The recent case of Orchard (Developments) Holdings PLC and Orchard (Huthwaite) Limited v National Westminster Bank PLC continues a line of bank friendly decisions regarding limitation in mis-selling claims.
Background to lending
As ever with cases relating to limitation, the chronology of the background is important.
In November 2002 National Westminster Bank PLC (the Bank) lent Orchard (Huthwaite) Limited (OHL) £2.8m. At the same time, OHL entered into a collar to comply with a condition of the loan that OHL hedged their risk against interest rate rises.
The base rate subsequently fell and, in August 2003, the Bank advised OHL that the break costs to exit the collar would be £185,000. OHL sent the Bank an email expressing concern about the break costs and that they did not understand how it had been calculated.
A couple of months later, the Bank lent Orchard (Developments) Holdings PLC (ODH) £3.2m. ODH subsequently refinanced in November 2004 with a revised facility of £2.8m over a term of 9 years and 7 months. It was a condition of the refinance that OHD hedge its risk against interest rate movement and it entered into a swap to meet that condition.
In 2008, both ODH and OHL (the Borrowers) experienced financial difficulties and were placed into the Bank's restructuring unit.
In January 2010, the Bank told ODH that it would cost £210,000 to break its swap and OHL that it would cost £347,000 to break its collar.
In board minutes from March 2012, the Borrowers noted that the Bank took into account the break costs when calculating the loan to value covenants under the loan facilities.
In March 2013, the Borrowers emailed the Bank stating that, in December 2011, they had become aware of the 'enormous extent of hedging break costs' and that they were 'surprised' that those costs formed part of the loan facilities. The borrower went on to allege that the Bank had failed to previously explain this.
The claim was issued on 31 March 2016. The Borrowers alleged breach of duty by the Bank in respect of a number of issues including the failure to provide a proper explanation of the break costs prior to the entry into the collar and the swap. The borrowers sought combined damages of £48.3m.
All parties subsequently agreed that a number of pleaded claims were already time barred, save for a claim in negligence.
The Bank issued an application for summary judgment on the basis that the Borrowers' claim was statue barred under s.14A Limitation Act 1980 (the Act).
Section 14A of the Act provides that, in respect of a claim in negligence, time starts running from the point at which the claimant had the requisite knowledge to bring a claim for damages in respect of the relevant damage. Once time starts running, a claimant has 3 years within which to issue proceedings.
'Knowledge' is defined in the Act as needing knowledge of both (a) the material facts about the damage and (b) that the damage was attributable to an act or omission by the defendant. The Act also provides that the test is an objective one, i.e. whether the facts would lead a reasonable person to conclude that there was a claim to be pursued.
All parties agreed that the claim would be time barred if the Borrowers had the requisite knowledge before 29 June 2012.
The court held that the claim was statute barred. In doing so, it rejected the Borrowers' argument that time only started to run from the date they had knowledge that there was an actual claim in negligence against the Bank.
The court said that the claim was broadly based on the allegation that the Bank failed to give a proper explanation of the collar and swap when they were sold, including failing to warn the Borrowers that there was a risk that the break costs could be significant. Based upon the facts, it was clear that the borrowers had a 'broad knowledge of the essence' of the facts which formed the basis of the Claim prior to June 2012. In particular, the Borrowers' email to the Bank in March 2013 demonstrated that they were aware of the extent of the break costs in December 2011.
The court was therefore satisfied that the borrowers knew that they had the foundation for a potential claim prior to June 2012. In reaching its conclusion, the court noted that, s. 14A makes it clear that knowledge of whether the acts or omissions did or did not constitute negligence as a matter of law was irrelevant.
The court also dismissed the Borrowers' argument that to strike out a claim for such a large sum would be unfair. There was no element of discretion afforded to the court as to the application of s. 14A of the Act – either a claim was time barred or it was not.
Seeking summary judgment on the grounds of limitation is a powerful tool available to defendants where claimants have delayed in bringing proceedings.
The actual state of knowledge of a claimant is not determinative of whether the clock has started in respect of s. 14A (although it is obviously very relevant). The whole factual matrix needs to be considered to see when the broad nature of the matters complained of were known, or ought to have been known, by a claimant.
In many instances, customers may have first complained about the sale of a particular product or their treatment many years before they eventually pursue any litigation and so lenders should review the whole relationship history. It is also worth considering the extensive press coverage around mis-selling claims which may make it harder for claimants to argue that they were unaware of the claims that might be available to them.