UK: I'm Sorry I Haven't A CLU – Swaps Claim Relating To Bank's Failure To Disclose Internal Credit Provision Is Dismissed – London Executive Aviation V. The Royal Bank Of Scotland Plc [2018] EWHC 74 (Ch)

Last Updated: 24 January 2018
Article by Steven Mills, Clare Stothard, Kerry Talbot and Thomas Leyland

In a robust judgment, Mrs Justice Rose (the Judge) has dismissed claims for negligence and misrepresentation in relation to two interest rate hedging products (the HPs) sold to the claimant (LEA). The judgment contains a detailed and helpful restatement of the law in relation to advice claims and misrepresentation in this area, but it also touches on two areas of specific interest: (i) the relevance of LEA's sophistication to the Judge's consideration of the claims; and (ii) whether in the circumstances the Bank ought to have disclosed its calculation of the CLU (credit line utilisation), which would have shown (to describe it in simplified terms) the Bank's internal assessment of the maximum credit risk it faced in case of a default by LEA on the HPs.

The parties

LEA is a private aircraft chartering business. It was, according to the narrative in the judgment, run by two individuals during the relevant period in 2007/2008, one of whom, Mr Margetson-Rushmore, dealt primarily with the financial aspects of the business. Mr Margetson-Rushmore has a degree in economics and is an accountant by training. In relation to the matters set out in the judgment, LEA also drew on the assistance of Mrs Margetson-Rushmore, a qualified solicitor, who trained at Linklaters and moved on from there to work at various banks, ending with a five-year spell as head of the UK leveraged finance team at UBS AG. Mrs Margetson-Rushmore was neither an employee nor an officer of LEA, but the evidence set out in the judgment indicates that she took the lead in a number of relevant calls and meetings. The judgment records the matters she discussed during those exchanges, including requests for swap pricing models which she could assess and manipulate, yield curves (and their significance), the effect on the HPs of the Bank having a right to terminate them early, and the importance of the specific swap pricing levels set under the terms of the HPs.

There was an issue in this case as to which RBS group company was the appropriate defendant, but we do not consider it here, save to note that, in referring to "the Bank", we refer collectively to RBS and NatWest, those entities involved in the relevant exchanges with LEA.

Relevant transactions

LEA entered into two secured loan agreements with Lombard North Central plc, also part of the RBS group, in June 2007 and January 2008 respectively, for approximately £2.5 million and £10.4 million (the Loans). LEA was obliged to pay interest on both Loans at a variable rate, subject to a minimum rate of 2.5 per cent. LEA agreed to make fixed monthly payments to cover interest due on the Loans and repay a portion of the principal. The proportion of the monthly payments allocated to principal would depend on prevailing interest rates, such that, if rates were low, more of the principal would be paid off. There would be a balloon payment at the end of the term of the Loans in order to repay any principal outstanding. On that basis, if interest rates remained high during the life of the Loans, the balloon payment would be larger. There was also an "Asset Coverage Percentage", calculated by reference to the value of the aircraft on which the Loans were secured and the balance of the Loans outstanding. If the Asset Coverage Percentage fell below the specified limit, Lombard could increase LEA's repayments or require it to take various other steps.

The HPs were not required as a condition of the Loans. Various discussions between the Bank and LEA took place between July and November 2007 in relation to possible interest rate hedging, which ultimately came to nothing, with LEA saying that it would revisit hedging at a later date. The Judge considered that these discussions were relevant, however, to the HPs, which were ultimately concluded on 12 February 2008, and we refer below to those aspects of the preliminary discussions that were material to the outcome of LEA's claims. The HPs consisted of: 

  • a dual rate swap with a 10-year term, the notional amount being £4 million for the first five years and £6 million thereafter. The swap could be cancelled by the Bank on 12 February 2013 and quarterly thereafter. LEA would pay interest on the notional at a rate of 4.69 per cent if the variable interest rate remained between 4 per cent and 6.25 per cent, but LEA would pay interest on the notional at a rate of 5.35 per cent if the variable rate was either below the floor or above the ceiling agreed; and
  • a value collar, for the same term and in respect of the same notional amounts. No payment would be made by either party if variable interest rates remained within a range between 3.75 per cent and 5.75 per cent. If the variable rate was lower than the floor, then LEA had to pay the Bank the difference between the variable rate and 5.49 per cent. If the variable rate was higher than the ceiling, the Bank had to pay LEA the difference between the variable rate and 5.75 per cent. The Bank was entitled to cancel the collar on 12 February 2013.  

The continuing low interest rates which followed the financial crisis of 2008 had the effect that LEA repaid a significant proportion of the Loans, but meant that it incurred significant cost in servicing the HPs. LEA claimed that it was entitled to damages in the sum of £3,844,574. 

The advice claim

The Judge considered the case law in this area, and referred to the general principles summarised below:

  1. it is necessary to analyse the dealings between the parties in order to establish whether the bank has not only sold products to its customer, but advised to the extent necessary to engage a duty of care to ensure that such advice is not negligent;
  2. contractual terms of business to the effect that no advice is provided can be highly significant;
  3. courts have taken a "pragmatic and commercially sensible approach" to analysing the dealings between bank and customer, and it would be wrong to dissect telephone calls and emails to extract what could be termed "advice" from a relationship not expressly characterised as advisory – what is said by a salesman should not be equated with what is said by an adviser; 
  4. the questions of whether advice was given as a matter of fact and whether the bank assumed legal responsibility for such advice are conceptually separate but closely linked, and it is not possible "to draw a bright line" on all occasions; and 
  5. courts are cautious about importing concepts from the regulatory sphere, including as to what constitutes advice.

It is perhaps surprising in view of the final principle articulated by the Judge that LEA invited her to draw on regulatory rules and concepts to the extent that it did. Among the arguments rejected in this context were that, because the Bank had said (in cross-examination and in one of its presentations to LEA) that it was trying to understand LEA's business objectives, it must have been acting as an investment adviser. In addition, it was said that, in using a flow chart to guide LEA through a list of possible products, the Bank was giving regulated advice within the meaning of PERG. The Judge said that the authorities did not support founding a claim in negligence on the broader, regulatory definition of advice and using it to pluck possible personal recommendations out of the interactions between the parties. She also rejected the idea that "any interaction between the bank and the client by which the bank tries to understand what the client is trying to achieve or to help the client select from a range of available products steps over the line into being advice". It is also perhaps interesting to note that LEA was arguably not on the right side of the regulatory debate in relation to these issues either. Following the Financial Advice Market Review, the FCA has been seeking to remove barriers perceived as preventing firms from offering affordable financial advice to a wider range of customers. One of the concerns raised by the industry was the risk that any form of guidance could be seen as the provision of regulated advice. The FCA has since proposed changing the definition of regulated advice such that, for most firms, it is aligned with the provision of personal recommendations.

Did the Bank advise?

There was a further issue between the parties as to whether LEA had adequately identified the advice that it said the Bank's salesman gave. LEA argued for a holistic approach, referring to the salesman as being "in advice mode" and urging the Judge to look at the thrust of what effect various presentations and emails were designed to have. The Judge declined to approach the matter on this more nebulous basis, holding that it must be possible for the claimant to point to some written or oral statement made by the defendant which, properly construed, amounts to advice. She considered the most likely instances of alleged advice pleaded, and found that the Bank had not pressured LEA into the HPs, or steered it towards one option rather than another. 

A specific allegation made by LEA was that the Bank's salesman convinced them that interest rates might fall in the short term, but would then rise. In this context, the Judge noted that the salesman was saying "what any financially literate person could pick up from the financial press" and that he had not professed specific expertise. It was also in this context (as well as others, as set out below) that LEA's own sophistication clearly played a part in the Judge's reasoning. She noted, specifically, that:

  • the terms of the HPs might be complicated, but that they seemed no more complicated than the terms of the Loans, which Mr Margetson-Rushmore had been quite capable of negotiating;
  • the Bank's choice of scenarios in cost/benefit spreadsheets sent to LEA did not exclusively show the risks of higher interest rates and, in any event, Mrs Margetson-Rushmore could and did manipulate the spreadsheets in order to make them "live", so that she could model scenarios where base rates were different; and
  • in many of their calls with the Bank, Mr and Mrs Margetson-Rushmore indicated that they were concerned that interest rates might fall, and were willing to accept otherwise unfavourable changes to the HPs in order to achieve a lower floor.

Did the Bank owe a duty of care in relation to any advice?

The Judge held that no advice was provided, but she also considered whether the Bank would have been liable in negligence for any such advice. She held that it would not, and that the evidence fell "far short" of establishing the necessary relationship. In reaching this view, the Judge relied on: 

  • the sophistication of LEA, and of Mrs Margetson-Rushmore in particular. She held that Mrs Margetson-Rushmore had deliberately emphasised to those acting for the Bank that they should view her as an equal. The Judge noted of Mrs Margetson-Rushmore that "there cannot be many small company executives who know enough to ask their bank to provide them with various forward curves for different interest or swaps rates over different periods and then discuss at length the significance of the fact that the curve is inverted". Mrs Margetson-Rushmore's sophistication is perhaps unusual in the context of cases like these, but significantly, the Judge also said: "These company directors [i.e. not Mrs Margetson-Rushmore] are experienced business people and not timid or unworldly consumers. They must take some responsibility for making sure they understand the implications of the transactions to which they are committing their business";
  • the lack of any written agreement to advise;
  • the availability of independent advice. While Mrs Margetson-Rushmore acknowledged in evidence that she had approached former banking colleagues for their views on the HPs, LEA alleged that the availability of independent advice was limited and the Judge ultimately regarded it as a neutral factor; and
  • the absence of indicia of an advisory relationship, including the fact that in none of the exchanges between the parties that were before the court did LEA ever ask the Bank's salesman what it should do.

The "mezzanine" claim

The Judge agreed with the decision of Asplin J in Property Alliance Group v. Royal Bank of Scotland (PAG) against the existence of a so-called mezzanine duty, pursuant to which a salesman, once he has provided information in relation to a product, is always under a duty to explain the product fully. She considered, however, the matters said by LEA to give rise to a breach of such duty. These included: alleged inaccuracy in explaining the circumstances in which the Bank would exercise its call option (which the Judge rejected); inaccurate explanation of the purpose of the ISDA Master Agreement (which the Judge accepted, but held not to be significant); and the Bank's alleged failure to disclose the CLU (as to which see below) or otherwise properly explain LEA's potential exposure to breakage costs. In relation to breakage costs, the Judge held that the fact of their existence was neither complicated nor surprising and in any event fully understood by Mr and Mrs Margetson-Rushmore. The Judge rejected LEA's arguments. 

The misrepresentation claim and the CLU

Shortly before it traded the HPs, the Bank produced a figure of £1.6 million representing the CLU. In rough terms, this represented the Bank's internal view of its exposure were LEA to default on the HPs. It was accepted by both parties that it was not common practice at the time to disclose the CLU. Its significance in this case was said to be that, a few days earlier, the Bank had represented to LEA that it could face an additional balloon repayment on the Loans of £1.5 million as a result of exposure to high interest rates. LEA said that, once the Bank had the figure for the CLU, it should have been apparent that the possible downside of having the HPs was greater than the possible downside of not having them, and the Bank should therefore have appreciated that there was no point in proceeding with the HPs.  LEA's pleading in relation to the CLU was the result of a late amendment to its case, and set very high. It alleged fraudulent misrepresentation on the part of the Bank's employee in not disclosing the CLU figure and its alleged effect.

The Judge held that, even had the CLU figure been disclosed, it would not have made any difference to LEA's decision. Mrs Margetson-Rushmore's own spreadsheets produced in advance of the trades modelled at least one scenario where comparatively low interest rates would cause LEA a substantial loss. The Judge also found that no reasonable person could have understood the Bank to represent, in referring to the risk of a higher balloon payment in case of high interest rates, that this was more than LEA might ever have to pay under the HPs if interest rates were very low. 

Conclusions

Reading the judgment, it does not seem surprising that the claims failed, and the single most significant reason why they did is arguably the sophistication of LEA. Many of the arguments it advanced are familiar ones in swaps disputes and the Judge followed the approach which has been adopted by the courts in recent cases such as PAG. LEA argued about mismatching terms between the HPs and the Loans. It argued inadequate disclosure of possible breakage costs if it decided to terminate the HPs early. It was, however, inevitably very difficult for LEA to convince the Judge of the existence of an advisory relationship or reliance on alleged misrepresentations in circumstances where Mrs Margetson-Rushmore in particular was so plainly able to understand and deal with such issues. This judgment confirms that there are limits to the extent to which sophisticated businesses can viably put forward the same arguments in swaps disputes that might be of more relevance to less sophisticated SMEs. In addition to being struck by the sophistication of LEA, the Judge found that, while honest, LEA's witnesses' recollection was largely reconstructed from material disclosed in the proceedings and/or influenced by hindsight in view of the prevailing market conditions since the financial crisis.

The later claim in relation to the CLU similarly seems a stretch in the circumstances. It seems inherently improbable that the presentation of an estimated exposure in relation to the Loans would convey an implied representation in relation to the likely size of a differently calculated figure in relation to the HPs. For it to be so obvious a representation that failure to correct it could be characterised as deliberately dishonest seems still more unlikely.

The judgment refers to the need to take a pragmatic and commercially sensible approach to the parties' dealings, and it is plain from this judgment that not every SME will have the instinctive sympathy of the court. 

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions