High Court summarily dismisses alleged LIBOR fraudulent misrepresentation claim on the basis that it is time-barred

The High Court has granted summary judgment in favour of two banks, in connection with an alleged interest rate hedging products (IRHP) mis-selling claim related to LIBOR manipulation, on the basis that it was issued outside the statutory limitation period: Boyse (International) Ltd v NatWest Markets plc and another [2021] EWHC 1387 (Ch). In doing so, the High Court dismissed the claimant’s appeal against the judgment of the Chief Master, considered in our previous blog post: High Court strikes out two IRHP mis-selling claims on the grounds of abuse of process, limitation and underdeveloped allegations of fraud.

The decision is a reassuring one for financial institutions faced with claims issued close to or after the end of the statutory limitation period. The decision provides helpful guidance on when the limitation period will begin to run under the Limitation Act 1980 (the Act) for the purpose of alleged fraudulent misrepresentation claims. In particular, the decision illustrates: (i) the difficulties that may be faced by claimants seeking to rely on the deliberate concealment extension to postpone the limitation period under s.32(1)(a) of the Act; and (ii) the court’s increasing willingness to deal robustly with attempts to extend the limitation period on a summary basis where, traditionally, such cases have been less amenable to strike out or summary determination (see our previous blog posts on limitation issues here).

In the present case, the High Court was satisfied that a reasonably diligent person in the position of the claimant would have been alert to the widely available material about LIBOR at the relevant time and should have been on the lookout for publications such as the Financial Service Authority’s (FSA) (as it was then) Final Notice on LIBOR manipulation in 2013. In the High Court’s view, the Final Notice would have completed the picture required for the claimant to plead a case of fraudulent misrepresentation. Given that more than six years had passed between publication of the Final Notice and the claim being issued in these proceedings, the High Court dismissed the appeal and granted summary judgment in favour of the banks, on the basis that the claim was time-barred.

We consider the decision in more detail below.

Background

The claimant trust company entered into two LIBOR-referenced IRHPs in August 2007 and November 2008 with the defendant banks (the Banks). In 2012, following the then FSA’s announcement that it had identified serious failings in the sale of IRHPs to small and medium-sized businesses by a number of financial institutions, the Banks set up a past business review (PBR) compensation scheme. The claimant was offered a redress payment under the PBR scheme, which it accepted (without prejudice to its right to proceed with a claim for consequential loss). In 2015, the Banks rejected the claimant’s claim for consequential loss under the PBR scheme.

The claimant subsequently issued proceedings against the Banks on 19 February 2019 for: (a) fraudulent misrepresentation/breach of contract for alleged LIBOR manipulation (the LIBOR Claim); and (b) alleged negligent and fraudulent misrepresentations made in relation to the suitability of the IRHPs (the IRHP Misrepresentation Claim).

The Banks applied to the High Court for strike out and/or reverse summary judgment.

Decision of the Chief Master

The Chief Master’s reasoning is summarised in our previous banking litigation blog post.

The Chief Master granted summary judgment in favour of the Banks, finding that the LIBOR Claim was time-barred and that deceit in relation to the IRHP Misrepresentation Claim was not adequately pleaded (refusing the claimant permission to amend).

The claimant appealed against the Chief Master’s decision on the LIBOR Claim, submitting that he was wrong to conclude that it was sufficiently clear that such a claim was barred by the provisions of sections 2 and 32(1) of the Act. The claimant’s case was that the LIBOR Claim was not time-barred on the basis that:

  • Prior to the publication of the Final Notice in relation to LIBOR manipulation (published on 6 February 2013), there was not a sufficient “trigger” for the claimant to investigate the Banks’ LIBOR fraud.
  • The claimant could not have discovered the alleged LIBOR fraud with reasonable diligence on 6 February 2013, and would, in its particular circumstances, have needed to take exceptional measures in order to have done so before 19 February 2013 (the date the claim form was issued).

The claimant did not appeal the strike out of the IRHP Misrepresentation Claim.

High Court decision

The High Court found in favour of the Banks, upholding the Chief Master’s decision to grant summary judgment, for the reasons explained below.

Legal principles relating to limitation periods and discovery of alleged fraud

The High Court in its review of the existing law highlighted the following key principles:

  • Section 2 of the Act provides that an action founded on tort shall not be brought after the expiration of six years from the date on which the cause of action accrued.
  • Claims for fraudulent misrepresentation are an “action based upon the fraud of the defendant” and so fall within the meaning of section 32(1)(a) of the Act. In such claims, the limitation period does not begin to run until the claimant has “discovered the fraud…or could with reasonable diligence have discovered it”.
  • The claimant will have discovered a fraud when he or she is aware of sufficient material properly to be able to plead it (as per Law Society v Sephton and Co [2004] EWCA Civ 1627).
  • As to what is meant by “reasonable diligence” in section 32(1) of the Act, the question is not whether the claimant should have discovered the fraud sooner but whether they could with reasonable diligence have done so. The burden of proof is, therefore, on the claimant. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. The test for reasonable diligence is how a person carrying on a business of the relevant kind would act if he or she had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency (as per Paragon Finance plc v DB Thakerar & Co [1998] EWCA Civ 1249 and FII Group Test Claimants v HMRC [2020] UKSC 47).

Application of legal principles on limitation periods and discovery of alleged fraud

The High Court held that the Chief Master was right to reach the conclusion he did on the LIBOR Claim. A reasonably diligent person in the claimant’s position would have discovered the alleged fraud before 19 February 2013 (six years before the claim form was issued), and there was no real prospect of the contrary being successfully argued at trial.

The High Court commented that the Chief Master described the Final Notice as a “trigger” in the sense of this being the point in time from which the limitation period began to run, because the necessary facts to plead a case were available to the claimant from the time of publication of the Final Notice. It followed that further time for investigation was not required. Accordingly, the Chief Master was entitled to conclude that the evidence contained in the Final Notice in relation to LIBOR manipulation would have completed the picture required for the claimant to plead a case of fraudulent misrepresentation.

In the view of the High Court, the Chief Master was entitled to reach the view that a reasonably diligent person in the circumstances of this case would have been alert to the widely available material about LIBOR prior to February 2013 and should have been on the lookout for publications such as the Final Notice. In particular, the High Court referenced the claimant’s pleaded reliance on the Banks’ representations as to LIBOR, the losses the claimant allegedly sustained as a result of the IRHPs, and the widespread publicity about LIBOR as an outdated/discredited benchmark and its alleged manipulation.

The High Court therefore dismissed the claimant’s appeal on the LIBOR Claim, disposing of the proceedings in their entirety.

Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
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Erica Li
Erica Li
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High Court strikes out claims relating to alleged mis-selling of IRHPs on res judicata and abuse of process grounds

The High Court’s decision in Elite Property Holdings Limited & Anor v Barclays Bank plc [2021] EWHC 772 (Comm) is the latest instalment in a series of claims brought by the same claimant property investment companies against the defendant bank (and others) in relation to alleged mis-sold interest rate hedging products (IRHPs), which were included in the then-FSA (now FCA) past business review undertaken by the bank. The High Court granted the bank’s application to strike out the claim alleging breaches of agreements: (i) in relation to the bank’s assessment of consequential loss suffered by the claimants in respect of their IRHPs and (ii) that the bank would not take enforcement action against the claimants.

The decision is a reassuring one for financial institutions faced with duplicative claims involving the same cause of action, or matters determined in previous proceedings. The decision highlights the High Court’s scope to strike out such claims on the grounds of cause of action estoppel, issue estoppel or abuse of process. It also suggests that claimants may face difficulties in bringing further claims on issues not raised or determined in previous proceedings if, in the court’s view, such issues could or should have been raised then.

In the present case, the High Court was satisfied that the claim involved the same cause of action as was determined against the claimants in the original action or, in the alternative, it raised the same issues previously resolved against the claimants (see our banking litigation blog posts, on the previous decisions by the High Court and the Court of Appeal in related actions brought by the same claimants). Accordingly, the High Court held that the claim was barred by the principle of res judicata. The High Court also observed that: (i) even if it was wrong about the claim being barred by cause of action or issue estoppel, the new claim would fall squarely within the principle in Henderson v Henderson (1843) 3 Hare 100 and/or be an abuse of the court’s process; and (ii)  the claimants’ allegations had no real prospect of success and, if it had been necessary to do so, the court would have granted the bank’s application for summary judgment.

We consider the decision in more detail below.

Background

The claimant property investment companies had entered into a number of IRHPs with the defendant bank (the Bank) between 2006 and 2010. In June 2012, the Bank agreed with the then-FSA (now FCA) to undertake a past business review in relation to the alleged mis-selling of IRHPs (the FCA Review). The claimants’ IRHPs were included in this review. In the context of the FCA Review, the Bank made basic redress offers to the claimants in respect of their IRHPs in June 2014. The claimants rejected the basic redress offers and elected to submit a claim for consequential loss. However, in September 2014, the claimants asked the Bank to pay them the basic redress amounts offered, pending determination of their consequential loss claim. Consequently, the Bank made revised basic redress offers to the claimants. The revised basic redress offers were accepted by the claimants via signed acceptance forms in November 2014 (the 2014 Agreements), which acknowledged that the basic redress payments were in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss.

Subsequently, in 2015, the claimants rejected the Bank’s consequential loss decision and instead commenced litigation against the Bank (the Original Action). The majority of the claimants’ case was struck-out by the High Court. The Court of Appeal refused to grant permission to appeal (see our banking litigation blog post for further details on the background to this claim and the Court of Appeal’s decision). In 2019, the claimants issued a second claim, this time against BDO LLP, alleging that they had sustained loss and damage due to an unlawful means conspiracy in which the Bank and BDO conspired to mislead KPMG into allowing the Bank to foreclose on the underlying loan of one of the claimant companies when in fact there were no exceptional circumstances justifying that course of action. The High Court struck out the second action on the basis that it was a collateral attack on the Court of Appeal’s findings in the Original Action and it was an abuse of process (see our banking litigation blog post for further details on the background to this claim and the High Court’s decision).

The present decision is in connection with a third claim brought by the claimants, this time against the Bank, alleging breach of: (i) the 2014 Agreements in relation to the Bank’s assessment of consequential loss suffered by the claimants as a result of the IRHPs (the Consequential Loss Claim); and (ii) an oral agreement, claimed to have been made on 24 June 2013, that the Bank would not take any enforcement action against the claimants (the Oral Agreement Claim).

The Bank applied to the High Court to strike out the claimants’ latest claims on the grounds that they were an attempt to re-litigate matters that were (or could and should have been) raised against the Bank in the Original Action and were therefore res judicata and/or an abuse of process. In the alternative, the Bank applied for summary judgment on the grounds that the claims had no real prospect of success. The Bank argued that the Consequential Loss Claim involved the same cause of action that was determined against the claimants in the Original Action by the High Court and the Court of Appeal, or in the alternative, that the claims raised identical issues to those that have already been resolved against the claimants. The Bank also argued that the Oral Agreement Claim was barred by issue estoppel, or in the alternative fell squarely within the Henderson v Henderson principle since the point that the claimants now sought to raise was directly relevant in the conspiracy claims that were made in the Original Action concerning the lawfulness of enforcement action.

Decision

The High Court found in favour of the Bank, striking out the claimants’ Consequential Loss Claim and the Oral Agreement Claim for the reasons explained below.

Res judicata and abuse of process principles

The High Court noted that the principles relating to res judicata and abuse of process were reviewed in Virgin Atlantic Airways Ltd v Zodiac Seals UK Ltd [2013] UKSC 46 and more recently in Test Claimants in the FII Litigation v HMRC [2020] UKSC 47. The High Court then highlighted the following key principles:

  • Cause of action estoppel. Once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings. This is “cause of action estoppel”. The discovery of a new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be re-opened, and cause of action estoppel also extends to points which have might have been but were not raised and decided in the earlier proceedings for the purpose of establishing or negativing the existence of a cause of action (as per Arnold v National Westminster Bank Plc [1991] 2 AC 93 and Virgin Atlantic).
  • Definition of cause of action. A cause of action was defined in Co-operative Group Ltd v Birse Developments Ltd [2013] EWCA Civ 474 as follows: “In the quest for what constitutes as a ‘new’ cause of action, i.e. a cause of action different to that already asserted, it is the essential factual allegations upon which the original and the proposed new or different claims are reliant which must be compared”. Unnecessary or inessential allegations or facts must be ignored.
  • Issue estoppel. Where the cause of action is not the same in the later action as it was in the earlier one, some issue which is necessarily common to both was decided on the earlier occasion and is binding on the parties, this is “issue estoppel”. Issue estoppel extends to cover not only the case where a particular point has been raised and specifically determined in the earlier proceedings, but also where in the subsequent proceedings it is sought to raise a point which might have been but was not raised earlier in relation to an issue that has already been finally determined (as per Arnold v National Westminster Bank Plc).
  • Henderson v Henderson principle. A party is precluded from raising in subsequent proceedings matters which were not, but could and should have been raised in earlier proceedings. The High Court noted that the correct approach to the Henderson principle was considered by the House of Lords in Johnson v Gore Wood & Co [2000] UKHL 65 where the court said:
    1. The underlying public interest is that there should be finality in litigation and a party should not be twice vexed in the same matter.
    2. The bringing of a claim or the raising of a defence may, without more, amount to an abuse if the court is satisfied (the onus being on the party alleging abuse) that it should have been raised in the earlier proceedings if it was to be raised at all.
    3. A claim may be abuse where it amounts to a collateral attack on the outcome of prior litigation, either between the same parties or with a third party.
    4. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings, it should have been, so as to render the raising of it in later proceedings necessarily abusive. The court should carry out a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all of the facts of the case, focusing attention on the critical question whether, in all the circumstances, a party is misusing or abusing the court’s process by seeking to raise an issue which could have been raised before.
    5. The private and public interests which are served by the Henderson principle are distinct and either or both may be engaged.
  • Abusive proceedings. There is a more general rule against abusive proceedings. The court has an inherent power to prevent misuse of its procedure where the process would be manifestly unfair to a party, or would otherwise bring the administration of justice into disrepute among right-thinking people (as per Hunter v Chief Constable of the West Midlands Police [1981] UK HL 13).

Application of res judicata and abuse of process principles

Consequential Loss Claim

The High Court agreed with the Bank that the Consequential Loss Claim involved the same cause of action as was determined against the claimants in the Original Action, or in the alternative, it raised the same issues which had already been resolved against the claimants, and it was therefore barred by the principle of res judicata. There were four reasons for this:

  1. Both claims were for the alleged breach of the same contract and all the documents relied on in this claim were before the courts in the Original Action. Whilst there now appeared to be a different spin being put on the interpretation of the documents as to the material points of the contract, the fact remained that the same material was before the courts in the Original Action.
  2. Both claims were premised on the Bank having assumed an obligation to deal fairly and reasonably with the claimants’ consequential loss claim. Whilst not identically framed, there were effectively the same allegations of an obligation on the Bank to act fairly and reasonably in accordance with established legal principles in relation to the assessment and payment of the claim for consequential loss.
  3. The alleged breach of contract was the same i.e. a failure to do the assessment correctly resulting in the rejection of the claimants’ consequential loss claim. The allegation in the Original Action was not limited to the failure to assess in accordance with the terms of the FCA Review or the Bank’s agreement with the FCA but was broader, including a failure to assess in accordance with general legal principles and pay ‘fair and reasonable’ redress. The same was now being alleged again. However, it was determined against the claimants in the Original Action that the Bank had agreed to carry out the FCA Review in any particular way or pay redress in any particular form.
  4. The same loss was claimed in both actions i.e. damages for breach of the 2014 Agreements.

The High Court also said that even if it was wrong about the Consequential Loss Claim being barred by cause of action or issue estoppel, it would conclude that such a claim would fall squarely within the Henderson v Henderson principle and/or be an abuse of the court’s process as it was, at most, a different way of putting the same claim as brought in the Original Action.

Accordingly, the High Court struck out the claimants’ Consequential Loss Claim.

Oral Agreement Claim

The High Court agreed with the Bank that the Oral Agreement Claim was barred by issue estoppel as the issue of the lawfulness of enforcement action was live and determined by HHJ Waksman QC in the Original Action. Although the issue was not determined on an appeal to the Court of Appeal in the Original Action, the High Court said that in its view this did not prevent an issue estoppel from arising.

The High Court then said in the present case, the order of HHJ Waksman QC in the Original Action remained in full force and effect (the appeal having been dismissed) and that his decision continued to be fundamental to the disposal of the case. In the High Court’s view, there was also no injustice to the claimants because they could have sought to appeal against the decision of the appeal court which had gone against them.

The High Court also commented that even if had been wrong as to whether the decision of HHJ Waksman QC amounted to issue estoppel, in its view if the claimants wished to run the Oral Agreement Claim, they could and should have done so in the Original Action. Accordingly the attempt to run it in this claim contravened the Henderson v Henderson principle.

Accordingly, the High Court struck out the Oral Agreement Claim.

Summary Judgment

The High Court also commented that had it been necessary to do so, it would have in any event have concluded that both the Consequential Loss Claim and Oral Agreement Claim had no real prospect of success and granted summary judgment.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Mannat Sabhikhi
Mannat Sabhikhi
Associate
+44 20 7466 2859

High Court strikes out two IRHP mis-selling claims on the grounds of abuse of process, limitation and underdeveloped allegations of fraud

The High Court has dismissed two IRHP mis-selling claims by claimant investors against various defendant banks for losses alleged to have been suffered as a result of fraudulent misrepresentation or a unlawful means conspiracy: Boyse (International) Limited v Natwest Markets Plc and The Royal Bank of Scotland Plc [2020] EWHC 1264 (Ch); and Elite Properties and Ors v BDO LLP [2020] EWHC 1937 (Comm).

These decisions will be of broader interest to financial institutions as they show that the courts are willing (in appropriate cases) to deal with opportunistic claims alleging fraud on a strike out or summary judgment basis. Traditionally, such cases have been less amenable to a strike out or summary determination.

The decisions confirm that cases involving fraud: (a) need to meet a high bar in order for their pleadings to be satisfactory; (b) may be struck out on the basis of limitation if there is a clear and compelling case that the claimants had the requisite knowledge to bring such claims prior to the expiry of the relevant limitation period; and (c) which attempt to run a collateral attack on previous court findings will be struck out for abuse of process.

Boyse (International) Limited v Natwest Markets Plc and The Royal Bank of Scotland Plc [2020] EWHC 1264 (Ch)

Background

The claimant trust company entered into two interest rate hedging products (IRHPs) in August 2007 and November 2008 with the defendant banks (together, the Banks). In 2012, the IRHPs were deemed by the Financial Services Authority (as it was then) (FSA) to have been mis-sold. In 2014, the claimant was offered a redress payment by the Banks as part of its past business review compensation scheme (PBR), which it accepted. In 2015, the Banks rejected the claimant’s claim for consequential loss in their PBR.

The claimant subsequently brought a damages claim in 2019 against the Banks for: (a) fraudulent misrepresentation/breach of contract (for LIBOR manipulation) (the LIBOR Claim); and (b) negligent and fraudulent misrepresentation made in relation to the suitability of the IRHPs (the IRHP Misrepresentation Claim).

The Banks applied to strike out and/or obtain summary judgment on the claim, and the claimant cross-applied to amend its Particulars of Claim (POC).

Decision

The court granted the Banks summary judgment and struck out the claim in its entirety, and dismissed the claimant’s application for permission to amend its POC.

In reaching its decision, the court considered two issues:

  • whether to strike out or grant summary judgment on the claimant’s LIBOR Claim on the ground that it was time-barred; and
  • whether the undeveloped fraud part of the IRHP Misrepresentation Claim met the minimum pleading requirements for such a claim.

Issue 1: Was the LIBOR Claim time-barred?

The Claim Form was issued on 19 February 2019, which (the Banks argued) was more than six years after the claimant could with reasonable diligence have discovered the alleged fraud relating to LIBOR manipulation referred to in the FSA’s Final Notice (published on 6 February 2013), and related publicity.

The claimant argued that the LIBOR Claim was not time barred on the basis that:

  • The knowledge of Mr and Mrs Sharma (the two principals of the claimant) should not be attributed to the claimant for the purpose of s.32(1) of the Limitation Act 1980 (the Act), as they were not directors and the focus should be on the claimant’s knowledge. It was also suggested that the directors of the claimant could not reasonably have been expected to read, or read about, the Final Notice or to have known about the LIBOR scandal from reports in the press.
  • The 13 day gap between the date of the Final Notice and the date on which, six years later, the claimant’s Claim Form was issued, could be bridged by the need for the claimant to get expert advice on the published information to transform that information to relevant knowledge for the purpose of starting the clock under s.32 of the Act.

The court rejected both arguments and held that the claimant’s LIBOR Claim was time barred. It gave two key reasons for its decision:

  • It was impossible for the purposes of s.32(1) of the Act to treat Mr and Mrs Sharma as mere agents of the claimant and not attribute their knowledge to it. The claimant’s relationship with the Banks was formed and developed on the basis of Mr and Mrs Sharma’s dealings with them. Through those dealings, Mr and Mrs Sharma had been made aware of LIBOR and its purpose, they had dealt with the Banks in relation to the IRHPs and the alleged express LIBOR representation was made to Mrs Sharma. In the court’s view, there was no distinction between the knowledge of the directors of the claimant and Mr and Mrs Sharma.
  • Whilst accepting that for the purpose of time running that there had to be some appreciation of what the knowledge meant, the court stated that a person who has the relevant knowledge does not need to know how to plead express and implied representations which are later said to have been made dishonestly. The language in the Final Notice which addressed the FSA’s findings in relation to LIBOR was not technical and could have been understood by any person of reasonable sophistication. The claimant did not need to have developed its case or obtained advice before time started to run. The claimant’s LIBOR fraud case would have been apparent from the Final Notice and other findings. The claimant was aware that the IRHPs used LIBOR and that something had gone wrong from the widespread publicity given to the findings of the manipulation of LIBOR. In the court’s view, a “reasonably diligent person” in the claimant’s shoes would have been alert to the widespread publicity about LIBOR before 6 February 2013. The Final Notice was a trigger that started time running.

Issue 2: Was deceit in relation to the IRHP Misrepresentation Claim adequately pleaded?

In its draft POC, the claimant had included some limited references that hinted towards development of the deceit aspect of the IRHP Misrepresentation Claim. The Banks’ position was that this part of the claim was inadequately pleaded and did not meet the minimum requirements for a case on fraud.

The court agreed with the Banks: adequate particulars had not been given that the Banks knew the alleged IRHP suitability representation was false (and the claimant did not adequately identify the individuals at the Banks who it was alleged had such knowledge). The court noted the requirements of pleading a deceit case as set out in JSC Bank Moscow v Kekhman and others [2015] EWHC 3073 (Comm) and commented that in this case there was no distinct pleading of primary facts from which fraud could be inferred, nothing which “tilts the balance in the direction of fraud”, and no reason to believe that the claimant (given a further opportunity) could cure these defects.

Appeal

The claimant has filed an appeal against the court’s findings.

Elite Properties and Ors v BDO LLP [2020] EWHC 1937 (Comm)

Background

Two of the claimant companies entered into a number of IRHPs with a bank between 2006 and 2010. Subsequently, it was deemed that the bank had mis-sold those IRHPs and the relevant claimant companies became entitled to redress under a PBR agreed between the bank and the FSA in 2012. As part of the PBR, the bank agreed with the FSA an undertaking, that, absent exceptional circumstances, it would not foreclose on existing lending facilities without giving prior notice and issuing a final redress determination (the Undertaking). The bank also agreed with the FSA to appoint KPMG to the role of the “skilled person”, i.e. to act as an independent reviewer and oversee the PBR. Part of this role involved KPMG overseeing the bank’s compliance with the Undertaking; in practice, this entailed KPMG reviewing escalation requests from the bank and confirming whether “exceptional circumstances” existed which permitted the bank to foreclose on lending facilities, notwithstanding the mis-sale of the IRHPs.

In mid-2013, the bank wrote to two of the claimant companies stating that it had determined that both were unsophisticated customers for the purpose of the sale of the IRHPs and that under the PBR they were entitled to a redress payment (but the amount had yet to be determined and was not paid until late 2014). In late 2013, the bank submitted an escalation request seeking KPMG’s approval that “exceptional circumstances” existed that would permit the bank to appoint receivers over two of the claimant companies’ assets. KPMG allowed the bank to foreclose on the loan of one of the claimant companies, appointing BDO as receivers over various assets in September 2013.

The claimant companies subsequently brought a claim against BDO, alleging that they had sustained loss and damage due to an unlawful means conspiracy in which the bank and BDO conspired to mislead KPMG into allowing the bank to foreclose when in fact there were no exceptional circumstances justifying that course of action (the New Claim).

BDO applied to strike out or obtain summary judgment on the New Claim on the basis that:

  • it was an abuse of process in that it re-ran allegations which had been made by two of the claimant companies in a previous claim against the bank (see our previous blog post for further details on the background to this claim and the Court of Appeal’s decision) (the Original Claim);
  • it constituted a “collateral attack” on findings made by HHJ Waksman and the Court of Appeal in the Original Claim against the bank, which was an abuse of process; and
  • there were no reasonable grounds for bringing the claim or it had no reasonable prospect of success.

Decision

The court struck out the New Claim, holding that it was “quite clearly” (and indeed a “paradigm” case of) a collateral attack on the Court of Appeal’s findings and an abuse of process. It alleged the same conspiracy as in the Original Claim, where findings had been made that there was no reasonable prospect of the Original Claimants establishing that conspiracy.

The court highlighted that Hunter v Chief Constable of the West Midlands Police [1982] A.C. 529 underlined that it was an abuse of process to initiate:

proceedings in a court of justice for the purpose of mounting a collateral attack upon a final decision against the intending (claimant) which had been made by another court of competent jurisdiction in previous proceedings in which the intending (claimant) had full opportunity of contesting the decision in the court in which it was made.

Additionally, the court noted that  Panton & Anor v Vale of White Horse District Counsel & Anor [2020] EWHC 167 (Ch) emphasised that the fact a previous claim had been struck out, rather than having the issues decided at trial, was no bar to a second trial being struck out as an abuse of process.

Finally, the court found that the alleged new evidence, and further particulars on further unlawful acts relied upon in the New Claim did not establish the existence of a conspiracy between BDO and the bank to mislead KPMG into permitting the bank to foreclose.

Interestingly, the court also commented obiter that it would have granted reverse summary judgment on the New Claim, had it not struck it out, on the basis that the claim had no reasonable prospect of success.

John Corrie
John Corrie
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Nihar Lovell
Nihar Lovell
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Nic Patmore
Nic Patmore
Senior Associate
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High Court finds no implied contractual duties in connection with past business review

Since 2015 there has been a series of judgments in which claimant customers have (ultimately unsuccessfully) sought to impose contractual and tortious duties on financial institutions relating to the institution’s conduct of the 2012 past business review into the alleged mis-selling of interest rate hedging products (the “PBR”). The latest decision from the High Court represents good news for financial institutions in this context, finding that a bank owed no implied contractual duties to assess or compensate consequential loss claims under the PBR: Norham Holdings Group Ltd v Lloyds Bank plc [2019] EWHC 3744. The judgment, which was handed down in June 2019 but has only recently been made publicly available, demonstrates the robust approach the court is prepared to take to novel claimant arguments of this type.

In summary, the claimant alleged that a settlement agreement under the PBR in respect of direct losses, which expressly carved out claims for consequential loss from the scope of the settlement, should be construed as giving rise to an implied contractual duty on the bank to assess or compensate consequential loss claims under the PBR. The court rejected this contention, finding not only that the claimant’s construction of the particular language of the settlement was unnatural, but also that the imposition of such a duty would cut across the regulatory regime under which the PBR was established. The court also rejected an argument that the bank was estopped from contesting whether the swap was mis-sold in civil proceedings as a result of its assessment that redress was due under the PBR.

The latest decision is in line with two important previous authorities. In CGL Group Limited & Ors v Royal Bank of Scotland plc & Ors [2017] EWCA Civ 1073 (see our blog post), the Court of Appeal confirmed that the banks did not owe tortious duties to customers to conduct the PBR with reasonable skill and care, resolving previous inconsistent first instance decisions. Similarly, in Elite Property Holdings & Anor v Barclays Bank plc [2018] EWCA Civ 1688 (see our blog post), the Court of Appeal rejected the argument that a settlement agreement in respect of direct losses gave rise to implied contractual duties to carry out a detailed assessment of consequential loss and pay fair and reasonable redress if the claims were well founded. In both decisions, the Court of Appeal considered (among other matters) that it would undermine the regulatory and statutory regime to impose private law rights in such circumstances and there would need to be a clear expression of intention by the banks to undertake such duties – which there was not on the facts.

Given this previous higher authority, it is unsurprising that the claimant was unsuccessful in the present case, particularly as it bore close similarities to the claims rejected in Elite Property. However, the latest judgment serves to reiterate that the court will be reluctant to find that firms undertook any private law duties in the context of the PBR, absent clear expression of intention to do so. Furthermore, the court’s reasoning may apply to other formal past business reviews entered into voluntarily by agreement with the FCA and to section 404 of the Financial Services and Markets Act 2000 consumer redress schemes. Nevertheless, it would be prudent for firms to expressly exclude contractual and tortious duties when communicating with customers in respect of such reviews/schemes.

The court’s finding on estoppel will also be welcomed by banks, as it demonstrates that a bank’s offer of redress under the PBR will not (absent exceptional circumstances) prevent it from contesting mis-selling allegations in any subsequent litigation.

Background

The claimant, a property investment company, entered into a LIBOR interest rate swap in February 2008 with Lloyds Bank (the “Bank”). The claimant suffered losses under the swap as interest rates fell substantially following the financial crisis.

In June 2012, the Bank, along with a number of other banks, entered into an agreement with the FSA (now FCA) to conduct the PBR. The PBR terms required it to review past sales of interest rate hedging products in order to determine whether there had been any breach of regulatory requirements, and to compensate direct losses (referred to as basic redress”) where appropriate, as well as any consequential losses evidenced by customers (such as overdraft charges and additional borrowing costs).

In January 2014, the Bank concluded that there was insufficient evidence on file in relation to the swap to demonstrate compliance with regulatory requirements and offered a basic redress award to compensate direct losses (plus 8% interest) on the basis that the claimant should have been sold an alternative swap with different terms that would have incurred less losses (the counterfactual swap). The claimant accepted the basic redress award and elected that the Bank should also consider claims that it had suffered consequential losses. The parties signed a settlement agreement (the “Settlement”) to settle any claims for direct losses. The Settlement contained a broad full and final settlement clause covering all claims in respect of the swap except any claims for consequential loss.

In October 2016, the Bank offered a consequential loss award to the claimant for only part of the sums claimed by the claimant. This offer was rejected by the claimant, which subsequently issued proceedings in May 2017 alleging mis-selling of the swap and seeking consequential losses.

Preliminary issues

The instant judgment relates to the trial of two preliminary issues, being the claimant’s allegations that:

  1. Contractual entitlement. The claimant had a contractual entitlement to consequential loss assessed in accordance with the PBR basic redress findings, subject to proof of causation. This was on the basis that the Settlement should be construed as settling all pre-settlement causes of action in respect of the swap (including claims for consequential loss based on pre-settlement causes of action) – but carved out claims for consequential loss within the PBR.
  2. Estoppel. The Bank was estopped by convention from disputing that the swap was mis-sold (with the consequence that the court need only determine the amount of consequential loss), because it was assumed by the parties that the Settlement amounted to acceptance on the Bank’s part that the swap was mis-sold.

Decision

The court found in favour of the Bank on both of the preliminary issues.

Issue 1: Contractual entitlement

The court rejected the claimant’s argument that the Settlement created a contractual entitlement to consequential loss, for a number of reasons, including:

  • The claimant’s construction of the Settlement wording did not accord with the ordinary and natural meaning of the words (per Arnold v Britton [2015] UKSC 36). It required reading the exclusion of claims for consequential loss as relating solely to consequential loss claims considered within the PBR (rather than all causes of action in respect of consequential losses). The court rejected this construction and found that, if the Settlement had been intended to exclude solely PBR consequential loss claims, it would have said so expressly.
  • The alleged contractual duty owed to the claimant would cut across the regulatory regime and would be entirely at odds with the gratuitous nature of the PBR. The court drew support from the Court of Appeal’s reasoning in Elite Property in this regard.
  • Any purported contractual cause of action requiring the Bank to assess consequential loss in accordance with the PBR findings would merely replicate the Bank’s existing obligations to the FCA and would therefore fail for want of consideration.
  • The claimant’s argument undermined the commercial purpose of the PBR and the Settlement, as it implied that customers would be forced to abandon existing causes of action in respect of consequential loss, in order to accept a basic redress award. This would restrict customers that issue litigation to accepting the counterfactual findings of the PBR (in the claimant’s case, the counterfactual swap) and would prevent them from alleging fraud (which can obviate the need for losses to be foreseeable).

Issue 2: Estoppel

The court rejected the claimant’s estoppel by convention argument, as there was no unequivocal assumption by the parties that the Bank would not defend civil proceedings. The PBR made a much more limited finding that, on the limited information available to it, there had been insufficient evidence to demonstrate compliance with regulatory requirements. This was of no benefit to the claimant, as it had no cause of action based on breach of regulatory requirements, and in any event further information would be available in litigation.

Julian Copeman
Julian Copeman
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Dan Eziefula
Dan Eziefula
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Ceri Morgan
Ceri Morgan
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Court of Appeal holds no real prospect of success for claim alleging contractual obligations owed by a bank to its customers in the conduct of FCA review

The Court of Appeal has refused the claimants permission to appeal in the most recent interest rate hedging product (“IRHP“) mis-selling claim to come before the appellate courts: Elite Property Holdings & Anor v Barclays Bank plc [2018] EWCA Civ 1688.

The Court of Appeal considered the High Court’s decision to refuse the claimants permission to make two key (but contentious) amendments to the particulars of claim. Agreeing with the High Court, it held that neither claim had a reasonable prospect of success and refused to grant the claimants permission to appeal. The proposed amendments concerned the following claims:

  1. A claim that the bank owed a contractual obligation to its customers in relation to the conduct of the bank’s past business review into the sale of IRHPs agreed with the FCA (then FSA). The Court of Appeal noted that the bank was obliged to carry out the review pursuant to its obligation to the FCA, and the agreement between the bank and the FCA expressly excluded any rights of third parties under the Contract Rights of Third Parties Act 1999 (“CRTPA“). Further, there was no consideration provided by the customers in relation to any alleged contract.
  2. A claim brought in circumstances where one IRHP was restructured into another IRHP (and a settlement agreement was entered into in relation to the first IRHP). The proposed amended particulars of claim alleged that losses under the first product were “repackaged and continued” or “carried over and continued” under the second. The Court of Appeal found that there was no causative link between the mis-selling of the second IRHP and the losses pleaded.

The decision is a welcome one for institutions, confirming that claimants will face significant legal obstacles if they seek to bring claims of the type outlined above. In particular, the decision is consistent with the prior decisions of the Court of Appeal in CGL Group Limited & Ors v The Royal Bank of Scotland plc[2017] EWCA Civ 1073 and of the High Court in Marsden v Barclays Bank plc[2016] EWHC 1601 (QB) (which considered and rejected the notion of tortious duties owed by financial institutions to customers in carrying out their FCA reviews).

The result of this decision is that the instant proceedings will be brought to an end; save for a final appeal in relation to the High Court’s separate refusal permit an amendment of the particulars of claim to include conspiracy allegations. Permission to appeal in that regard has been allowed by the Court of Appeal, but the appeal itself has not yet been listed.

Background

For a detailed background to this decision, read our banking litigation e-bulletin on the High Court decision.

In summary, Barclays Bank plc (the “Bank“) provided loan facilities to the two appellant companies and the appellants entered into three structured collars with the Bank. Subsequently, the appellants raised concerns about the structured collars. This led to a settlement agreement concerning the structured collars being concluded by all parties in 2010 (the “2010 Agreement“) and the structured collars were terminated, with the break costs being financed by further loans from the Bank. The refinanced loans were hedged by the appellants entering into three interest rate swaps.

In June 2012, in common with several other banks, the Bank agreed with the FCA to undertake a past business review in relation to its sales of IRHPs to small and medium-sized enterprises (the “FCA review“). That undertaking expressly excluded third parties’ ability to rely on the terms of the undertaking.

The outcome of the FCA review was that the two appellant companies were offered redress by the Bank. Following negotiations in September 2014, in November 2014, the appellants agreed to receive basic redress payments in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss (the “2014 Agreement“).

Following a review of the evidence submitted by the appellants, the Bank rejected their claims for consequential loss. The appellants then issued proceedings to recover the consequential losses in November 2015. The Bank applied to strike out the majority of the appellants’ claims, which the appellants sought to meet by a cross application to amend the particulars of claim.

High Court Decision

For a detailed explanation of the High Court decision, please read our banking litigation e-bulletin. By way of summary, the key parts of that judgment insofar as relevant to the appeal:

  • Advisory claims – structured collars: The High Court struck out all mis-selling claims in relation to the structured collars, which it held were barred by the 2010 Agreement. The appellants did not seek to appeal this finding.
  • Advisory claims – swaps: The High Court also struck out the mis-selling claims in respect of the swaps, on the basis that the loss pleaded was said to be attributable to or caused by breaches of duty owed in respect of the structured collars alone. It refused leave to amend the particulars of claim to include a pleading that the losses incurred under the structured collars were “repackaged” by virtue of the appellants’ entry into the swaps and accordingly continued after the swaps were sold. The appellants described these as “legacy losses“, and argued that they were attributable to the Bank’s alleged breach of duty when selling the swaps.
  • Claims in relation to the FCA review: The High Court struck out the claim that the Bank owed and breached a tortious duty of care to the appellants in carrying out the FCA review, resulting in losses to the appellants. This was on the basis that any such claim was compromised by both the 2010 Agreement (in relation to the structured collars) and the 2014 Agreement (in relation to the structured collars and swaps).

The High Court refused permission to amend the particulars of claim, to include a contractual claim mirroring the tortious claims in relation to the FCA review above – on the basis that the Bank assumed such contractual obligations when the appellants accepted basic redress under the 2014 Agreement.

Grounds of Appeal

The appellants appealed the High Court’s decision on two grounds:

  • Advisory claims – swaps: The appellants appealed the finding that there was no reasonable prospect of success in relation to the swaps claim, asserting that the High Court had wrongly concluded that the appellants’ pleaded case in relation to the “legacy losses” arising from the swaps did not link breach of duty and loss.
  • Claims in relation to the FCA review: The appellants appealed the High Court’s refusal to permit them to amend the particulars of claim to plead that the acceptance of basic redress under the 2014 Agreement gave rise to a contractual relationship in relation to the Bank’s conduct of the FCA review.

The appellants had also initially sought to appeal the finding that there was no reasonable prospect of arguing that the Bank owed the appellants a tortious duty of care in relation to the conduct of the FCA review akin to the contractual duty. However, before the permission hearing, following CGL Group Ltd v Royal Bank of Scotland Plc[2017] EWCA Civ 1073, the appellants abandoned that ground of appeal.

Court of Appeal Decision

The Court of Appeal refused permission to appeal on both grounds.

(1) Advisory claims – swaps

The Court of Appeal assessed the original particulars of claim and was satisfied that the High Court was correct when it concluded that the losses claimed were only pleaded as having been caused by the appellants’ entry into the structured collars rather than the subsequent swaps.

The Court considered that the proposed amendments did not improve the appellants’ position. The proposed new paragraph in the particulars of claim suggested that the losses caused by the structured collars were “repackaged and continued” or “carried over…and continued” following the appellants’ entry into the swaps. The Court of Appeal was satisfied that while the losses may have occurred after the appellants’ entry into the swaps, “the cause of the relevant loss was the entering of the mis-sold structured collars“.

Accordingly, the Court of Appeal refused permission to appeal on this ground, finding that the High Court was right to refuse permission to amend the particulars of claim in relation to the swaps mis-selling claim. Given that the High Court struck out the swaps mis-selling claim as it was originally pleaded, the result is that these claims cannot now be pursued by the appellants.

(2) Claims in relation to the FCA review

The Court of Appeal held that the appellants’ claim that the Bank came under a contractual obligation to them in relation to the conduct of the FCA review (when they accepted basic redress under the 2014 Agreement) was unsustainable. Having heard argument from the Bank in Suremime Limited v Barclays Bank [2015] EWHC 2277 (QB), as well as Marshall v Barclays Bank [2015] EWHC 2000 (QB) and Marsden, the Court of Appeal concluded that there was “…plainly no such contract in June 2014 for all the reasons given by judges who decided the earlier cases” which the Court of Appeal described as having been “correctly decided on this issue“.

In support of this finding, the Court of Appeal relied on the following key factors in particular:

  • The Bank was obliged to carry out the review pursuant to its obligation to the FCA under the FCA undertaking that it had previously given.
  • The agreement between the Bank and the FCA expressly excluded any rights of third parties.
  • There was no consideration provided by the appellants in relation to any alleged contract at that time (as had been noted in Suremime).
  • The position had not changed in September or November 2014 (i.e. when the appellants entered into the 2014 Agreement); the suggestion that the Bank came under an additional contractual obligation to the appellants, mid-way through the FCA review, was nonsensical.
  • The only relevant contract was the 2014 Agreement, which was, in substance, a compromise agreement in relation to which the Bank had not assumed any additional obligations (such as obligations to carry out the FCA review with reasonable skill and care) in relation to the conduct of the FCA review.

Moreover, the Court of Appeal expressly endorsed the reasoning of Beatson LJ in CGL. This focused on the nature of the FCA review and the limitations of the remedies available to non-private persons under the relevant regulatory regime whose claims are time barred. Although CGL considered the imposition of a tortious duty of care, the Court of Appeal in the instant case commented that Beatson LJ’s reasoning was “…inconsistent with there being any basis for a claim in contract either, absent some clear expression of intention by the bank to assume a contractual obligation“. The fact that the imposition of a contractual obligation would cut across the regulatory regime seemed to the Court of Appeal to “strongly militate against there being a contract of the kind alleged by the appellants“; the only contract the Bank had entered into in relation to the FCA review was with the FCA.

Accordingly, the Court of Appeal refused permission to appeal on this ground also. The effect is that the appellants will not be able to pursue any claims relating to the Bank’s conduct of the FCA review, given that the High Court struck out the claim based on the existence of a tortious duty and refused permission to amend the particulars of claim to plead the existence of a contractual obligation.

Conclusion

This is another welcome decision for financial institutions given the clarity that the Court of Appeal has now given on two occasions in relation to claims relating to alleged contractual obligations or duties of care owed by financial institutions in relation to their conduct of FCA past business reviews.

John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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Nic Patmore
Nic Patmore
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Action for declaration that bank failed to conduct past business review properly is not arguable

In the context of interest rate hedging product (“IHRP”) mis-selling litigation, the High Court has rejected an application for permission to amend particulars of claim to include a claim for a declaration that the defendant bank failed properly to conduct its past business review of IRHPs (the “Review”): Teresa Day & Anor (t/a Appledore Clinical Services) v Barclays Bank plc [2018] EWHC 394 (QB).

This judgment is consistent with the related decision in CGL Group Limited & Ors v The Royal Bank of Scotland plc & Ors [2017] EWCA Civ 1073, in which the Court of Appeal held that it was not arguable that the defendant banks owed a duty of care in tort directly to their customers in connection with conduct of the FCA Review (read our banking litigation e-bulletin). The instant application was viewed by the bank as an attempt by the claimants to introduce “through the back door” a claim based on the bank’s alleged failures to conduct the FCA Review properly, now that such a claim could not be made through the “front door”, following the CGL decision.

The High Court held that the declaration sought would inappropriately and disproportionately extend the scope of the proceedings, because it would have required the court (and the parties) to address issues outside of the substantive claims. In this context, it was particularly relevant that the claimants accepted that they were unable to bring a claim against the bank for breach of duty to conduct the FCA Review properly, as a result of the decision in CGL. The court viewed the application as an attempt by the claimants to act as “informal enforcers” of the FCA regulatory regime when this was a matter for the FCA itself. It held that it was not a legitimate use of the court’s powers to make findings in an attempt to force the FCA to act; the more appropriate route would be for the claimants to seek judicial review if the FCA refused to take enforcement action against the bank.

The combined effect of the decision in this case and CGLis that private claims by customers based on conduct of the FCA Review by defendant banks are very unlikely to succeed, whether they are pleaded by way of an alleged tortious duty or by seeking a declaration of wrongdoing.

Background

In October 2007, the claimants purchased an interest rate collar from Barclays Bank plc (the “Bank”). In June 2012, the Bank agreed with the now-FCA to carry out the Review of its sales of IRHPs since 1 December 2001 to customers who did not meet the ‘Sophisticated Customer Criteria’, and to offer redress as appropriate. In January 2013, following a pilot exercise, the Bank agreed amendments to the specifications of the FCA Review. The two agreements between the Bank and the FCA are referred to in this e-bulletin as the “FCA Agreement”.

As part of the FCA Review, the Bank reviewed the IRHP sold to the claimants, and in early 2014 offered basic redress to the claimants together with compensation for consequential losses (provided that they could be proved). However, the claimants did not submit a claim for consequential loss and instead commenced proceedings in the High Court in October 2014.

The claimants alleged misrepresentation relating to the sale of the IHRP and/or that the Bank breached various Conduct of Business Rules giving rise to a claim for breach of statutory duty under s.138D of the Financial Services and Markets Act 2000 (“FSMA”). The claimants subsequently applied for permission to amend their particulars of claim on a number of bases. The instant judgment considered their application to introduce a claim for declaratory relief.

Decision

The court refused to grant permission to amend the particulars of claim to include the claim for declaratory relief, for the reasons explained below.

(1) Scope of the declaration

In oral submissions, the claimants confirmed that the declaration sought might cover “…any breach of any regulatory requirement on the part of the [Bank] including any element which constituted a breach of the [FCA Agreement]”. As to breach of the FCA Agreement, the complaint articulated by the claimants was that the Bank had not conducted the FCA Review properly, in particular by not allowing the claimants enough time to submit their consequential loss claim.

The claimants accepted that they had no direct claim against the Bank for failure to conduct the FCA Review properly following the decision in CGL. The court noted that part of the reasoning given by the Court of Appeal in CGL for rejecting the notion of the existence of any such duty of care owed by banks to customers, was because the appropriate enforcement mechanism in respect of the FCA Review was the FCA. The claimants asserted that the declaration was nonetheless appropriate because the FCA was “strapped for cash” and would not take enforcement action in individual cases unless findings have already been made for the FCA by a judge. However, the court noted that the trial judge would not have to deal with what happened in the FCA Review because there was no claim against the Bank for breach of the FCA Agreement (nor could there be because of the decision in CGL). Accordingly, the declaration sought would involve the court and the parties having to address issues other than those arising under the existing substantive claims. The court stated that this was a wholly unsatisfactory basis on which to proceed.

In the court’s view, the application amounted to an attempt by the claimants to act as “informal enforcers” of the FCA regulatory regime, when this was a matter for the FCA itself. The Bank’s conduct of the FCA Review was subject to the supervision and approval of the independent reviewer, in the form of the Skilled Person. This important role was described in CGL and was found to militate against the imposition of a duty of care in that case. The court held that it also militated against using a declaration as a device to force the FCA into action. The court characterised it as “absurd and inappropriate” to consider regulatory questions that extended beyond the issues in the underlying claim in the hope that the FCA may later provide compensation to unsuccessful litigants.

The court also found that the scope of the claim for a declaration remained unclear and had every prospect of adding significantly to the length of trial. Finally, even if the claim for declaratory relief was allowed, it was not accepted by the court that the claimants had any real prospect of success in establishing any breach of the FCA Agreement by the Bank. The time allowed by the Bank for submitting a consequential loss claim (four months) was not considered an impossibly short period of time, particularly considering the fact that the claimants had been involved in the FCA Review since early 2013 and were assisted by counsel for most of that time. The claimants had not sought any further extension of time. Further, the court noted that even after four years of litigation the consequential losses had still not been articulated.

(2) Discretionary power to grant declaratory relief

The court considered a number of cases on the discretionary power of the court to grant declaratory relief (presumably on the basis that the test for permission to amend under CPR 17 requires the amending party to demonstrate that the claim has a real prospect of success, although this was not expressly stated in the judgment). The court highlighted the following relevant principles from the case law in particular:

  • Cause of action: The court accepted that there is no need for an underlying cause of action in order to grant a declaration (following Guaranty Trust Co of New York v Hannay & Co [1915] 2 KB 536).
  • General principles: The court also considered the principles articulated in Financial Services Authority v Rourke [2001] EWHC 704 (Ch) that in granting a declaration the court should take into account: justice to both claimant and defendant; whether the declaration would serve a useful purpose; and whether there are any other special reasons for or against a declaration. The court considered that the claim for a declaration would extend the scope of the trial and be unjust to the Bank. Whereas refusing to allow the amendment would not be unjust to the claimants, due to the speculative nature of the claim. Further, the lack of clarity and difficulty in determining the scope of the declaration was a special reason against granting it.
  • Non-parties: The court noted that the claimants were not a party to the FCA Agreement between the Bank and the FCA, but this did not itself preclude the granting of a declaration provided that the non-party was directly affected by the issue: Rolls Royce Plc v United the Union [2009] EWCA Civ 387. However, it would still be exceptional for a non-party to obtain declaratory relief where the contracting parties themselves were not in dispute as to their rights/obligations: The Federal Mogul Asbestos Personal Injury Trust v Federal-Mogul Limited & Ors [2014] LR 671. In the current case, there was no dispute between the Bank and the FCA in relation to the FCA Agreement, and in any event, there was no legal right on the question of the time extension. The court held that this case clearly fell into the category where it would still be exceptional to allow a non-party to a contract to seek declaratory relief.
  • Judicial review as an alternative to declaratory relief: The court also highlighted that the claimants could seek judicial review of the FCA’s refusal/failure to take enforcement action against the Bank. The court noted that while there have been other cases in which the obligations of a public body were considered by the court when judicial review was also available, they were highly fact-sensitive. On the present application, the court doubted the claimants’ legitimate interests in seeking a declaration and determined that it was not a legitimate use of the court’s powers to make findings in an attempt to force the FCA to act. The court commented that this would cut across the regulatory regime which had been established for the FCA generally and the FCA Review in particular.

Comment

The possibility of claimants finding new routes to attack the FCA Review seems even more remote. This robust decision represents a further marker by the High Court upholding the integrity of the process.

John Corrie
John Corrie
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Ceri Morgan
Ceri Morgan
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Nihar Lovell
Nihar Lovell
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High Court rejects application to include conspiracy allegations in IRHP misselling claim and gives guidance on meaning of “exceptional circumstances” in past business review undertakings given to the FCA

The latest in the line of recent judgments concerning interest rate hedging product (“IRHP“) misselling allegations concerns an application by the claimants to introduce economic tort claims for wrongful interference, conspiracy to injure and/or conspiracy to use unlawful means: Elite Property Holdings Ltd & Anor v Barclays Bank plc [2017] EWHC 2030 (QB). The High Court comprehensively rejected the claimants’ application. It follows an earlier decision in the same proceedings, in which the Court struck out the majority of the claimants’ claims relating to the sale of their IRHPs and ordered the claimants to particularise properly their claims for conspiracy (see our e-bulletin on that decision here). The combined effect of these judgments is likely to bring an end to the proceedings in question, subject to the claimants’ pending applications for permission to appeal both decisions.

In the instant case, the Court rejected the claimants’ application for permission to amend the particulars of claim on the basis that the claims sought to be introduced had no real prospect of success. Underpinning the proposed amendments was an allegation that the defendant bank (the “Bank“) had unlawfully foreclosed the claimants’ loan facility in breach of an undertaking given by the Bank to the FCA. The undertaking was given in the context of the Bank’s past business review (“PBR“) relating to the sale of IRHPs, and provided that the Bank was not entitled to foreclose or adversely vary customers’ facilities unless there were “exceptional circumstances“. The Court found that there could be “no serious argument” that the circumstances were not “exceptional“.

The Court also noted that, had it been necessary to determine the point, it would have found the claims were compromised by a settlement agreement entered into between the parties in 2014. This approach to settlement agreements in IRHP misselling cases is in line with other recent authorities (see e-bulletin here).

While the new Elite decision turned on its particular facts, it does serve as a warning as to the dangers of insufficient pleadings in cases involving allegations of conspiracy or similar, and adds to the growing body of case law providing certainty for banks in IRHP misselling cases. In particular, the Court provided some guidance by way of a postscript as to the way in which claims in conspiracy ought to be pleaded, which is of general application. The Court’s discussion of the meaning of “exceptional circumstances” in the PBR undertaking is also likely to be of wider interest to banking institutions, particularly those who have given similar undertakings as part of their PBRs.

Background

The Bank provided loan facilities to the two claimant companies (“Elite” and “Decolace“, respectively), which were secured over properties including three elderly care homes owned by Elite. In connection with those facilities, between 2006 and 2008, the claimants entered into three structured collars with the Bank. The claimants subsequently alleged that those collars had been mis-sold; the Bank then agreed to restructure their loans. As part of that restructuring, the parties agreed to enter into a settlement agreement in relation to the collars.

In 2012, in common with several other banks, the Bank agreed with the FSA (now the FCA) to undertake its PBR in relation to its sales of IRHPs to small and medium-sized enterprises, which included the provision of appropriate redress. As part of that agreement with the FCA, the Bank agreed that it would not foreclose on or adversely vary existing lending facilities (except with prior consent) until a final determination had been reached in relation to the redress owed to the customer, “except in exceptional circumstances“.

The Bank also agreed with the FCA to appoint KPMG to the role of the “skilled person” to the PBR, to act as an independent reviewer and oversee the PBR. Part of this role involved KPMG overseeing the Bank’s approach to its undertaking to the FCA by confirming whether “exceptional circumstances” existed.

During 2012 and 2013 various events took place, causing the Bank to allege that Elite had breached its loan facility agreements, triggering its right to foreclose under the “exceptional circumstances” carve-out of the undertaking. These events (listed at paragraphs 20-28 of the judgment) included the following:

  • Elite twice defaulted on its cashflow to debt requirements under its loan facilities (for which the Bank sent reservation of rights letters).
  • HMRC made a demand on a company associated with Elite, which operated the care home business and provided security for the underlying loan, Health and Homes Limited (“H&H“), for corporation tax of approximately £700,000. HMRC subsequently issued a winding up petition against H&H as payment was not made.
  • Without the Bank’s consent (which was required), H&H and Elite agreed to transfer the care home business to another company in the same group.
  • H&H submitted a proposal for a company voluntary arrangement, stating that it was unable to pay its debts as they fell due. This was rejected by HMRC and H&H was placed into creditors’ voluntary liquidation.
  • The Bank became aware that both claimants had been struck off the BVI Companies Register (although it was later confirmed that they had each been restored).

The Bank sought confirmation from KPMG that these constituted “exceptional circumstances” under the undertaking to the FCA. It indicated that it wished to appoint BDO as administrators and LPA receivers over both claimants. KPMG granted the Bank’s request.

In September 2013, the Bank made a formal demand on the claimants. The demand against Decolace was withdrawn following confirmation that it had been restored to the BVI register (as the striking-off had been the central basis for that demand). Subsequently, the Bank commenced enforcement action by appointing administrators over H&H, which was followed by the appointment of LPA receivers over the assets.

At this time, Elite and Decolace were also taking part in the Bank’s PBR. This led to the Bank making offers of “basic redress” to the claimants (which excluded consequential losses). The claimants separately submitted claims for consequential losses, which the Bank ultimately rejected. The claimants then issued proceedings to recover those alleged losses.

The claimants’ particulars of claim alleged: (a) mis-selling of the relevant swaps; (b) breach of duty on the Bank’s part in conducting the PBR; and (unusually for these claims) (c) conspiracy. In a judgment dated 16 December 2016, the Court struck out the claimants’ claims relating to parts (a) and (b), and ordered the claimants to particularise fully and properly their conspiracy claims. It is that order which gave rise to the claimants’ application to amend the particulars.

Application to amend particulars of claim

The claimants sought to add claims relating to wrongful interference by unlawful means, conspiracy to injure and/or conspiracy to use unlawful means. In particular, they sought to allege that:

  • The Bank combined with BDO to engineer “a position whereby the Bank could foreclose on or adversely vary the Claimants’ existing facilities“.
  • The Bank’s foreclosure and adverse variance to the facilities (carried out by BDO as LPA receivers) amounted to unlawful means and an unlawful interference in the claimants’ business.
  • In the alternative, that the Bank’s combination with BDO amounted to a conspiracy to injure the claimants.

The proposed amendments set out lengthy factual particulars relating to the allegations made, which appear at paragraph 45 of the judgment. The “unlawful means” alleged for both the tort of wrongful interference and conspiracy to use unlawful means, was that the Bank was in breach of its undertaking to the FCA not to enforce, because the circumstances were not “exceptional“.

Decision

To determine whether to allow the claimants’ proposed amendments, the Court applied the test of whether the proposed claims had a real prospect of success. To meet this test, claims must carry “some degree of conviction“, albeit that the Court ought not to “embark on a mini trial to see whether there is a real prospect“. The Court rejected each of the amendments sought, reasoning as follows:

Wrongful interference by unlawful means

  • In relation to the tort of wrongful interference by unlawful means, the Court found that there could be “no serious argument” that the circumstances were not “exceptional“. The Court found that it was conclusive that KPMG as the skilled person had approved the Bank’s designation of the circumstances as “exceptional circumstances“, noting that it was not open to a customer to “second-guess” what constituted “exceptional circumstances“. Because there was no unlawfulness to begin with, this would dispose of both the wrongful interference by unlawful means claim, and conspiracy to use unlawful means claim.
  • The Court also held that the claim should fail on the basis of the reasoning in OBG v Allan [2007] UKHL 21:”Unlawful means therefore consists of acts intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. It does not… include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant.” (emphasis added). The Court found that the unlawful acts (if any) against the FCA (the third party) in the present case, did not interfere with the FCA’s (the third party’s) freedom to deal with the claimants. The Court concluded: “This is all far removed from paradigm cases of wrongful interference where, for example, a trade competitor of the victim of the tort acts unlawfully as against the third party so as to stop the third party from dealing in some way with the victim in order to diminish the victim’s business, and so on.”

Conspiracy to injure

  • In relation to the tort of conspiracy to injure, the Court noted that there must be a “predominant intention on the part of the conspirators to injure the claimant“. The Court concluded that there was no such intention in the present case and, in the absence of a motive, found that the conspiracy to injure plea was “hopeless” and “should never have been made“.

Conspiracy to use unlawful means

  • Given that the only unlawfulness relied upon was breach of the undertaking (and the Court ruled that there was no real prospect of establishing such a breach), this plea also failed.

While not required to determine the point, the Court went on to consider whether the claims sought to be introduced by the claimants were barred by virtue of a settlement agreement entered into in 2014. The Court found that each of the wrongful interference and conspiracy to use unlawful means claims were caught by that settlement agreement, and that there was a “strong case” to say that the conspiracy to injure claim also fell within the scope of the settlement agreement.

By way of a postscript, the Court made the following general observations in relation to the pleading of cases in conspiracy or similar. Specifically:

  • While noting that claims in conspiracy or similar are “notoriously difficult to plead“, the Court found that the particulars ought to have been pleaded in a more “structured way“, with a separate section for each plea giving “proper particulars of each constituent element of the tort“.
  • The Court noted that it was “vital“, particularly in cases involving conspiracy to injure, to plead both the nature of the injury which it is said was intended, and the motive for that alleged injury. The Court observed that, unless both elements are pleaded, there is a risk that a court will be “puzzled by the plea as it was here“.

Conclusion

While this case turned on its own facts, it provides both helpful general guidance on the appropriate approach to pleading claims based in conspiracy, and more specific guidance on the meaning of “exceptional circumstances” in undertakings given to the FCA not to foreclose on customers in the context of IRHP mis-selling. The case also reminds claimants of the appropriateness of making allegations of conspiracy.

John Corrie
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Court of Appeal confirms no tortious duty of care owed to customers in connection with the FCA past business review

Over the past two years, the courts have grappled with the novel claimant argument that financial institutions owe duties of care in tort directly to their customers in connection with their conduct of the past business review of interest rate hedging product sales announced by the FCA (then FSA) in 2012 (the “Review“). There have been a number of contradictory High Court decisions – see our previous e-bulletins here and here.

However, in good news for financial institutions, the Court of Appeal has now clarified – in three conjoined appeals – that such claimants have little prospect of bringing such claims against the banks conducting that Review: CGL Group Limited & Ors v Royal Bank of Scotland plc & Ors [2017] EWCA Civ 1073.

The Court of Appeal found it was not even arguable that the defendant banks in the three linked cases owed tortious duties to the claimants to conduct the Review with reasonable skill and care. This was primarily because such a duty would undermine the statutory and regulatory regime, which grants customers rights to bring claims against financial institutions only in certain defined circumstances. Such claims should now be amenable to summary judgment.

In addition, the separate High Court decision in Cameron Developments (UK) Limited v National Westminster Bank plc & Ors [2017] EWHC 1884 (QB) suggests that customers who accept “basic redress” under the Review will be treated as having settled all claims relating to the way in which the bank conducted the Review, where the settlement wording is sufficiently broad. This provides another reason why such customers should be prevented from bringing claims in connection with the Review.

The combined effect of these two cases should spell an end for any similar claims regarding the Review.

CGL Group: background

In Suremime Limited v Barclays Bank plc [2015] EWHC 2277 (QB), the High Court found that it was arguable (for the purposes of a summary judgment application) that the defendant bank owed a tortious duty to the claimant to conduct the Review with reasonable skill and care. However, in the subsequent first instance decision in CGL Group Limited v Royal Bank of Scotland [2016] EWHC 281 (QB), the High Court expressly declined to follow Suremime and instead found such duties were unarguable. CGL Group appealed this decision, and the appeal was heard together with the appeals of two other cases in which claims based on such tortious duties had been struck out.

The principal issue before the Court of Appeal was whether it was arguable that the defendant banks owed the alleged tortious duty of care in connection with the Review.

CGL Group: Court of Appeal judgment

In a detailed judgment, the Court of Appeal found that the alleged tortious duty of care was not arguable. The Court’s decision was based on the following factors in particular:

  • The alleged tortious duty would undermine the regulatory and statutory regime, which provides for recourse only in certain circumstances (under section 138D Financial Services and Markets Act 2000 or through the Financial Ombudsman Service). In particular, the Court held that the framework for consumer redress schemes provides a clear pointer against the imposition of a duty of care, as it was the deliberate intention of Parliament that only the FCA was to have the power to require the banks to comply with a consumer redress scheme and that no individual could enforce such schemes or sue for breach. The alleged tortious duty would undermine Parliament’s intention to confer a private law cause of action only on a limited class in defined circumstances. The Court did not consider that it was relevant that the Review was undertaken pursuant to contractual agreements between the FCA and the banks (and was not established under any of the FCA’s official stautory powers, such as its consumer redress scheme powers, such as its consumer redress scheme provisions). The Court found that the Review was nevertheless clearly part of the regulatory scheme, as the FCA and the banks agreed the Review as an alternative to enforcement proceedings. If a bank failed to comply with the terms of the Review agreement, the Court considered that it would be the responsibility of the FCA to bring enforcement proceedings.
  • The Court rejected the claimants’ submissions that the correspondence in which the banks invited customers to participate in the Review evidenced a voluntary assumption of responsibility by the banks. In particular, the banks were obliged to carry out the Review under their agreements with the FCA, so it could not be said that the banks were acting “voluntarily“.
  • In addition, the appointment of an independent reviewer as a “skilled person” who would be examining the decisions of the Review made it “difficult to argue” that the banks had assumed responsibility to customers. As the independent reviewer could not have owed a duty of care to customers, the Court said it would be “surprising” if the bank owed a duty.
  • Imposing the alleged tortious duty would, in effect, allow customers to circumvent the limitation period for the original mis-selling of the product, as the limitation period would re-start at the date of the Review. It would thus allow time-barred claims via a back door.
  • The existence of a conflict of interest is another factor weighing against the imposition of the duty. The conflict of interest between the banks and their customers arises because the banks were being asked to assess whether they had acted in breach of their regulatory duties and to pay out redress if so.
  • The customers could not demonstrate reliance on the banks conducting the Review with reasonable skill and care, as it remained open to them to pursue a claim in mis-selling.

The Court considered the above factors under the umbrella of the three classic tests used to determine the existence of a tortious duty of care in respect of economic loss. As has become customary, the Court considered the tests together in the round and used them as cross-checks on each other (see Playboy Club London Ltd v Banca Nazionale del Lavoro SpA [2016] EWCA Civ. 457 (e-bulletin here)). These tests are: (1) “assumption of responsibility“; (2) the three-fold test in Caparo Industries plc v Dickman [1990] 2 AC 605 (forseeability, proximity and whether it is “fair, just and reasonable” to impose a duty); and (3) the incremental test (whether the addition to existing categories of duty would be incremental rather than indefinable).

Cameron Developments: background

The claimant entered into an interest rate swap with the defendant bank in March 2010 (the “Swap“). The sale of the Swap was considered as part of the bank’s Review. In September 2014, the bank’s Review offered the claimant “basic redress“, which offered to cancel the Swap (at no cost) and replace it with an interest rate cap and also to refund the difference between the net payments made under the Swap and the payments that the claimant would have made if it had entered into the cap at the outset.

The claimant accepted the basic redress in October 2014. The acceptance form included a full and final settlement of claims connected with the swap, save that claims for “consequential losses” were carved out and not settled (the “Settlement“).

In April 2015, the Review rejected the claimant’s consequential loss claims. The claimant subsequently issued a claim for these losses, alleging:

1. Mis-selling claims in respect of the original sale in March 2010 (the “Mis-selling Claims“).

2. Breach of a tortious duty of care to conduct the Review with reasonable skill and care (the “Tort Claims“).

3. Breach of an alleged separate contract, entered into at the time of the Settlement, to assess the consequential loss claims within the Review (the “Contract Claims“).

The bank sought summary judgment over the Tort Claims and the Contract Claims on the basis that they had been settled by the terms of the Settlement. The bank accepted that the claimant was entitled to bring the Mis-selling Claims in order to claim consequential losses allegedly incurred as a result of entering the Swap.

Cameron Developments: judgment

The Court found that the Settlement settled both the Tort Claims and Contract Claims and, accordingly, granted summary judgment. Some key factors in the decision were:

  • The wording in the Settlement covered claims “arising under or in any way connected with the sale” of the Swap. This was sufficiently broad to cover claims in relation to the Review, which the Court found are “connected with” the sale of the Swap, in the ordinary sense of the words.
  • Whilst the parties had not considered the possibility of the Tort Claims or Contract Claims at the time of entering the Settlement (and the claimant did not know at that time it was giving up those claims), the settlement wording was sufficiently broad to capture future, unknown claims (covering “past, present or future claims … regardless of whether or not you are aware of them at the date of this letter“).
  • The parties agreed that the carve-out for “consequential losses” in the Settlement would not apply to the Tort Claims or Contract Claims, following the decision on this point in Elite Property Holdings Limited & Anr v Barclays Bank plc [2016] EWHC 3294 (QB) (see our e-bulletin here). The carve-out applied only to claims that the mis-selling caused consequential loss, and did not apply to claims that the alleged breaches of duty by the Review caused consequential loss.

Conclusion

These two judgments will be welcomed by financial institutions. The uncertainty caused by the conflicting first instance decisions in Suremime and CGL Group has now been resolved, and any existing claims against banks alleging duties of care in connection with the Review are now at risk of summary judgment. Claimants who had brought Review claims may still be able to pursue mis-selling claims (if they are not time-barred), although this will of course require them to prove breach of duty at the time of the original sale.

Significantly, the Court of Appeal’s reasoning is likely to apply to other past business reviews and redress exercises conducted by financial institutions with regulatory oversight by the FCA. In that context (and whilst any review would need to be considered by reference to its individual circumstances), financial institutions are likely to be assisted by the finding that the overall regulatory regime for consumer redress schemes provides a clear pointer against the imposition of a duty of care (even where the Review in this case was not undertaken pursuant to any official statutory power). The appointment of an independent reviewer to oversee a review further weighs against the imposition of a duty of care. This suggests that claimants may find it difficult to establish such tortious duties in connection with other consumer redress exercises overseen by the FCA.

John Corrie
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High Court strikes out claims relating to the mis-selling of interest rate hedging products Supreme Court on contractual interpretation – striking a balance between the language used and the commercial implications

  • In Wood (Respondent) v Capita Insurance Services Limited (Appellant) [2017] UKSC 24, the Supreme Court has unanimously dismissed an appeal brought by Capita Insurance Services Limited (“Capita”) on the construction of an indemnity clause.
  • The Supreme Court emphasised that it did not seek, once again, to reformulate the guidance to the legal profession, noting that its judgments in Arnold v Britton [2015] AC 1619 and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 provide sufficient statements of this nature.
  • Rainy Sky and Arnold are often seen as pulling in opposite directions, with the former having given a greater role to commercial common sense in interpreting contracts, while the latter re-emphasised the importance of the natural meaning of the words used.
  • The present judgment, however, emphasises the common ground, commenting that they were in fact saying the same thing – namely that interpretation is a unitary exercise, in which a balance must be struck between the indications given by the language used (in both the clause under scrutiny and the remainder of the contract) and the implications of rival constructions (which is usually thought of as the business common sense approach).
  • Interestingly, Lord Hodge said that in striking a balance between these two tools to construction it does not matter which way round they are used, so long as the court balances the indications given by each.
  • The decision does however emphasise that the weight to be given to each tool will depend on the circumstances. Some agreements may be successfully interpreted by textual analysis, eg because they have been professionally drafted and their meaning is clear. Others may require a greater emphasis on the commercial background and implications to interpret a disputed provision.
  • It also emphasises, in line with Arnold, that business common sense can only be taken so far, remembering that one side may have agreed to something which with hindsight did not serve his interest. It is not the role of the court to save the parties from a bad bargain.

Background to the appeal

The appeal concerns an indemnity clause in a share purchase agreement (“the SPA”), for the sale and purchase of the entire issued share capital of Sureterm Direct Limited (“the Company”), a car insurance broker. The sellers of the Company were its managing director Mr Wood (together with other minor shareholders) (the “Sellers”). The buyers of the Company were Capita Insurance Services Ltd (the “Buyer”).

After the acquisition, the Company conducted a past business review in response to concerns that had been raised by its employees in relation to its sales processes and potential misselling of its products in the period prior to completion of the SPA. In accordance with its regulatory obligations, the Company then reported these findings to the FSA. This ultimately led to the FSA determining that the Company’s customers had been misled and that it should conduct a customer remediation exercise, which it did, resulting in the payment of £1.35 million in customer compensation.

The Buyer then brought a claim against the Sellers for losses they had suffered as a result of the misselling, relying upon the following indemnity in the SPA (the “Indemnity”):

“The Sellers undertake to pay to the Buyer an amount…to indemnify the Buyer… against all actions, proceedings, losses, claims, damages, costs, charges, expenses and liabilities suffered or incurred, and all fines, compensation or remedial action or payments imposed on or required to be made by [the Company] following and arising out of claims or complaints registered with the FSA, the Financial Services Ombudsman or any other Authority against [the Company], the Sellers or any Relevant Person and which relate to the period prior to the Completion Date pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product of service.”

The Sellers claimed that this loss was outside the scope of the Indemnity given that the requirement to remediate customers had not arisen as a result of a claim by the customers or a complaint by those customers to the FSA (but rather arose from the Company self-reporting the misselling).

At first instance, Popplewell J held that the Indemnity required the Sellers to indemnify the Buyer even if there had been no claim or complaint by a customer, primarily on the basis that it did not make business common sense for the clause to operate to exclude those claims. The Court of Appeal disagreed and found that liability under the Indemnity could not arise in the absence of any actual claim or complaint by a customer. (For a summary of the Court of Appeal’s decision ([2015] EWCA Civ 839), see our blog post on that decision here).

The Buyers appealed to the Supreme Court.

Judgment

The Supreme Court unanimously upheld the Court of Appeal’s decision, finding that the Sellers were not liable under the Indemnity given there had been no actual claim by customers or any complaint registered with the FSA in relation to the misselling.

In the lead judgment given by Lord Hodge (with whom the other Justices agreed) the court held that its primary task in contractual interpretation is to ascertain the objective meaning of the language in the contract.

Citing the Supreme Court’s decision in Arnold v Britton [2015] AC 1619 (which confirmed the approach in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900), the court noted that where there are rival constructions, the court may have regard to business common sense as an aid to deciding between them. However, in striking a balance between indications given by the language used and the implications of the rival constructions based on business common sense, the court must consider the quality of drafting of the clause and must also be alive to the possibility that one party has struck a bad bargain.

Striking this balance involves an iterative process of considering each suggested interpretation against the provisions of the contract and its commercial consequences (Arnold citing In re Sigma Finance Corpn[2010] 1 All ER 571). Lord Hodge said, interestingly, that to his mind it did not matter whether this analysis begins with an examination of the plain language or with the factual background and implications given by rival constructions, so long as the court balances the indications given by each.

Lord Hodge emphasised that both the language and the commercial implications should be used as tools to ascertain the objective meaning of the agreement, and their use will vary according to the circumstances of the particular agreement. Some contracts can be successfully interpreted principally by textual analysis (because of their sophistication, or because they have been negotiated and prepared by skilled professionals), whereas others will require a greater emphasis on the factual matrix (because of their informality, brevity or the absence of skilled professional assistance).

The Indemnity

In applying these principles to the Indemnity, the court took the view that it was poorly drafted and its meaning was therefore “avoidably opaque”. It was therefore necessary to adopt the iterative process in order to examine the clause both through a textual analysis of the words in the context of the contract as a whole, and to consider whether the wider relevant factual matrix could provide guidance as to its meaning in light of the commercial effect of rival interpretations.

The court gave considerable emphasis to the contractual context in this case. In particular, the court appears to have been influenced by the existence of warranties which, subject to a two year limitation, would have provided for compensation for losses which arose from the FSA redress scheme. The court observed that two years after completion was not an unreasonably short period of time in which to conduct an internal review for any relevant misselling/regulatory breaches in order to bring a claim under the warranties. The court considered that it is not contrary to business common sense for parties to agree wide-ranging warranties, which are subject to a time limit, and in addition to agree a further indemnity, which is not subject to any such limit but is triggered only in limited circumstances.

In this context, the court made interesting observations about the utility of business common sense to aid the construction of a contract which has plainly been the subject of negotiation by sophisticated parties:

“Business common sense is useful to ascertain the purpose of a provision and how it might operate in practice. But in the tug o’ war of commercial negotiation, business common sense can rarely assist the court in ascertaining on which side of the line the centre line marking on the tug o’ war rope lay, when the negotiations ended.”

While the agreement may have become a bad bargain for the Buyer, given their failure to bring a claim in time under the warranties, it is not the court’s role to construe the Indemnity in a way that improves their bargain.

Accordingly, the result may have been different had the Indemnity stood on its own (ie if the contract did not contain the warranties). In that event, it may have been anomalous to exclude loss caused by regulatory action that was prompted otherwise than by a customer claim or complaint (ie from the Company self-reporting). This reinforces the importance of construing the contract as a whole, within its wider context.

Comment

While the Supreme Court has sought to emphasise that it was not intending to restate the recent key authorities underpinning the common law position in relation to contractual interpretation, the court’s application of those principles in this case suggests a more balanced consideration of both the textual approach (focusing on the plain language of the contract) and the purposive approach of looking at the factual context to consider the commercial implications of the rival meanings. Perhaps the possible shift in emphasis is explained by the fact that, unlike in Arnold, the Supreme Court concluded very clearly that the clause was poorly drafted, which created difficulties both in the interpretation of the meaning of the plain language as well as the rival interpretations and their practical consequences. However, the fact that yet another case of contractual construction has reached the highest appellate courts highlights the difficulty in applying to individual clauses what the courts treat as the settled principles.

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High Court strikes out claims relating to the mis-selling of interest rate hedging products

In a recent decision, Elite Property Holdings Ltd & Anor v. Barclays Bank plc [2016] EWHC 3294 (QB), the High Court struck out the majority of the claimants’ claims relating to the sale by Barclays of interest rate hedging products (IRHPs”), in particular, three structured collars and three swaps. This decision adds to the growing body of cases providing certainty in this area of the law.

Three features of the decision are likely to be of particular interest:

  • The Court upheld the terms of a settlement agreement previously entered into by the parties, finding that the claimants’ attempt to set it aside on the basis of alleged “sharp practice” by the bank was “hopeless”. This was because the claim which the claimants said Barclays ought to have revealed at the time of the settlement agreement was the very one that they had agreed to settle by that agreement. In this respect, the decision follows recent authority in IRHP mis-selling cases, including Marsden v. Barclays [2016] EWHC 1601 (QB) and Marshall v. Barclays [2015] EWHC 2000 (QB).
  • The Court did not attempt to resolve the conflicting authorities concerning the question of whether a bank owes a duty of care to a claimant whose IRHPs were reviewed as part of the 2012 Financial Conduct Authority (FCA”) Review into IRHPs (Suremime Limited v. Barclays Bank plc [2015] EWHC 2277 (QB) and CGL Group Limited v. Royal Bank of Scotland[2016] EWHC 281 (QB), see our e-bulletin here), but noted that the latter case is subject to appeal.
  • Related to the above, the Court held that Barclays did not owe the claimants any similar contractual duty as a result of its entering into an agreement to provide redress to the claimants. While Barclays did have an obligation to review the claimants’ IRHPs as a result of its agreement with the FCA, a clear expression of intention would be required before the Court would find that Barclays had assumed a separate contractual obligation to the claimants over and above conducting the Review in accordance with its agreed terms.

The case is discussed in more detail below.

Background

Between 2006 and 2008, Barclays provided loan facilities to the two claimant companies. In connection with those facilities, the claimants entered into three structured collars with the bank.

Subsequently, the claimants raised several concerns with the collars. Following discussion, they agreed with Barclays that they would break the collars and refinance the break costs, but sought to reserve their rights to complain about the sale of the collars. Barclays offered to finance the break costs, but on the condition that the parties agree to a full and final settlement of the complaints around the sale of the structured collars. Following discussion, settlement was concluded by all parties in 2010 (the “2010 Agreement”) and the collars were terminated, with the break costs being financed by further loans from Barclays. The refinanced loans were hedged by the claimants entering into three interest rate swaps.

In June 2012, in common with several other banks, Barclays agreed with the FCA to undertake a past business review in relation to its sales of IRHPs to small and medium-sized enterprises. Following that review, Barclays offered redress to each of the two claimant companies, which covered:

a) Past payments in respect of the structured collars and swaps (“Basic Redress”); and

b) Compensatory interest, calculated as a flat percentage rate of the Basic Redress, and intended to be in lieu of consequential loss.

The claimants accepted the offer of Basic Redress, but rejected the offer of interest, requesting that Barclays conduct a detailed assessment in relation to consequential loss. The parties then signed acceptance forms in November 2014, acknowledging that the Basic Redress payments were in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss (2014 Agreements”). Barclays paid the Basic Redress to the claimant companies in December 2014.

Following a review of the evidence submitted by the claimants, Barclays rejected the claimants’ claims for consequential loss, and the claims were ultimately treated as closed. The claimants then issued proceedings to recover the consequential losses.

The claimants’ claims

The claims were based on three grounds:

  • Barclays owed and breached an advisory duty in respect of the collars and swaps, which caused the claimants losses as a result of stresses placed on their cash flow by the obligations under the structured collars (Advisory Claims”).
  • Barclays owned and breached a duty of care to the claimants in carrying out the FCA Review, resulting in losses to the claimants when consequential losses were not compensated and LPA receivers appointed (Review Claims”).
  • Barclays combined with the LPA receivers to inflict intentional harm on the claimants, thereby committing the tort of unlawful interference and causing the claimants loss (Conspiracy Claims”).

Barclays applied for summary judgment or to strike out the Advisory Claims and the Review Claims, and to require the Claimants to re-plead or withdraw the Conspiracy Claims.

Decision

Advisory Claims – the structured collars

The claimants conceded that any potential claims in relation to the structured collars were time-barred, but alleged sharp practice on the part of Barclays, such that the bank could not rely on the terms of the 2010 Agreement.

Referring to BCCI v. Ali [2002] 1 AC 251, the Court noted that in order for a claim of sharp practice to succeed, the claimants would need to show an arguable case that at the time the 2010 Agreement was entered into:

a) Barclays knew that the claimants had or might have a claim against it;

b) The claimants did not know that they had or might have such a claim; and

c) Barclays knew that the claimants did (or might) not know about the claim.

The Court also referred to recent authority dealing with mis-selling of IRHPs, Marsden v. Barclays [2016] EWHC 1601 (QB) and Marshall v. Barclays [2015] EWHC 2000 (QB). In both cases, the Court found that there was no sharp practice on the part of the bank, because the customer already knew that it had a potential mis-selling claim at the point that the relevant release was entered into.

The Court held that the claim of sharp practice in the current claim was “hopeless“, because the claim that the claimants argued Barclays ought to have revealed was the very one that the claimants had themselves brought to the Bank’s attention (thus failing limbs (b) and (c) of the BCCI test). In reaching that conclusion, the Court referred to the following key pieces of evidence:

  • Evidence that the claimants had raised complaints about the collars in 2010, which fell broadly under the category of “mis-selling”.
  • Evidence that the claimants had in mind from as early as December 2008 the need to take legal advice in respect of the structured collars.
  • The fact that 2010 Agreement expressly referred to the claimants’ desire to reserve their rights to complain about the structured collars.

Advisory Claims – the swaps

As to the swaps, the claimants pleaded loss arising from breaches of duty said to be owed in respect of the structured collars alone. However, prior to Barclays’ application being heard, the claimants sought leave to amend their Particulars of Claim to include a plea that the losses incurred under the collars were “repackaged” by the swaps and accordingly continued after the swaps were sold. The claimants described these as “legacy losses“, and argued that they were attributable to the bank’s breach of duty when selling the swaps.

The Court rejected this argument, citing the principle that a claimant seeking damages must prove a causal connection between a defendant’s breach and the loss suffered by the claimant. The Court concluded that (on the claimants’ own case) the chain of causation started when the structured collars were sold; the fact that the loss carried on after the swaps were entered into was irrelevant to the chain of causation.

Review Claim

The Review Claim related to both the collars and the swaps. The Court noted the conflicting authority on the question of whether a bank owed a customer a duty of care in tort in respect of the FCA Review: Suremime Ltd v. Barclays Bank Plc [2015] EWHC 2277 (QB) and CGL Group Ltd v. Royal Bank of Scotland [2016] EWHC 281 (QB). In Suremime, the Court found that it was arguable that a bank did owe a customer such a duty of care; in contrast, in CGL, the Court rejected that a bank owed such a duty. CGL is now subject to appeal.

In the current case, the bank did not attempt to strike out the plea and accordingly the Court did not attempt to resolve the conflict between the two previous authorities. Nevertheless, the Court held that any such claim against the bank was compromised by both the 2010 Agreement (in respect of the collars) and the 2014 Agreements (in respect of the collars and swaps). As regards the 2014 Agreements, the Court considered whether the damages claimed fell within the carve-out for “consequential loss”, and was satisfied that they amounted to a fresh claim (i.e. were not “consequential losses”). In reaching that conclusion, the Court found that the definition of “consequential loss” was expressed in clear language and required the losses to be “the knock-on effect of the mis-sale“. The losses sought in respect of the Review Claim were not a knock-on effect of the mis-sale, but were, on the claimants’ own case, a consequence of the bank’s alleged failure to conduct the FCA Review properly. They were therefore settled by the broad terms of the 2014 Agreements.

The Court also considered the claimants’ argument, introduced by way of proposed amendment to the Particulars of Claim, that when they submitted the acceptance forms for Basic Redress as part of the 2014 Agreements, contracts were entered into between the claimants and the bank subject to certain express and implied terms which imposed on the bank a duty of care owed to the claimants in respect of the FCA Review. The claimants argued that, in breach of those contractual terms, Barclays failed to assess fair and reasonable redress, and thus to act with reasonable care and skill when carrying out the FCA Review.

In rejecting this argument, the Court found that, while Barclays had an obligation to investigate the consequential loss arising out of the sale of the collars and swaps, the source of that obligation was the bank’s agreement with the FCA to conduct the review, and was therefore already in place when the parties entered into the 2014 Agreements. The Court agreed with the decisions in Marsden and Marshall that the FCA Review was undertaken as part of the participant banks’ regulatory obligations and agreement with the FCA, and noted that the agreement with the FCA expressly excluded the right of any person who was not a party to the agreement enforcing any of its terms. Any finding that the bank had assumed a new contractual obligation to the Claimants to carry out the FCA Review with particular care and skill would therefore require a clear expression of that intention.

Conspiracy claims

For completeness, the Court agreed that the conspiracy claims were inadequately pleaded, noting that the claimants had “pleaded the bare bones of these claims because they are in no position to do more“, but that they were “not entitled to wait for disclosure to see what turns up“. The claimants were given time to clarify this aspect of the Particulars of Claim.

Conclusion

Whilst not setting out new law, the case is a useful further decision in the body of IRHP mis-selling claims, including around how the Court will view previous settlement agreements, and the FCA Review.

John Corrie
John Corrie
Partner
+44 20 7466 2763
Hannah Bain
Hannah Bain
Associate
+44 20 7466 2413