VW Property Investments v National Westminster Bank plc [2016] EWHC 378 (QB)

The argument that interest rate hedging products were wagers had been dealt with by compromise agreement in this case. In previous court decisions, however, the argument had been held to have no real prospect of success anyway.


Between 2004 and 2010 VW Property Investments (VW) borrowed money from National Westminster Bank (NatWest). Over the same period, the parties entered into four interest rate hedging contracts (the Hedging Contracts) and one swap agreement (the Swap). Each contract and the Swap had a market value at day 1 in favour of NatWest i.e. Natwest had a more favourable chance of benefitting from the agreements. The Hedging Contracts were intended to limit VW's exposure to fluctuating interest rates by fixing the rate of interest on VW's loans. However, the Hedging Contracts later proved disadvantageous to VW and advantageous to NatWest.

In 2014, the Hedging Contracts were reviewed pursuant to a Review Agreement NatWest entered into with the Financial Services Authority. The review resulted in NatWest offering VW compensation of £420,000. VW accepted NatWest's offer and signed a compromise agreement in 'full and final settlement' of any claim arising from the sale of the Hedging Contracts. However, the compromise agreement reserved VW's right to claim for 'additional losses' under the Interest Rate Hedging Product Review (IRHPR).

The Swap was also examined by NatWest, but it concluded that it had complied with applicable standards and that no compensation payment was appropriate.

The claim

VW issued a claim against NatWest for additional losses on the Hedging Contracts and the Swap. Amongst other things, VW alleged that:

  • The Hedging Contracts amounted to contracts for differences and accordingly were to be characterised as wagers at law; as the market value at day 1 was not disclosed or of equal uncertainty to both sides, the Hedging Contracts were voidable and NatWest was liable in damages;
  • NatWest breached an implied term that it would not manipulate LIBOR rates; and
  • NatWest owed VW a tortious duty of care in connection with the manner in which it conducted the IRHPR.

VW sought damages of £1,176,668.82.

The judgment

The Judge held that the claim in respect of the Hedging Contracts had been compromised in the agreement entered into by the parties. The claim could only concern the Swap.

The Judge noted that the claim regarding the wager issue had been raised previously without success on three occasions by different parties in other proceedings, all of which resulted in the Court of Appeal rejecting applications for permission to appeal. The Judge referred to the test set in the case of Morgan Grenfell v Welwyn Council which provides that an interest rate swap agreement is not a wager where at least one party entered into the contract for a genuine commercial purpose. It was held that VW had no real prospect of success in respect of this argument.

VW's case in respect of manipulation of LIBOR rates was described as incoherent with no real prospect of success. The only LIBOR rate applicable to VW's borrowing was £ sterling (GBP) and VW had made no allegation that NatWest was manipulating the GBP LIBOR. The claim in respect of breach of duty was described as 'wholly incomprehensible as pleaded'. As a result, the VW's claim was struck out in its entirety.


The judgment emphasises the importance for financial institutions to ensure that, when offering compensation for defective products, that:

  • Any offer of compensation is subject to the customer entering into a compromise agreement; and
  • The terms of the compromise agreement are sufficient to withstand the risk of further litigation arising from the sale of the product.

The case also serves as a useful reminder of the test to be applied when determining whether an interest rate swap agreement can be classified as a wager. The judgment noted that the argument that 'swap' contracts were unenforceable due to being wagering contracts had already been raised unsuccessfully on a number of occasions by other parties.

Although the previous decisions were not binding, the Judge stated that he was not entitled to ignore previous, highly persuasive decisions of the court. The result was that the attempt to raise the same wager argument was held to have no real prospect of success.