Borrowers prepaying a fixed-rate loan were not required to indemnify a lender in respect of the breakage of an internal hedging agreement. We have examined and commented on the practical implications of Barnett Waddington Trustees (1980) Limited v The Royal Bank of Scotland plc [2015] EWHC 2435 (Ch) (14 August 2015).


In April 2004, The Royal Bank of Scotland (‘RBS’) entered into a loan agreement for up to £9,237,500 (the ‘Loan’), with members of the Merchant Place Property Syndicate 35 acting by its trustees (the ‘Borrowers’), to finance the acquisition, development and letting of a property. In order to fund the interest and hedge the risk of a fixed-rate loan RBS Corporate Banking Division, an internal division of RBS, entered into an internal hedging agreement (the ‘Internal Hedging Agreement’) with RBS Markets, the interest rates desk, another internal division. RBS would have had the benefit of external hedging arrangements with third parties, but not on a back-to-back basis in respect of the loan but rather on a portfolio basis (the‘External Hedge’).

The Borrowers wanted to redeem the Loan. However, RBS contended that, as a condition of such redemption, the Borrowers must pay an ‘Interest Rate Swap termination cost’ by virtue of an indemnity contained in clause 12 of the loan agreement. Clause 12.1(f) stated that ‘The Borrowers shall indemnify the Bank on demand against any Loss … which the Bank has sustained or incurred as a consequence of … any cost to the Bank incurred in the unwinding of funding transactions undertaken in connection with the Facility’.

The Borrowers contended that the internal Interest Rate Swap termination cost was not a ‘Loss’ for the purposes of clause 12.


In order to rely on the indemnity in clause 12, RBS needed to show that the Internal Hedging Agreement was a ‘funding transaction undertaken in connection with the Facility’. Warren J. found that this was not the case as ‘the contexts of the definition of “Loss” and of clause 12.1(f) envisage a transaction which takes place between two different legal entities; different departments of the Bank do not qualify as separate entities. Corporate Banking cannot borrow from Group Treasury nor can it pay interest to Group Treasury. These are all internal arrangements within the Bank, effected for its own purposes.

RBS argued that the External Hedge may be funding transactions within the scope of clause 12. Warren J. refused to rule on this, as it was not included in the claim form and he did not have sufficient information about the nature of the External Hedge.

BLP Comment

Courts have a tendency to interpret these fixed rate funding indemnities strictly. This case is not alone; see for example K/S Preston Street v Santander (UK) plc [2012] EWHC 1633 (Ch). The answer is to ensure that on an individual basis the indemnity accurately reflects the lender’s funding and hedging agreements.