In the continuing march of swaps litigation, each new judgment handed down represents a fresh carcass over whose bones those involved in such litigation inevitably pick for insights as to how future cases are likely to be decided. The recent judgment in the Crestsign litigation may well prompt the same response, although the judge was at pains to emphasise at times that each case is highly fact-specific.
The judgment is ultimately a victory for the Bank, particularly as regards the effect of its contractual (and non-contractual) documentation, but that victory was not unequivocal and there are points in the judgment which claimants may find encouraging.
The judgment considers the odd combination of a finding of fact that advice was given, and the effect of documents asserting a non-advisory relationship. The key findings in the judgment are summarised in the Conclusions section below.
It is unnecessary to recite the factual background to the dispute in full, save for a few key aspects. Crestsign is a family owned and run property investment company, letting out commercial premises. Its borrowing at the relevant time was approximately £3.3 million and the judge accepted that the intention of its owners was to retain the properties they owned for approximately 10 years, following which they would be sold and the proceeds used to repay Crestsign's borrowing (which the owners wished to remain interest-only) and provide some surplus for the family.
In June 2008, Crestsign refinanced its borrowing with the Bank for a period of five years, and entered into an interest rate swap with a term of 10 years (subject to an option for the Bank to terminate at intervals before that time), incorporating a discounted rate for two years followed by a fixed rate of 5.65% thereafter (the Swap).
The Swap was agreed following a series of meetings and calls, and exchange of e-mails, between Crestsign and a representative of the Bank authorised to sell such products. There was some disagreement as to what was said in the meetings and conversations which took place, and in general terms the judge preferred Crestsign's evidence on those matters. He found, among other things, that:
- the Bank's representative said that interest rates were likely to rise (with which prediction Crestsign's owners expressly disagreed) despite the fact that the Bank's own internal forecast was that they would fall;
- Crestsign had not understood the explanations given;
- a more limited oral presentation of possible interest rate hedging products had been provided than the Bank's witnesses suggested;
- break costs were mentioned, but there was no attempt to explain or quantify them; and
- Crestsign did not fully grasp the implications of the loan and swap contracts being separate, and for disparate terms.
The Bank's documents
The judge considered various documents produced by the Bank (the Documents), in particular:
- A Risk Management Paper provided to Crestsign after its initial meeting with the Bank, containing descriptions of four possible hedging products, a summary of relevant benefits and considerations, and a number of notes. The notes included:
- reference to the fact that the hedging contract would be separate from any borrowing to which it might relate, and that terminating one would not necessarily terminate the other;
- reference to possible exposure caused by a mis-match between the term of the loan and the term of the swap;
- a statement that break costs might be payable on early termination, and that they might be substantial; and
- statements that Crestsign would make its own evaluation of the transactions it entered into, that it should consult such advisers as it needed, and that no reliance could be placed on the Bank for advice or recommendations of any sort.
- The Bank's Terms of Business which included a provision stating that the Bank would not provide advice on particular transactions unless it specifically agreed to do so; and
- The Bank's Stand-Alone Derivatives Terms, which included representations and warranties that Crestsign had made its own independent decision to enter into the Swap and did not rely on any communication by the Bank as investment advice or as a recommendation.
In November 2011, Crestsign sought to refinance its borrowing with another bank, but was unable to do so because of the amount of break costs which would be payable to terminate the Swap. It complained in June 2012 that the Swap had been mis-sold, and issued its claim in June 2013.
It made two claims against the Bank:
- breach of a common law duty to use reasonable skill and care when giving advice and/or making recommendations to ensure that such advice and/or recommendations were suitable (the First Duty); and
- breach of a common law duty to take reasonable care when providing information, to ensure that such information was both accurate and fit for the purpose for which it was provided, namely to enable Crestsign to make a decision on an informed basis (the Second Duty).
The Bank denied that it owed the First Duty at all, and asserted that the Second Duty was limited to a duty to give information which was not misleading. It asserted that there was no breach, that the Documents precluded any interpretation that the sale of the Swap was advised, and that Crestsign was contractually estopped from making any such allegation.
The judge's conclusions
(a) the First Duty
The judge considered the arguments in this claim on the basis that Crestsign had to show first that the Bank did in fact give advice about the Swap in such a way as to give it "the force of a recommendation", and second that the interaction between the Bank and Crestsign was such that it gave rise to an assumption by the Bank of the duty for which Crestsign contended.
Crestsign succeeded on the first point, but failed on the second. The judge applied the test of whether an impartial observer would conclude that advice had been given, and decided that they would, in that the Bank had (he held) "steered" Crestsign towards a particular product rather than providing a set of equally weighted options. Interestingly for the broader context of swaps litigation, he also found that absent the existence of the Documents, he would have found that the nature of the interactions between Bank and client gave rise to an assumption by the Bank of a duty of care.
The Documents, however, tipped the scales against such a conclusion. The Bank asserted that the Documents clearly showed that the basis of the parties' dealings was that it would not act as adviser. Crestsign argued that there was (in effect) a collateral, unwritten advisory agreement between it and the Bank which came into existence when they entered into an advisory relationship. It argued that, on that basis, the provisions of the Documents on which the Bank relied simply did not apply, and that just as they did not succeed in disclaiming liability for negligent advice actually given, nor could they found a contractual estoppel. Crestsign further argued that the relevant clauses were unreasonable exclusions of liability within the meaning of the Unfair Contract Terms Act 1977 (UCTA) and should be struck down.
The judge agreed with the Bank that the relevant provisions in the Documents, stating that Crestsign could not rely on the Bank for advice, were "basis terms" rather than exclusion clauses. In other words, they set out the agreed basis on which the parties had conducted their dealings, rather than excluding a liability which would otherwise arise. The judge concluded that the position was effectively as it would have been had the Bank's representative said: "although I recommend one of these products as suitable, the Bank does not take responsibility for my recommendation; you cannot rely on it and must make up your own mind".
The consequences of this finding were first, that the First Duty did not exist, and second, that the provisions did not need to be assessed against UCTA for reasonableness.
The judge referred to the "fine line" which separates the provision of information from the giving of advice, the ease with which it can be crossed, and the difficulty for a salesman of knowing when he might inadvertently do so. In that context, he found it legitimate for parties to agree on a defined basis for their dealings. For the same reasons, the judge found that Crestsign was estopped from claiming that the Bank owed it the First Duty.
The second implication of the judge's finding, that the UCTA reasonableness test did not apply, turned out to be significant for the Bank. The judge held obiter that had he needed to assess the provisions of the Documents setting out the basis of the parties' dealings for reasonableness, he would have found them to be unreasonable. The judge's thinking on this point is (understandably) not developed in the judgment, but will doubtless be of interest to claimants attacking other clauses, or indeed were Crestsign to succeed in any appeal. The judge refers to being influenced in this view by the findings of the FSA's 2012 review into the sale of interest rate hedging products, but it is not clear in what way he considered that such findings would apply to UCTA's reasonableness test in the context of this specific relationship.
The judge made a further obiter finding that had he held the First Duty to exist, he would have found that it had been breached. Again, the reasons for this are perhaps not as well-developed as they would have been had the point been relevant, but the judge's view appears to have rested on a conclusion that a swap term which exceeded the term of the related loan inherently presented an unacceptable risk for this customer.
(b) the Second Duty
The argument between the parties in relation to the Second Duty was, in effect, a debate as to whether the Bank merely had a duty not to make any statement which was misleading, or whether it had a duty to provide information which was accurate and fit for the purpose of allowing Crestsign to make an informed decision.
The judge, having considered these competing assertions, articulated a hybrid duty which neither party had proposed. He accepted that the starting position was that the Bank did not have any duty to provide information at all, but it had chosen to do so and as a result had changed that position. He was unwilling to accept that the Bank had a duty to provide information in relation to a full range of products (in order to educate Crestsign sufficiently that it made an informed choice between them). Instead, he held it was under an obligation only in relation to information it provided as to the products it wished to sell.
Pausing here, the difference between the Bank and Crestsign could be described as a conceptual one. The Bank accepted that it had a duty in relation to information it actually provided, whereas Crestsign maintained that the Bank had a duty to provide more information than it actually did. On this distinction, the judge accepted the Bank's position.
He did not, however, agree with the Bank's characterisation of its duty as set out above. Rather, he preferred the articulation in Cornish v. Midland Bank plc  3 All ER 513 that "…if the 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 once again depend on the precise nature of the circumstances and of the explanation or advice which is tendered."
On that basis, the judge concluded that the Bank owed a duty to explain fully and accurately the effect of the products it offered to sell to Crestsign, but not to educate it further. The judge made it clear that, in his view, such a duty extended to correcting obvious misunderstandings on the part of Crestsign and answering reasonable questions.
On this basis, the judge found that the Bank had not been in breach of its duty, in that it had indeed provided a factually accurate, and not misleading explanation of the products it offered, including in relation to the mis-matching terms of swap and loan. With acknowledged anxiety, the judge also came to the conclusion that the Bank had given adequate information about break costs which mentioned that these could be substantial.
This series of conclusions is likely to raise a number of further questions. The Bank's proposed formulation of (in essence) a duty not to misstate had the benefit of relative simplicity. The requirement that any explanations given are full, accurate and proper necessarily provides more limbs over which to argue. Given the judge's hesitant conclusions on break costs, it is also likely that they will be the subject of some attention in future cases.
This judgment is curious in a number of respects. First, the judge was avowedly sympathetic to Crestsign and reluctant to find in favour of the Bank. This was perhaps the inevitable consequence of his finding that poor advice was actually given. The judgment shows too how the court will need to grapple with cases where the judge finds that advice was given, but where the relevant documents preclude an advisory duty. Such cases (which may seem more stark where counterparties are financially unsophisticated) are likely to continue to be among the harder swaps disputes to resolve, and this judgment provides no easy answers. Its key findings (referred to in more detail above) are arguably that:
- the statements in the Bank's documentation that it did not provide advice to Crestsign were descriptive of the relationship between the parties such that:
- they precluded liability for advice which was actually given; and
- they were not exclusion clauses and thus could not be judged for reasonableness;
- had those statements been subject to a test of reasonableness under UCTA, the judge would have found them to be unreasonable; and
- there is a duty on the part of banks to ensure that explanations given are full, accurate and proper, but no duty to "educate" unsophisticated clients.