UK: Recent Decision On Interest Swap Mis-Selling Claim Made In Favour Of Bank

In a recent decision (Thornbridge Limited v Barclays Bank Plc [2015] EWHC 3430(QB)), the High Court, following the judgement in Springwell, held that a bank did not assume an advisory duty in agreeing an interest rate swap and will look at all the evidence of the relationship between the parties to determine whether an advisory relationship exists

Background

Thornbridge Limited (the "Claimant") was a property investment company. In March 2008 the Claimant sought a loan from the Defendant; Barclays Bank Plc. The loan agreement was entered into on 16 April 2008. It was a condition of the loan that the Claimant either entered into an interest rate hedge or accepted a fixed interest rate. Discussions took place between the parties to discuss interest rate hedging. Interest rate hedging is a common feature of real estate finance loans as it reduces the risk to borrowers of being unable to pay interest on the loan. This is because they are normally made on a floating basis referenced to LIBOR.

Following these discussions, on 30 May 2008 the Claimant entered into an interest rate swap agreement (the "Swap") with the Defendant. The Swap was intended to protect the Claimant against interest rate rises. However, in 2008 there were a number of reductions in the Bank of England base rate, to which payments under the Swap were linked. As a result, the Swap payments due from the Claimant increased significantly. After making a series of complaints, the Claimant requested a restructuring of the Swap. The Claimant did not want to pay the high breakage costs associated with the restructuring so allowed the Swap to continue to maturity. As a result, the Claimant issued a claim against the Defendant.

The Claim

The Claimant claimed damages from the Defendant for losses arising from alleged negligence, breach of contract and breach of statutory duty. The Claimant alleged that the Defendant failed to advise as to the purchase of a suitable product, failed to provide adequate information regarding break costs (for instance, failing to give examples of the break costs when interest rates were low) and/or failed to take reasonable care to ensure information was not misstated.

Judgement

It was for the court to determine, (i) whether the Defendant had assumed an advisory duty; (ii) whether, if the relationship was advisory, the Claimant was prevented from asserting such a relationship by the terms of the Swap agreement i.e. due to the "Non-Reliance" clause in the agreement; (iii) and if the relationship was not advisory did the Defendant owe a duty to provide full and complete information?

The High Court held:

In light of all the evidence, the Defendant had not recommended the Swap nor assumed an advisory duty. Even if the Defendant had given advice during the discussions, they had not gone beyond the daily interactions of a sales force and its customers (JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EW HC 1186 applied). The discussions on the likely movements in the interest rates were predictions or views rather than formal advice.

Even if advice was given, the Claimant was contractually estopped from asserting that the Defendant had advised it to enter into the transaction. The court reached this conclusion after having considered the relevant 'Non-Reliance' clause and determined that it was not an exclusion clause so "no question of reasonableness arises".

In the absence of an advisory relationship there was no common law duty to provide information but the Defendant did have a duty not to mislead (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465 applied); this was particularly the case when the Defendant provided examples of break costs. However, the Defendant did not mislead the Claimant by failing to give "illustrations of the possible side effects of more significant falls in interest rates"; as such low rates were not reasonably foreseeable at the time. Finally, there was no duty to give full information about the advantages and disadvantages of the products.

Commentary

This judgement and confirmation of Springwell will be welcomed by banks. The court set out "detailed reasoning" to fully explain its reasoning in order to prevent similar claims in the future. However, the court will look at "all aspects of the objective evidence of the relationship between the parties".  Thus, even if a party does not hold itself out as giving advice the court may find that the relationship was in fact an advisory one.

A significant factor against the finding of the Defendant having provided investment advice is that the Defendant did not receive a fee for any advice. The court drew a distinction between the advice of an investment adviser and the advice given by a salesperson as part of the selling process. Taking into account all the evidence, any advice given by the Defendant fell within that of a salesperson selling a product and seeking to make a profit and not to obtain a fee for any specific investment advice.

The court was quick to defend the Defendant stating that it "cannot be criticised for failing to give illustrations showing greater falls in interest rates". This is because this is a "case based on hindsight". Neither party could have predicted interest rates to have fallen to such low levels at the time of entering into the Swap. Hence, it is easy to criticise the Defendant with hindsight that it should have provided better illustrations but such knowledge was unforeseeable at the time. Thus, given the circumstances "there was no requirement" to give examples of the effect of falls in interest rates.

In conclusion, "the swap did what it was supposed to do"; it protected the Claimant's exposure to interest rate rises. In the event, the rates fell and the Swap simply responded to that change of circumstances. So the Swap was not unsuitable for the Claimant, this is simply "an allegation with the benefit of hindsight".

Appeal Tracker

Judgement is currently being appealed in the Court of Appeal (Civil Division) on 14 January 2016. This decision is thus one to watch closely in the coming weeks.

A link to the judgement can be accessed below:

http://www.bailii.org/ew/cases/EWHC/QB/2015/3430.html

Recent Decision On Interest Swap Mis-Selling Claim Made In Favour Of Bank

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.