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22 December 2015
In Thornbridge Limited v Barclays Bank PLC(1) the High Court considered a claim for the mis-sale of an interest rate swap based on several different causes of action, all of which were unsuccessful. The decision includes a detailed analysis of the circumstances in which advisory and other duties will arise in the context of the sale of an interest rate hedging product.
In April 2008 the claimant, Thornbridge Limited, entered into a 15-year loan agreement with the defendant, Barclays Bank PLC, to borrow £5.65 million to fund a property investment. Interest was payable at Barclays' base rate (which reflected the Bank of England base rate) plus a margin of 1.5%. As a condition of the loan, Thornbridge was required to hedge its exposure to interest rates on the full value of the loan for at least five years. During May 2008, Thornbridge discussed interest rate hedging with Barclays via telephone and email, and Barclays provided a written presentation purporting to summarise the available options. Following these discussions, Thornbridge entered into a five-year interest rate swap with Barclays, under which Thornbridge paid a fixed amount of 5.65% in exchange for a payment of Barclays' base rate (both calculated on a notional amount equivalent to the outstanding loan). The effect of the swap was to fix Thornbridge's net interest liability on the loan and swap at 5.65% plus the margin of 1.5%.
Barclays' base rate then rapidly fell from its May 2008 level of 5% to 0.5%, with the effect that Thornbridge became liable for substantial payments under the swap. In late 2009 Thornbridge considered restructuring the swap, but was quoted an indicative break cost of £565,000 which it was unwilling to pay. Instead, Thornbridge decided to let the swap continue to maturity.
Thornbridge alleged that Barclays owed it an advisory duty and, having undertaken to explain the products available, a mezzanine duty to give its explanations as fully, accurately and properly as the circumstances demanded. It was uncontroversial that Barclays owed Thornbridge a duty not to make negligent mis-statements. Thornbridge alleged that Barclays had breached these duties by, among other things:
Thornbridge also alleged that the words "subject to Application Regulations" in Barclays' terms of business incorporated the relevant Financial Conduct Authority rules into the parties' agreement and that, in any event, it had a cause of action under Section 138D of the Financial Services and Markets Act(2) (which provides a direct right of action only for private persons) for breach of these rules.
The judge held that Barclays did not owe Thornbridge an advisory duty. The judge accepted that Barclays had expressed views in relation to the future direction of interest rates and also appeared to endorse the option of an interest rate swap. However, even if this amounted to 'advice' (in the usual meaning of the word), it did not in the judge's view go beyond what the court in JP Morgan Chase Bank v Springwell Navigation Corp(3) described as "the daily interactions between an institution's salesforce and a purchaser of its products". It was also relevant that Barclays did not receive a fee for any advice. The judge also held that even if the facts had supported an advisory duty, Barclays' boilerplate contractual language would have given rise to a contractual estoppel precluding a claim for breach of an advisory duty.
The judge also decided that Barclays did not owe any mezzanine duty, apparently refusing to accept the existence of a non-advisory duty which went beyond the obligation not to negligently mis-state the position. Thornbridge relied on the dictum in Bankers Trust International PLC v PT Dharmala(4) that if a bank "does give an explanation or tender advice, then it owes a duty to give that explanation or tender that advice fully, accurately and properly. How far that duty goes must…depend on the precise nature of the circumstances and of the explanation or advice which is tendered". Having considered the application of this principle in Bankers Trust, the judge held that "the principle which can be derived from that case is that a positive duty would exist only in the context of an advisory relationship or…if [the failure to provide the further information] rendered inaccurate or unreasonable the information provided". The judge also suggested that, to the extent that the more recent decision of Crestsign v NatWest(5) (which has given renewed prominence to this mezzanine duty) was based on some more general principle, it had "elevated the duty of a salesman to that of an adviser".
The judge went on to find that even if Thornbridge had established that the duties alleged, there would have been no breach in relation to break costs. Barclays had provided indicative break costs based on a 1% fall in Barclays' base rate, which was adequate in the circumstances. The judge also considered that, in the absence of any indication from Thornbridge that it might have wished to refinance the loan or transfer the swap within the five-year term, there could be no obligation to explain what would happen in that event.
The judge also held that the written presentation (which, for example, did not mention that a cap would allow Thornbridge to benefit from falling rates) did not – with one exception – fail to explain properly the competing advantages and disadvantages of the different hedging instruments. This was despite the fact that Barclays' principal witness accepted under cross-examination that the presentation was inadequate (which the judge characterised as "opinion evidence and of little weight"). The presentation did contain one negligent mis-statement – that break costs could be payable by Thornbridge on termination of a cap – but Thornbridge failed to demonstrate that without this mis-statement it would have entered into a cap instead of a swap and so no loss arose.
Finally, the judge rejected Thornbridge's arguments on the incorporation of the Financial Conduct Authority rules and Section 138D of the Financial Services and Markets Act, noting that the scope of 'private persons' with causes of actions under Section 138D – which is generally limited to individuals – is due to be considered by the Court of Appeal in MTR Bailey Trading v Barclays Bank Plc.(6)
To those familiar with mis-selling litigation, Thornbridge's failure to establish an advisory duty will come as no surprise. On the facts – Thornbridge's principal director was a sophisticated and successful businessperson and had declined offers of a meeting to discuss hedging options in more detail – this always looked to be an uphill struggle. However, what is striking is the weight that the judge placed on the distinction between advisers and salespersons (following Springwell), which also affected the judge's approach to the mezzanine duty.
One of the fundamental failings in the sale of interest rate hedging products to small and medium-sized enterprises which has been the subject of complaints and litigation (and identified by the Financial Conduct Authority) is the failure of bank salespeople to observe properly the boundary between non-advisory execution-only sales and advice. Moreover, in circumstances where the customer has to purchase an interest rate hedging product as a condition of a loan – and even if it is possible to do so from a third party, it is practically always going to do so from its lender – it is unclear what the salesperson is supposed to do if not help the customer to choose between the available options. Against that background, it is suggested that the presumption that the salesperson must be selling and not advising is (even if rebuttable) unhelpful.
In relation to the mezzanine duty, it is unclear whether, in rejecting this duty, the judge fully recognised that this is not intended to be a positive duty. It is simply an obligation to give any explanations as fully as the circumstances demand, which does not sound onerous or controversial. Moreover, the judge accepted that there might be a non-advisory obligation to provide information where not to do so would be unreasonable, which seems to accept that an enhanced duty will exist in some circumstances and begs the question of what these circumstances are. In any event, this duty is due to be considered in 2016 by the Court of Appeal in Crestsign,(7) which should provide some clarity.
For further information on this topic please contact Parham Kouchikali or Daniel Hemming at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(2) Section 138D(2) provides that a "contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty".
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