The recent decision of Crestsign Ltd v National Westminster Bank Plc and another  EWHC 3043 (Ch) provides a useful illustration of how advisory and non-advisory cases are distinguished in misselling claims, and how good paperwork can make all the difference.
Crestsign was a property investment company. In 2008, it refinanced its borrowing with National Westminster Bank Plc (Natwest). After a series of meetings, calls, and emails with Natwest, it also decided to enter into an interest rate swap (Swap). In connection with that decision, Natwest provided Crestsign with certain documentation. This included:
- "Risk Management Paper" (the Paper). This set out a description of four possible hedging products and included a brief summary of the advantages and disadvantages of each product. It also warned that the hedging contract was separate from any borrowing to which it might relate, that Crestsign faced possible exposure caused by a mis-match between the term of the loan and the term of the Swap, details of break costs which may be payable and which may be substantial, and that Crestsign should evaluate for itself the viability of the transaction and seek advice if necessary as it was not entitled to rely on Natwest for advice or recommendations.
- Natwest's Terms of Business. These stated that Natwest would not provide advice on any particular transactions unless it had specifically agreed to do so.
In 2011, Crestsign tried to refinance its borrowing again with another lender but found that the costs involved in terminating the Swap were prohibitive. Crestsign therefore brought a misselling claim against Natwest.
Crestsign argued that Natwest was in breach of its duty to ensure that, when giving advice or making recommendations, the advice/recommendations were suitable and, when providing information, the information was accurate and fit for the purpose for which it was provided.
Duty of Care
The Deputy Judge first found that Natwest ought to owe Crestsign a duty of care. This was because there was a disparity in the knowledge and expertise and the respective roles of Crestsign and Natwest. It was also reasonable to expect that Crestsign would rely on Natwest's skill and judgement. And Natwest had given advice about the Swap which had the 'force of recommendation'.
However, on the facts of the case, Natwest had prevented a duty arising through the documents provided to Crestsign. Any assumption of responsibility had been negatived by the disclaimer. Natwest's terms and conditions had made clear that it would not provide advice on the merits of a particular transaction except where it had explicitly agreed to do so. There was nothing to counter that presumption here and Natwest's terms and conditions made clear that it was providing a "non-advisory dealing service".
Crestsign had argued that the relevant clauses in the terms and conditions were exclusion clauses and that they were unreasonable within the meaning of the Unfair Contract Terms Act 1977 (UCTA) and therefore could not be relied upon by Natwest. The Deputy Judge disagreed. He regarded them as "basis terms" and not exclusion clauses. This was because they set out the limited basis upon which the parties had agreed to conduct their dealings from the outset rather than excluding liability after the event.
But for these findings, the Deputy Judge said that he would have held Natwest in breach of duty (adopting COBS as the relevant standard), and the disclaimers (if exclusion clauses) would have failed UCTA's reasonableness test. A clear example of being saved by good documentation.
The Deputy Judge then held that the extent of any duty to ensure that information was both accurate and fit for the purpose for which it was provided would depend on the facts of each case.
He accepted Crestsign's argument that a bank which undertakes to explain the nature and effect of a transaction owes a duty to take reasonable care to do so as fully and properly as the circumstances demand. He therefore concluded that while Natwest was not under a duty to explain the whole range of products that might be available, it was under a duty to explain fully those products which it wished to sell Crestsign. Of those products it wished to sell, Natwest was only under a duty to explain their effect accurately and without misleading.
Notably, that duty did not extend as far as a "duty to educate". It was not necessary for Natwest to be satisfied that Crestsign understood every aspect of each product, including the risk associated with each. Such a duty would stray into the territory of advice giving.
In the circumstances, Natwest did not need to provide a clear explanation of the mechanics of interest rate derivatives, the risks involved, how they are priced and the rationale for choosing one over another. Nor did it have a duty to take "adequate steps to ensure that Crestsign had an adequate understanding of the full range of circumstances in which exit costs might become payable".
On the facts, the Deputy Judge found that Natwest was not in breach. Natwest had explained, albeit briefly, the products it was recommending. The information was not misleading and it was sufficient to comply with its duty.
Key Takeaway Points
- The case is a good example of how good documentation can exclude an advisory duty in circumstances where it is possible that some advice has been given unwittingly.
- It also demonstrates that clauses restricting the scope of dealings (describing the relationship) can be more effective than exclusion clauses.
- Even in non-advisory cases, there will usually be a duty to give full and accurate explanations of products. However, there will ordinarily be no duty to educate unsophisticated clients.