relationship regime under the Act. The decision therefore closes a further avenue to claimants bringing such claims.

Background

The claimants (the “Borrowers“) were two couples of British expatriates resident in Spain. They entered into loan agreements (the “Loan Agreements“) with NM Rothschild & Sons Limited (the “Bank“).

The purpose of the loans was to advance funds to the Borrowers for the purpose of investing in a fund. The underlying investment was in notes issued by Barclays Bank plc (the “Issuer“) which in turn represented investments into three highly rated funds. The Issuer gave a capital guarantee on the notes so that at maturity, the Borrowers would receive approximately 100% of the capital invested in order to repay the loans. The purpose of the scheme was to avoid adverse tax consequences which could arise if the Spanish version of inheritance tax (“ISD“) applied to the Borrowers’ properties. Other lenders had, prior to the Bank’s involvement, expressed an interest in providing loans in connection with the scheme but did not participate. The loans to the Borrowers were secured by these investments and unencumbered properties in Spain.

The constituent parts of the scheme, being the notes and the loans were separate. An independent financial adviser, Henry Woods Investment Management (the “IFA“), was responsible for promoting the scheme to investors. There was a dispute (see below) about the nature and extent of the role of the Bank in its dealings with the Borrowers prior to the making of the Loan Agreements and the investment.

There was a relatively complex fee structure which, insofar as is relevant, meant that the fund charged an 8% fee (paid out of the loan monies), of which 4% went to the IFA. The only fee charged by the Bank was a 0.5% set-up fee in relation to the loans; the Bank made its money on the spread of interest rates.

The investments underperformed. In part, the High Court commented that this appeared to have been caused by the financial crisis of 2007-2008, and due to a desire on the part of the Issuer to deal with the investments conservatively so as to ensure that it would not have to use its own funds to repay the guaranteed amount. There were various related proceedings in Spain.

Claim

The sole cause of action advanced by the Borrowers was pursuant to s.140A and s.140B of the Act. Specifically, the Borrowers alleged that an unfair relationship arose between them and the Bank in relation to the Loan Agreements. The principal relief sought was the cancellation of the existing indebtedness owed to the Bank and the discharge of the related security. As part of that unfair relationship claim, the Borrowers alleged that incorrect advice was given as to the suitability of the scheme and misrepresentations made by (or on behalf of) the Bank to the Borrowers in relation to the scheme and its efficacy in relation to tax.

The Bank denied the entirety of the claim brought against it, although it accepted that it owed a duty not to mislead or misrepresent, and that it was subject to the regime under the Act. The Bank denied that any advice was given or any actionable representations were made (and if they were made, denied that they were wrong or false). The Bank relied on various clauses in the Loan Agreements defining the scope of its relationship with the Borrowers (which it said was not in any sense advisory), the absence of any representations made by the Bank and the absence of any reliance by the Borrowers. These same basis clauses were relied on by the Borrowers as factors (among others) which they alleged showed the relationship was unfair.

Law on unfair relationships

The substantive claim (i.e. whether incorrect advice was given or misrepresentations made, making the relationship unfair) fell to be considered under s.140A(1)(c) of the Act because it concerned things done or not done by the Bank prior to the making of the Loan Agreements. Claims as to whether the nature of the clauses of the Loan Agreements themselves (i.e. the basis clauses) contributed to the unfairness, fell to be considered under s.140A(1)(a) of the Act. Section 140B provides for the type of relief available where an unfair relationship claim has been made out.

The court completed a detailed review of the relevant legal principles in relation to unfair relationship claims, the key aspects of which are listed below.

  1. The court relied on Lord Sumption’s leading judgment in Plevin v Paragon [2014] UKSC 61 on the effect of s.140A of the Act in determining that the court’s role, in assessing the relationship between the parties, was in fact “more than an exercise of discretion” and would require a “large amount of forensic judgment“.
  2. The court noted that the advice and misrepresentation elements of the unfair relationship claim could have been separate causes of action in themselves. Significantly, the court therefore proceeded on the basis that the “same elements as are required by the cause of action should be shown when such matters are raised as constituting an unfair relationship. Otherwise, there is a danger that the analysis of their significance or otherwise becomes blurred and uncertain“. However, the court noted that the burden of proof was on the creditor to prove that the relationship was not unfair.
  3. On causation, if the debtor would have entered into the relevant agreement in any event, the court said this “must surely count against a finding of unfair relationship“.
  4. The fact that there has been no breach of a relevant regulatory rule may be “highly relevant” but was “not determinative” in the court’s view. By contrast, if the conduct on the part of the creditor would have amounted to breach of such a rule, but the rule did not apply, that “can be relevant“. The court concluded that it could consider the conduct of an agent in this respect too.
  5. The court noted that (so far as it was aware) this was the first case in which the efficacy of basis clauses in relation to an unfair relationship claim had been tested. The court stated that the assessment of the unfairness or otherwise of basis clauses was not the same exercise as that which would be conducted under UCTA, the Misrepresentation Act 1967 or the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR“). This was because of the “different and wider exercise” set out in the unfair relationship provisions of the Act. As such, a term may not be unfair under the UTCCR, but still give rise to an unfair relationship, although the court noted in the present case that it did not matter much which unfairness or unreasonableness regime was relied upon. However, the court said that as a matter of “common sense“, a clause which is found to fall outside of the UCTA regime (i.e. a basis clause) should have “much less” impact on the issue of the unfair relationship than an exclusion clause which is found to be unreasonable under UCTA.

Decision

In the context of assessing whether there was any unfair relationship, the court considered each element of the advice and misrepresentation causes of action in turn.

Breach of advisory duty

The court addressed two questions on this issue: whether the Bank actually gave advice; and if in doing so, it assumed the role of an adviser:

  • First, the court concluded that overall the Bank “did not give any material advice“. The reality of the Borrowers’ evidence at trial was to the effect that the Bank’s representative had made misrepresentations as part of a sales pitch, rather than giving negligent advice.
  • Second, the court commented that it was “quite impossible” to see how the Bank had assumed an advisory role. The Loan Agreements and an article included in the IFA’s newsletter (setting out details of the scheme) clearly pointed to the fact that the Bank had not. Moreover, the court commented that “importantly” there was already the IFA whose job it was to advise on the scheme and specifically the investment. The Borrowers’ attempts to downplay the significance of the role played by the IFA were rejected. The Bank did not receive any commission for any advice, whereas the IFA received 4%.

Consequently, while accepting that someone could have more than one adviser, the court found there was no basis for that finding in the present case. The court also found that the relevant clauses of the Loan Agreements made clear that the Bank was acting as lender only and not assuming an advisory role, which had the effect of negating the existence of any advisory duty (if there was one).

The question then arose as to whether the clauses were susceptible to judicial control, for which the court said a useful starting point was to consider whether such clauses would be regarded as exclusion clauses for the purpose of UCTA and s.3 of the Misrepresentation Act 1967. The court set out a number of factors for determining this. The court considered the question was multifaceted and that none of the factors was necessarily determinative. With these factors in mind, the court found that the clauses in question were basis clauses and not exclusion clauses and therefore (in keeping with other recent decisions) not susceptible to judicial control under UCTA, on the basis that:

  • The language was not expressly that of exclusion of liability.
  • There were other clear indications that this was not an advisory relationship. In particular: (a) the IFA’s article in its newsletter; and (b) the terms of certain confidential reports produced by the IFA for (and signed by) the Borrowers, stating that the IFA was acting as adviser and the fact that the Bank did not provide investment, tax or legal advice.
  • The clauses could not sensibly be described as artificial or “rewriting history”; rather they affirmed it.
  • The clauses were not to be found within a mass of standard terms as one might see in a typical consumer contract.

Even if the relevant clauses were exclusion clauses, the court concluded that they were “manifestly reasonable“. The court highlighted that the question in the instant case was unfairness rather than reasonableness, but held that – on the facts – the analysis and the result should be the same. In particular, the court stated that the clauses were a proportionate and legitimate attempt by the Bank to limit its exposure to a wider role for sound commercial reasons.

Consequently the court concluded that there was no “advice-based element of unfairness“.

Misrepresentation

The court forensically analysed whether each of the 49 alleged representations had been made by the Bank. The court concluded that the alleged representations had either not been made (by the Bank, at least) or were – to the extent that they were made – not false. Even if the misrepresentations had been made by the Bank, the court concluded that the evidence suggested the claims would have failed on causation and the court expressed doubt as to whether the alleged representations had been relied upon.

The court went on to consider the effect of clauses in the Loan Agreements which stated that no representations had been made. Taking a similar approach as it did in relation to the advice claim; the court found that these clauses were basis clauses which established a contractual estoppel. Citing Crestsign Ltd v National Westminster Bank Plc [2014] EWHC 3043 (Ch), the court noted that these clauses served the “the useful function of removing a grey area as to what might or might not be a representation, [which] is very apposite here where many of the alleged representations were given orally in a quasi-social setting and where differences of emphasis could make all the difference“.

Again, the court considered that the clauses in question would be found to be reasonable for the purpose of UCTA even if they were found to be exclusion clauses. If the clauses were reasonable for the purpose of UCTA, then there was no reason to suggest that they would be unfair for the purpose of s.140A of the Act.

Unfairness on other grounds

The Borrowers also relied on a number of other (unspecified) clauses which were said to be unfair and other points of unfairness. The court rejected all such arguments. In particular, the court considered the Borrowers’ argument to the effect that, even if there was no positive misrepresentation by the Bank, it failed to warn the Borrowers of certain risks. For example, the Borrowers said that the Bank had not warned against the risk that the investment returns might not cover the interest due. However, there was no advisory duty on the Bank (in contrast with the IFA) and there was no “mezzanine” duty. This element therefore did not lead to any unfairness.

Conclusion

Accordingly, the court considered that the Borrower had clearly satisfied the burden of showing that there was no unfair relationship and the claims failed.

Comment

The decision will be welcomed by financial institutions which, unusually, have the burden of proof in unfair relationship claims. There is now clear guidance on the approach that the courts will take in such cases. The decision also follows a number of other recent mis-selling cases that cumulatively illustrate the difficulty for claimants that allege, in ordinary lender-borrower relationships, that financial institutions owed an advisory duty in relation to the product or scheme in question. Moreover, this is another case in which basis clauses have been found to be effective in negating the existence of an advisory duty of care.

 

John Corrie
John Corrie
Partner
+44 20 7466 2763
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948
Nic Patmore
Nic Patmore
Associate
+44 20 7466 2298

Latest IRHP “Mis-selling judgment confirms no “mezzanine” duty of care owed by banks

December 21, 2017

A recent decision of the High Court has, consistent with previous authorities, found in favour of the bank in relation to allegations of interest rate hedging product (“IRHP“) mis-selling: Marz Limited v Bank of Scotland plc. However, the judgment helps to clarify some previously unclear points.

The decision represents a useful summary of the key legal issues arising in IRHP mis-selling litigation, and highlights the challenges for claimant customers hoping to widen the scope of duties owed by financial institutions.

In particular, the court in the current claim refused to extend in a non-advisory relationship the imposition of an “intermediate” or “mezzanine” duty – i.e. a duty to provide adequate information to enable the recipient to make an informed decision (for example, as to the suitability of a product bought and sold). In other words, the duty in such transactions remains a duty not to mis-state information provided by the bank and not a “duty to speak“. This particular issue is now likely to need to be resolved at appellate level due to conflicting decisions at first instance. The judgment also helpfully confirms that a bank’s internal assessments, income and credit lines should not ordinarily be disclosable to customers.

Marz has been granted permission to appeal.

Background

The claimant, Marz Limited (“Marz“), was a catering business and its director was Mr Raja Adil (the “Director“), the main principal and a qualified solicitor. Marz brought a claim against Bank of Scotland plc (“BoS“) in connection with the sale of an interest rate swap executed in June 2008 (the “Swap“), following a period of negotiation with BoS in relation to Marz’s banking facilities.

As part of the proposed lending facilities with BoS, Marz agreed to a hedging condition, which provided that Marz would enter into either a 5-year interest rate swap or an interest rate cap over a minimum notional amount of £12.5m. There was a period of communication between BoS’s treasury team, the Director and Marz’s third party advisers in relation to potential interest rate hedging products.

Prior to Marz’s entry into the Swap, BoS sent the Director copies of its Terms of Business for retail clients (the “Terms of Business“), which contained the following:

(a)   BoS “will advise and deal with you on the basis that we are meeting your objective to manage risk“; and

(b)   where BoS makes “a recommendation or suggestion to [Marz], [BoS] will take reasonable steps to assess whether such services are suitable for [Marz]”.

The Terms of Business also provided that in “the event of any conflict between these Terms of Business and any other agreement between us relating to a particular transaction or series of transactions (for example an ISDA agreement) the terms of that other agreement shall prevail“.

Subsequently, BoS also sent to the Director an ISDA Master Agreement, which contained a standard non-reliance clause (which has previously been the subject of judicial comment). Pursuant to this clause, each party represented that it was acting for its own account, making its independent decision to enter into the Swap, based on its own judgment and it was not relying on any communication of the other party as investment advice or as a recommendation to enter into the Swap (“Part 5(2) of the ISDA“).

This ‘non-reliance’ provision was commonly used by banks in relation to IRHP transactions around this time. In accordance with prevailing practice, after Marz entered into the Swap, BoS sent a written trade confirmation letter, which contained terms and representations in materially identical terms to those included in Part 5(2) of the ISDA.

The claim

The effect of the global financial crash in late 2008 and subsequent fall in interest rates to historical lows was that Marz ended up paying interest rates considerably above base rate. It subsequently claimed that the Swap was unsuitable and that BoS has mis-sold the product to it. Broadly, the case turned upon whether in explaining the available hedging products and providing the Swap to Marz, BoS owed and breached its duties to Marz by way of:

(a)   express contractual duties under its Terms of Business to take reasonable steps to ensure that it was suitable (which arose where the sale was an advised one); and/or

(b)   common law duties to take care in allegedly advising and/or providing information and/or explaining the options so as to enable Marz to make an informed decision.

Decision

The court dismissed the claim in full. The case raised similar issues to those seen in other IRHP claims and the key issues are set out below.

(1)   Advisory duty

The court dismissed the claim that BoS had owed and breached a duty to Marz to advise it in relation to its entry into the Swap.

The court started from the basis that banks do not ordinarily owe any duty to advise customers as to the prudence of taking out a particular loan, or the soundness of the transaction that they propose to finance. The court acknowledged that bank salesmen frequently offer statements of opinion and ‘advice’ without assuming legal responsibility for such advice.

Marz was therefore required to prove that BoS had assumed responsibility as an adviser in respect of the choice and terms of the Swap. In finding that there was no such advisory duty in this case, the court made the following observations:

  • The contractual documentation (specifically the ‘non-reliance’ ISDA wording) set out above weighed against the existence of an advisory duty.
  • Marz was not assisted by: (a) the regulated status of BoS’s salespeople; or (b) the fact that the Terms of Business and internal bank policies contemplated the sales people at BoS assessing whether the transactions were suitable.
  • The content of pre-contractual information, in the form of product profiles and updates on pricing and products was inconsistent with the existence of an advisory relationship. In particular, the non-contractual disclaimers contained within the product profile were consistent with the court’s overall assessment of the relationship between the parties as not giving rise to a duty of care to advise.
  • The absence of a written advisory agreement and the absence of payment of an advisory fee to BoS also weighed against an advisory duty. In fact, the evidence suggested that Marz was in receipt of advice from its third party (unregulated) advisers, rather than BoS, in relation to hedging.

(2)   Intermediate duty to provide information

The court also added further weight to the notion that there is no intermediate information-related duty (referred to in some commentary as a “mezzanine” duty, sitting somewhere between an information duty and a duty to advise). In particular, the court commented that in the absence of an advisory relationship, a salesman providing information does not have to explain fully the products he wishes to sell, including alternatives and comparisons. The salesman’s duty is a more limited duty not to misstate.

In this regard, the court expressly noted the reasoning in Property Alliance Group Limited v Royal Bank of Scotland plc [2016] EWHC 3342 (Ch) and Thornbridge Ltd v Barclays Bank plc[2015] EWHC 3430 (QB). This was in contrast to the judgment in Crestsign Limited v National Westminster Bank plc [2015] 2 All ER, which found that the bank “came under a duty to explain fully and accurately the nature and effect of the products in respect of which [it] chose to volunteer an explanation“.

(3)   Estoppel

The estoppel defence related to whether, pursuant to Part 5(2) of the ISDA, the parties should be taken as having agreed that their relationship was not an advisory one and the bank should not be taken to have provided advice relied upon by the customer so as to assume any duty of care. The court held that it was bound by Springwell Navigation Corporation v JP Morgan Chase Bank and others [2010] EWCA Civ 1221. The court noted that the Court of Appeal in Springwell appeared to endorse in this context the doctrine of so-called contractual estoppel, under which the parties to a contact are bound by agreeing that a certain state of affairs should form the basis for a transaction, whether that state of affairs was in fact the case or not, and could not deny the existence of the state of affairs upon which they agreed.

However, the court in the instant case commented that it regarded Part 5(2) of the ISDA and the wording set out in the trade confirmation letter as “more a matter of contract rather than estoppel“.

(4)   Basis clause or exclusion clause?

Consistent with previous authority, the court found that Part 5(2) of the ISDA defined the parties’ relationship, rights and duties, as a matter of contract – it was therefore a basis rather than exclusion clause (and therefore not subject to any test of reasonableness under the Unfair Contract Terms Act 1977 (“UCTA“)). However, the court nevertheless subjected Part 5(2) to the UCTA reasonableness test and held it to be reasonable. The court commented that Part 5(2) is enshrined in the industry standard ISDA and was well known to Marz’s Director.

(5)   Alternative arrangement

Marz alleged that the Swap was unsuitable and instead that properly advised by BoS, Marz would have entered into an alternative arrangement, namely an interest swap of £5 million and amortising interest rate cap of £7.5 million with the premium payable in deferred instalments (the “Alternative Arrangement“).

The court rejected these arguments and in particular found that the main factual obstacle for Marz on this issue was that the Alternative Arrangement did not comply with the hedging condition to which Marz had agreed as part of the proposed banking facilities. Accordingly, this counterfactual was not persuasive, as Marz was required to enter into a hedging product in order to satisfy the hedging condition.

Marz attempted to amend its counterfactual to meet the condition after conclusion of the trial, but this was rejected by the court as it would have required reopening the matters subject to investigation which would have been a “wholly inappropriate procedural course“.

(6)   Credit line/income/metric of internal assessment

The court also rejected Marz’s submission that that BoS’s credit line should have been disclosed to Marz. The court cited Crestsign, in which the experts agreed that a credit line was “an internal measure not normally disclosed to a bank’s customers“. In addition as per Thornbridge and Property Alliance Group: there is no obligation on a salesperson to explain either the amount of income, or to provide information about the mechanics of its internal risk assessment of the transaction.

This is consistent with the reasoning provided in the recent Privy Council case of Deslauriers and another (Appellants) v Guardian Asset Management Limited (Respondent) (Trinidad and Tobago) [2017] UKPC 34 (see our e-bulletin) in which the bank was found not to have owed a duty to disclose internal lending policies to the customer.

(7)   Break costs

Marz’s claim that BoS failed to explain the risk of break costs in entering into a swap was found to be contradicted by the evidence. The documents provided to Marz’s Director by BoS included explanations and warnings about the risk of break costs, including the risk of “significant” costs in the event of an early termination. These disclosures were held to be sufficient in the circumstances.

(8)   Causation and quantum

The court rejected Marz’s primary submission that properly advised Marz would not have entered into any hedging transaction (and the hedging condition would have been “abandoned“) – holding this to be an unrealistic proposition.

The court also rejected Marz’s secondary submission that BoS would have agreed to amend the hedging condition to enable Marz to enter into the Alternative Arrangement. The court was not persuaded that BoS would have agreed, retrospectively, to vary the hedging condition to accept the Alternative Arrangement.

John Corrie
John Corrie
Partner
+44 20 7466 2763
Nic Patmore
Nic Patmore
Associate
+44 20 7466 2298
Shameem Ahmad
Shameem Ahmad
Associate
+44 20 7466 2621
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

Thornbridge Limited v Barclays Bank: Confirmation of the court’s current approach to IRHP mis-selling claims is good news for financial institutions

January 5, 2016

The latest in a recent line of judgments on interest rate hedging product (“IRHP“) mis-selling, Thornbridge Limited v Barclays Bank plc [2015] 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:

  1. 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“.
  2. 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 [2014] 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.

Background

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:

  1. Advice Claim: Barclays provided unsuitable advice to enter into the Swap, and should have instead advised Thornbridge to enter into an interest rate cap.
  2. 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“.

Decision

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.

Contractual estoppel

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 [2014] 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[2013] EWCA Civ 1197:

  1. If a bank undertakes an advisory duty, it will have positive duties to provide advice and information.
  2. 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 [2014] EWHC 2882 (see also Titan Steel Wheels v Royal Bank of Scotland plc [2010] 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 [2008] 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.”

Comment

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.

Rupert Lewis
Rupert Lewis
Partner
+44 20 7466 2517
Dan Eziefula
Dan Eziefula
Associate
+44 20 7466 2182
Ceri Morgan
Ceri Morgan
Professional Support Lawyer
+44 20 7466 2948

Private LIBOR claims – an uphill battle for claimants

May 17, 2013

The ongoing regulatory investigations into the manipulation of LIBOR have prompted much speculation about the possibility of claimants bringing private law actions against banks based on the regulators’ findings. In the first cases to come before the UK courts, the Court of Appeal has recently granted permission to appeal two High Court decisions as to whether LIBOR-based claims could be introduced into existing actions alleging mis-selling of interest rate hedging products.

In light of those decisions, this briefing considers the prospects of such LIBOR claims in the mis-selling context and identifies substantial obstacles claimants will face in seeking to ‘piggyback’ off the regulatory actions.

A copy of our Banking Litigation Briefing is available here.