The Court of Appeal recently handed down judgment in WW Property Investments Ltd v National Westminster Bank plc  EWCA Civ 1142. Notably, it gave detailed reasons why WW had no real prospect of successfully establishing that various interest rate hedging products (“IRHPs”) that it had entered into with NatWest were wagers and that, even if it did, this would not lead to remedies at common law. WW is not the first claimant to have tried to establish this, and the judgment will be good news to banks facing claims relating to IRHPs.
The judgment was handed down in an application by WW for permission to appeal the High Court’s decision to strike out its claim against NatWest and refuse it permission to add to its points of claim. The Court of Appeal granted WW only very limited permission to appeal; it found that, for the most part, the High Court had been correct to find that WW’s claim had no real prospect of success.
WW borrowed money from NatWest between 2004 - 2010. It also entered into four IRHPs with NatWest: three collars and a swap (where WW was the fixed and NatWest the floating payer). WW hoped that the IRHPs would hedge its exposure to interest rate obligations under its loans. However, the IRHPs proved detrimental to WW after interest rates dropped and remained low following the financial crisis of 2007 – 2008. It was relevant to WW’s case that each of the IRHPs had a mark-to-market value in favour of NatWest at its outset.
In overview, WW’s claims were as follows:
- The Wager Claim: WW said that the IRHPs were contracts for difference and, necessarily, were also wagers. It submitted that wagers are regulated at common law such that they are only valid if the parties to them have an equal knowledge of whether or not the event the subject of the wager will occur (or that there was an implied term in the IRHP agreements to that effect). WW contended that it had less knowledge than NatWest of how interest rates would fluctuate and that the mark-to-market value of the IRHPs evidenced that. WW claimed that NatWest was liable to repay the net payments under the IRHPs because the IRHP agreements were invalid or to pay damages for breach of the implied term.
- The LIBOR Claim: WW said that it was an implied term of the swap (which was referenced to the Sterling LIBOR rate) that the Bank had not, and would not, manipulate any LIBOR index or, alternatively, GBP LIBOR rate (or that there was an implied representation to that effect). WW claimed that the swap agreement could be rescinded for breach of the implied term (or misrepresentation).
- The IRHP Review Claim: WW said that the Bank owed it a tortious duty of care in connection with how, in 2014 – 2015, it had reviewed its sale of the IRHPs to WW. WW said that NatWest had conducted that review negligently.
It was a matter for the Court of Appeal to decide whether or not an appeal on any of these claims would have a real prospect of success, such that WW should be given permission to appeal.
The judgment was largely dismissive of WW’s claims:
The Wager Claim
The Court of Appeal agreed that IRHPs were contracts for difference, but found that the IRHPs were not wagers. It considered that a basic principle had been established in cases like City Index Ltd v Leslie  2 QB 98 and Morgan Grenfell Ltd v Welwyn Hatfield District Council  1 All ER 1 that “a contract entered into for a genuine commercial purpose, and which is not a disguise for something else, is not to be treated as a wager”. It found that WW had entered into the IRHPs for a genuine commercial purpose (to hedge its exposure to its interest rate obligations) and not simply by way of a bet (as one might bet on a horse).
Even though the Wager Claim had fallen at the first hurdle, the Court of Appeal went on to consider whether wagers are regulated at common law such that they are only valid if the parties to them have an equal knowledge of whether or not the event the subject of the wager will occur. It found that wagers do not stand to be regulated at common law: depending on their nature, they fall under either the Gaming Act 2005 or the Financial Services and Markets Act 2000. It also commented that even if that had not been so, the case that WW sought to rely on as regards the common law position (Jones v Randall (1774) 1 Cowp 37) did not establish that the parties must have equal knowledge of the likelihood of whether or not the event will occur.
The LIBOR Claim
The Court of Appeal found that it was arguable that there was an implied term of the swap that the Bank would not manipulate the GBP LIBOR rate or that there was an implied representation to that effect. However, it found that WW’s pleadings surrounding breach and/or misrepresentation were so obscure that there was no real prospect of success.
The IRHP Review Claim
The Court of Appeal found that there was a real prospect of WW establishing that NatWest owed it a duty of care in conducting the IRHP Review. The High Court had found that WW could not succeed on this aspect of the case because its pleadings on this point were incomprehensible. However, the Court of Appeal found that there was a pleading of a failure to carry out the IRHP Review properly in respect of the swap that was not wholly incomprehensible. It therefore granted permission to appeal on that narrow issue.
The question of whether IRHPs are wagers and whether this can invalidate an IRHP has arisen in a number of recent High Court cases (see Nextia Properties v Royal Bank of Scotland  EWHC 3167, Derek Gladwin v Barclays Bank plc (unreported), and the High Court’s decision in WW Properties Investments Ltd v National Westminster Bank plc  EWHC 378 (QB)). However, this has not deterred claimants from trying their luck in bringing wager-type claims against banks in respect of IRHPs.
In entering the fray and handing down a lengthy judgment on this question, the Court of Appeal hopes “finally [to] lay to rest this ingenious but misguided heresy, so that no further time or money will be wasted on it”. This clarity will be welcomed by defendant banks.
Finally, it is interesting to note that consideration will be given as to whether any appeal of the IRHP Review claim should be heard alongside the appeal of CGL Group Ltd v Royal Bank of Scotland  EWHC 281. In light of these cases (and of consideration of similar issues in Suremime Limited v Barclays Bank plc  EWHC 2277 (QB)), it would be useful to have the Court of Appeal’s view on whether or not banks owe unsophisticated customers a duty of care in how they review sales of IRHPs to them.