Summary

A borrower claimed unsuccessfully against Barclays in respect of an interest rate swap sold by the Bank to hedge exposure under an investment property loan.

Facts

On 16 April 2008, Thornbridge Ltd entered into a £5.65 million facility agreement with Barclays Bank PLC as lender in order to buy Queens House, a property in Sheffield. The Bank provided a 15-year term loan, with interest payable at its base rate plus 1.5% margin. As a condition precedent to drawdown, Thornbridge was required to enter into hedging arrangements on terms acceptable to the Bank. It duly entered into an interest rate swap with Barclays in May. The swap’s principal terms were as follows: the duration was five years, to end in May 2013; the notional amount was £5.65 million, equivalent to the loan; Thornbridge agreed to pay a fixed amount each month, calculated at the rate of 5.65% on the notional amount.

Payments under the loan and swap commenced in July 2008. Lehman’s collapsed in September. Interest rates fell from 5% in July 2008 to 0.5% in March 2009, where they still remain. Thornbridge began to find the arrangements onerous. It approached the Bank, asking what it would cost to walk away from the deal. The Bank’s quote of £565,000 proved unpalatable, so it persevered until the swap matured. Subsequently, the borrower commenced proceedings, alleging that the Bank was negligent; in breach of its statutory duties under FSMA 2000; and in breach of contract.

In particular, Thornbridge claimed that:

  • whilst the Bank had no general duty of care to advise on the merits of the product, having taken upon itself to do so, it was then under a duty to advise with reasonable skill and care.

Evidence of the Bank’s advisory role included the job title of the banker who put together the deal – ‘Corporate Risk Advisor’. He had delivered a presentation to the borrower entitled an ‘Interest Rate Risk Management Strategy’;

  • the Bank had failed to give sufficient warning of the onerous break costs;
  • Barclays failed to adequately describe all the available hedging products;
  • the swap repayment profile remained fixed, whilst that of the loan varied in accordance with interest rates. The Bank was thus over-hedged, at the borrower’s expense;
  • it was classified as a retail client under COBS in the FCA Handbook. Consequently, it was owed various duties. Furthermore, it was entitled to commence a private action for breaches of the Rules;
  • Barclays were also in breach of contract, since these duties had been incorporated into the terms of the swap arrangements. The relevant provision stated that ‘this Agreement and all transactions are subject to Applicable Regulations’.

Judgment

Barclays had not taken on an advisory role. Thornbridge’s director was a sophisticated businessman; the Bank had not charged an advisory fee; discussions around the product were only ‘the daily interactions between an institution’s salesforce and a purchaser of its products’ (Springwell Navigation Corporation v JP Morgan Chase Bank and others [2010] EWCA Civ 1221).

Even if the Bank had assumed an advisory role:

  • its disclaimer, in the following terms, was effective:

‘Each party represents to the other party that…

It is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into the Transaction: it being understood that information and explanations related to the terms and conditions of the transaction shall not be considered investment advice or as a recommendation to enter into the Transaction’.

Thornbridge was contractually estopped from claiming for breach of advisory duties;

  • the advice given regarding break costs was adequate. The fact that indicative break costs mapped out figures assuming only a 1% fall in interest rates was not negligent. Thornbridge had not asked about its liability on early termination. The Bank was not obliged to provide further illustrations.

There was no obligation to provide full, accurate or proper information extending beyond the duty not to make negligent misstatements. The Judge did find that the presentation contained a mistake as to the payment of break costs on a capped swap. However, on the facts, this mistake did not influence Thornbridge.

Thornbridge did not have locus standi to commence an action against the Bank in respect of alleged breaches of COBs. Furthermore, the Bank’s terms of business did not incorporate COBs into the swap’s terms. Accordingly, there could be no breach of contract in respect of any breaches of the Rules in COBs.

Comment

The Judge commented that she was ‘bound to look in detail at the exchanges between the parties’. Banks may find it interesting and perhaps uncomfortable to note the parameters of this obligation, which extended to every telephone call (all recorded) as well as all exchanges by email, presentations, attendance notes and of course the contractual documents.

In summary, the Judge found that the borrower’s claim was ‘based on hindsight’. The collapse of Lehmans; the ensuing financial crisis; rock-bottom interest rates were not envisaged at the time the deal was struck. It was not a case of ‘a claimant being advised to enter, or being misled into entering, into a swap which in the circumstances was unsuitable’.

Reassuringly, the Bank’s disclaimer withstood the court’s scrutiny.

Thornbridge Limited v Barclays Bank PLC [2015] EWHC 3430 (QB)