The recent High Court decision of Barnett & Ors v RBS [2015] EWHC 2435 (Ch) concerns the construction of a loan agreement relating to finance provided by the defendant bank ("RBS") to a property syndicate (of which the claimant was the largest member, together the "Borrowers"). When the Borrowers indicated that they were considering early redemption of the loan, RBS informed them that they were liable for the costs of unwinding an interest rate transaction related to the loan.


By way of a loan agreement dated 1 April 2004 ("the Loan Agreement"), the Borrowers were given a facility of over £9m for a maximum term of 30 years at a fixed interest rate of 5.1%. The Borrowers were contemplating redeeming the loan but were informed by RBS that if they did so they would be liable to pay an "Interest Rate Swap termination cost", calculated as at May 2014 at about £2.396m. This "Interest Rate Swap termination cost" was said to arise as a result of RBS undertaking an internal interest rate swap ("the Internal Swap") in order (so it was argued) for RBS to be able to provide the Borrowers with their fixed rate of interest on the loan. There was no evidence that the Borrowers were aware that the Internal Swap would be made at the time of the Loan Agreement or indeed that they were aware of the Internal Swap at all until they attempted to redeem the loan. RBS argued that terminating the Internal Swap early would cause it to sustain a loss for which the Borrowers, under the terms of the Loan Agreement, were liable.

RBS maintained this position on the basis of a clause contained in the Loan Agreement which stated that the Borrowers would indemnify RBS on demand against any "Loss" (a term defined in the Loan Agreement) arising as a consequence of:

Any cost to the Bank incurred in the unwinding of funding transactions undertaken in connection with the Facility [….]

"Loss" was defined in the Loan Agreement as:

Losses, claims, demands, actions, Proceedings, damages, or other payments, costs, expenses and other liabilities of any kind including…any costs to the Bank incurred in the unwinding of funding transactions [….]

The Borrowers sought a declaration from the court that the Internal Swap was not a "funding transaction" under the Loan Agreement. They further argued that in any event RBS would suffer no "Loss" (as defined) as a result of unwinding the Internal Swap.

The judgment

The judge made the declaration sought by the Borrowers. Drawing on the principles of interpreting commercial documents as set out in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 andRainy Sky SA v Koomin Bank [2011] UKSC 50, the judge held that the Internal Swap was not a "funding transaction" within the meaning of the Loan Agreement. He held that the two words must be construed together in the context of the relevant provisions as a whole. Significantly, the Internal Swap was not an arrangement between RBS and an external party; it was an arrangement carried out between two different departments of RBS. It did not therefore constitute a "transaction" for the purposes of the Loan Agreement.

Further, the judge held that the Internal Swap did not in any event cause RBS any loss. The respective funding positions hedged by the Internal Swap were internal to RBS; no third party was involved. Unwinding the Internal Swap might cause one RBS department to need to account to another RBS department for a sum of money; but the position of RBS itself, irrespective of any internal accounting taking place between different parts of the bank, would not be affected. Unwinding the Internal Swap would, in this sense, be cost neutral to RBS itself. 


In spite of the judge's declaration, this is potentially a case that has not yet run its course. An argument was raised by RBS during the hearing that the Internal Swap was linked to external hedging undertaken by RBS in order to protect its position in relation to the loan given to the Borrowers, and that RBS did in fact therefore stand to suffer a Loss in the event of early redemption. Whether or not this decision is appealed (and on what basis) remain to be seen.