In Thornbridge Limited v Barclays Bank PLC the High Court considered a claim for the missale of an interest rate swap based on several different causes of action, all of which were unsuccessful. The decision includes a detailed analysis of the circumstances in which advisory and other duties will arise in the context of the sale of an interest rate hedging product.
In April 2008, the claimant, Thornbridge, entered into a 15 year loan agreement with the defendant, Barclays, to borrow £5.65 million to fund a property investment. Interest was payable at Barclays' base rate (which reflected Bank of England base rate) plus a margin 1.5%. As a condition of the loan, Thornbridge was required to hedge its exposure to interest rates on the full value of the loan for at least 5 years. During May 2008, Thornbridge discussed interest rate hedging with Barclays via telephone and email, and Barclays provided a written presentation purporting to summarise the available options. Following these discussions, Thornbridge entered into a 5 year interest rate swap with Barclays under which Thornbridge paid a fixed amount of 5.65% in exchange for a payment of Barclays' base rate (both calculated on a notional amount equivalent to the outstanding loan). The effect of the swap was to fix Thornbridge's net interest liability on the loan and swap at 5.65% plus the margin of 1.5%.
Barclays' base rate then rapidly fell from its May 2008 level of 5% to 0.5%, with the effect that Thornbridge became liable for substantial payments under the swap. In late 2009 Thornbridge considered restructuring the swap, but was quoted an indicative break cost of £565,000 which it was not willing to pay and so decided to let the swap continue to maturity.
Thornbridge alleged that Barclays owed it an advisory duty and, having undertaken to explain the products available, a 'mezzanine' duty to give its explanations as fully, accurately and properly as the circumstances demanded. It was uncontroversial that Barclays owed Thornbridge a duty not to make negligent misstatements. Thornbridge alleged that Barclays breached these duties by (amongst other things):
- Providing inadequate information concerning the potential break costs of the swap and their effect on Thornbridge's ability to refinance and/or transfer the swap; and
- Failing properly to explain in the written presentation the competing advantages and disadvantages of the swap and other hedging products (and in particular a cap).
Thornbridge also alleged that the words "subject to Application Regulations" in Barclays' terms of business incorporated the relevant FCA rules into the parties' agreement and that, in any event, it had a cause of action under s. 138D of FSMA[i] (which provides a direct right of action for 'private persons' only) for breach of these rules.
The judge held that Barclays did not owe Thornbridge an advisory duty. The judge accepted that Barclays had expressed views in relation to the future direction of interest rates and also appeared to endorse the option of an interest rate swap. However, even if this amounted to 'advice' (in the usual meaning of the word) it did not in the judge's view go beyond what the court in JP Morgan Chase Bank v Springwell Navigation Corp[ii] described as "the daily interactions between an institution's salesforce and a purchaser of its products". It was also relevant that Barclays did not receive a fee for any advice. The judge also held that, even if the facts had supported an advisory duty, Barclays' boilerplate contractual language would have given rise to a 'contractual estoppel' precluding a claim for breach of an advisory duty.
The judge also decided that Barclays did not owe any 'mezzanine' duty, apparently refusing to accept the existence of a non-advisory duty which went beyond the obligation not to negligently misstate the position. Thornbridge relied on the dictum in Bankers Trust International PLC v PT Dharmala[iii], that if a 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 does must … depend on the precise nature of the circumstances and of the explanation or advice which is tendered". Having considered the application of this principle in Bankers Trust, the judge held that "the principle which can be derived from that case is that a positive duty would exist only in the context of an advisory relationship or … if [the failure to provide the further information] rendered inaccurate or unreasonable the information provided." The judge also suggested that, to the extent that the more recent decision of Crestsign v NatWest[iv] (which has given renewed prominence to this 'mezzanine' duty) was based on some more general principle, it had "elevated the duty of a salesman to that of an adviser".
The judge went on to find that, even if Thornbridge had established that the duties alleged, then there would have been no breach in relation to break costs. Barclays had provided indicative break costs based on a 1% fall in Barclays' base rate, which was adequate in the circumstances. The judge also considered that, in the absence of any indication from Thornbridge that it might wish to refinance the loan or transfer the swap within the 5 year term, there could be no obligation to explain what would happen in the event that Thornbridge wished to do so.
The judge also held that the written presentation (which, for example, did not mention that a cap would allow Thornbridge to benefit from falling rates) did not (with one exception) fail properly to explain the competing advantages and disadvantages of the different hedging instruments. That was despite the fact that Barclays' principal witness accepted under cross-examination that the presentation was inadequate (which the judge characterised as"opinion evidence and of little weight"). The presentation did contain one negligent misstatement - that break costs could be payable by Thornbridge on termination of a cap - but Thornbridge failed to demonstrate that but for this misstatement, it would have entered into a cap instead of a swap and so no loss arose.
Finally, the judge rejected Thornbridge's arguments on the incorporation of the FCA rules and on s. 138D of FSMA (noting that the scope of 'private persons' with causes of actions under s. 138D - which, generally speaking, is currently limited to individuals - is due to be considered by the Court of Appeal in MTR Bailey Trading v Barclays Bank Plc[v]).
To those familiar with misselling litigation, Thornbridge's failure to establish an advisory duty will come as no surprise. On the facts - Thornbridge's principal director was sophisticated and successful businessman and had declined offers of a meeting to discuss hedging options in more detail - this always looked to be an uphill struggle. However, what is striking is the weight the judge placed on the distinction between advisors and salespersons (followingSpringwell), which also affected the judge's approach to the 'mezzanine' duty.
One of the fundamental failings in the sale of interest rate hedging products to SMEs which has been the subject of complaints and litigation (and as identified by the FCA) is the failure of bank salespeople properly to observe the boundary between non-advisory execution-only sales and advice. Moreover, in circumstances where the customer has to purchase an interest rate hedging product as a condition of a loan and, even if it might be possible to do so from a third party it is practically always going to do so from its lender, it is not obvious what the 'salesperson' is supposed to be doing if not helping the customer to choose between the available options. Against that background, it is suggested that the presumption that the 'salesperson' must be selling and not advising is (even if rebuttable), not very helpful.
In relation to the 'mezzanine' duty, it is not clear whether, in rejecting this duty, the judge fully recognised that this is not intended to be a positive duty. It is simply an obligation to give any explanations that are given as fully as the circumstances demand, which does not sound very onerous or controversial. Moreover, the judge accepted that there might be a non-advisory obligation to provide information where not to do so would be 'unreasonable', which seems to accept that an enhanced duty will exist in some circumstances, begging the question of what those circumstances will be will. In any event, this duty is due to be considered by the Court of Appeal next year in Crestsign[vi], so we will hopefully have some clarity then.