WW Property Investments Limited v National Westminster Bank plc6 

Summary: The High Court confirmed that interest rate hedging agreements are not wagers   in law where at least one party enters into the contract for a genuine commercial purpose and not to speculate. Additionally, the High Court struck out a claim that the bank had breached an implied term of the swap agreement that it would not manipulate the London Interbank Offered Rate (Libor).

Between 2004 and 2010 the defendant bank lent money to the claimant. During the same period, the claimant executed three interest rate hedging agreement (the Collars) with the bank, before closing these out and entering into a further interest rate agreement in 2010 (the Swap).

In 2014, the agreements were reviewed pursuant to an agreement that the major banks had reached with the Financial Services Authority (now the Financial Conduct Authority (FCA)). In August 2014, following this review, the Claimant accepted an offer of redress from the bank in relation to the Collars. The claimant signed a compromise agreement in full and final settlement of claim connected with the sale of the Collars, but reserved its rights to claim for additional losses under the review. A claim in the FCA review for such additional consequential loss was subsequently made by the claimant and a claim for redress in relation the swap; both were rejected by the bank.

Following this, the claimant brought legal proceedings against the bank alleging that:

  • the Collars and Swap amounted to contracts for differences and were wagers at common law. As a result, the contracts were subject to implied terms that the chances are equal and the parties possess equal ignorance and/or equal knowledge of the odds. These implied terms had been breached as the bank had not disclosed to the Claimant that the market value on day one was in the bank’s favour and there was not equal uncertainty to both sides. Therefore the contracts were voidable and damages payable by the bank
  • the bank was subject to an implied term in the swap that it would not manipulate Libor and it had breached that term by manipulating Libor to its advantage causing the Claimant loss
  • the bank owed the claimant a duty of care in tort in connection with the manner in which it conducted the review of the Collars and Swap, which it had breached, causing the Claimant loss.

The bank applied to strike out the claim, relying on the terms on the compromise agreement.

The judge held that the claims in relation to the Collars had been settled under the compromise  agreement.

In respect of the remaining claims relating to the Swap, the judge found:

  • the High Court and Court of Appeal had previously rejected the argument that interest rate hedging agreements are wagers and that this claim attempted to raise substantially the same arguments. He noted that the test for such matters comes from Morgan Grenfell v Welwyn Council (2)7 that an interest rate swap agreement is not a wager where at least one party enters into the contract for a genuine commercial purpose and not to speculate. Therefore, he held this claim had no real prospect of success
  • the Libor claim was vague, generalised, unclear and not properly pleaded. He was also of the view that there was no relevant breach clearly alleged. Therefore, he held this claim had no real prospect of success
  • the tort claim as initially advanced was vague and incoherent. The judge ruled that the case had no prospect of success as presently formulated. In oral submissions, the Claimant attempted to advance that the bank had not complied with the FCA’s requirements for the FCA Review. The bank objected as this claim was not pleaded and the Claimant sought permission to amend the claim.

Accordingly, the judge refused permission to amend and struck out the claimant’s claim in its entirety.

The court has now made it very clear that it will not entertain swaps claims based on the proposition that interest rate hedging agreements should be treated as wagers at law, as long as at least one party entered into the relevant agreement for a genuine commercial purpose and not to speculate.

In relation to the clams based on breach of implied terms not to manipulate Libor and for breach of duty of care owed in respect of conduct of the review, the court’s decision to strike out was based on the way they were pleaded and only gives limited insight into the court’s approach to these claims more generally. For the courts approach to swap claims arising to manipulation of Libor, the case of Property Alliance Group v Royal Bank of Scotland (discussed below) should be monitored.