The recent decision of Crestsign Ltd v National Westminster Bank plc and Royal Bank of Scotland plc1 is the latest of a series of cases relating to mis-selling of financial products and provides an extreme example of how banks have been able to escape liability, notwithstanding findings of negligence and unreasonable disclaimers.
The claimant, Crestsign, was a small family run company investing in commercial property for letting to commercial tenants. From September 2007, Crestsign sought to refinance its business and began looking for a bank that would offer a loan facility of £3.3m on an interest only basis for around 10 years.
In early 2008, Crestsign was in discussions with National Westminster Bank plc (NatWest) and in May 2008, NatWest offered a £3.45m loan for a five year term on an interest only basis at 1.5% over the base rate, subject to certain conditions, including Crestsign entering into an interest rate swap. After discussions with bank representatives as to the options available, Crestsign agreed to enter into a 10 year interest rate swap with Royal Bank of Scotland plc (RBS) on a notional amount of £3.5m, reducing to £3m over 10 years, with a discounted rate payable in the first two years and a fixed rate thereafter at 5.65%. The transaction was subsequently completed in June 2008.
Unfortunately for Crestsign, when the discount period came to an end in June 2010, the base rate had fallen to 0.5%. This left Crestsign paying both interest of 2% on its loan and 5.15% (the fixed rate payable under the swap less the variable base rate receivable) on the £3.5m notional amount of the swap. When Crestsign tried to extricate itself in 2011, it found that the break costs of the swap were then around £600,000.
Crestsign brought proceedings against NatWest and RBS alleging breach of a duty of care in giving advice on the suitability of the swap and in giving information about the swap.
Did the banks owe a duty of care in giving advice?
In order to found this duty, the court had to decide first whether the banks’ communications had “the force of a recommendation” and secondly whether the interaction between the parties was such that it gave rise to an assumption of responsibility. The court came to the conclusion that what the bank representative had said to Crestsign in the run up to the transaction had crossed the line and amounted to the giving of advice not merely information. Moreover, that this advice was negligent, given, among other things, that the terms of the loan and the swap were different, placed most of the risk on Crestsign and exposed Crestsign to the risk of very high break costs. The judge further held that the relationship between the parties was such that the banks could be deemed to have assumed a duty of care to Crestsign. However, citing Henderson v Merrett Syndicates Ltd, the court went on to note that “an assumption of responsibility may be negatived by an appropriate disclaimer”.2
RBS’ terms of business specifically stated that it was not giving advice on a particular transaction and the swap contained express terms that Crestsign had not relied on any advice from Crestsign. In deciding whether the banks had successfully disclaimed responsibility, the judge stated that: “You look at the words used to see whether, understood in their proper context from the perspective of an impartial and reasonable observer (ie the court), they prevent a representation from having been made, or whether, by contrast they exclude liability for making it”,3 the former being a “basis” clause and the latter being an “exclusion” clause. This is an important distinction, because “exclusion” clauses are open to challenge on the grounds of reasonableness under the Unfair Contract Terms Act 1977 (UCTA), whereas “basis” clauses are not. On the facts, the court held that the disclaimers and terms of business in the documents were basis clauses – although had they been exclusion clauses, the judge would have considered them unreasonable and therefore void under UCTA.
Did the banks owe a duty of care in giving information?
In the alternative, Crestsign argued that the banks owed a duty of care in providing information to ensure that it was accurate and fit for the purpose for which it was provided, such that Crestsign would have been fully informed of all of its options. The judge held that the banks did owe a duty to explain fully and accurately the nature and effect of the products in respect of which they chose to offer an explanation. However, they did not owe a duty to explain all of the products that might be available to Crestsign or to ensure that Crestsign correctly understood the information provided to it or its implications. On the facts of the present case, the court came to the conclusion that the banks had taken adequate steps to explain the nature of the products they wished to sell to Crestsign. It was found that even though the provision of information in relation to these products was brief, it was not inaccurate. In particular, the summary and attributes of the structures was not factually wrong, nor misleading.
Mis-selling of interest rate products to unsophisticated customers has been the subject of intense regulatory scrutiny, with the banks paying out over £1.5bn to around 10,000 customers in the course of the Financial Conduct Authority’s Interest Rate Hedging Product Review which began in May 2013.
Court challenges, however, have generally been less successful. The question of whether a clause properly describes the future relationship between the parties (ie a basis clause not subject to UCTA) or whether it “rewrites history or parts company with reality” (an exclusion clause subject to UCTA) has generated much judicial commentary since the well-known decision in JP Morgan Chase Bank v Springwell Navigation Corporation.4 In this case, the court in Crestsign readily acknowledged that the distinction between an exclusion clause and a basis clause will often involve drawing a fine line, which depends on the wording and context. Nevertheless, even though the judge clearly sympathised with Crestsign, he was unable to find in its favour and the case is consistent with a long line of unsuccessful cases against banks. Interestingly, however, outside the field of financial products, the courts have been more willing to find that disclaimers are exclusion clauses and not basis clauses.5 Given the scope for argument, it seems unlikely that Crestsign will be the last word on the subject.