In WW Property Investments Limited v National Westminster Bank plc(1) – one of many interest rate swaps claims that have been made since the global financial crisis – the High Court confirmed, in line with previous decisions, that interest rate hedging agreements are not wagers in law where at least one party entered into the contract for a genuine commercial purpose and not to speculate. Interestingly, the High Court also struck out a claim that the bank had breached an implied term of the swap agreement that it would not manipulate the London Interbank Offered Rate (Libor).
Between 2004 and 2010 the claimant borrowed money from the defendant bank. Over the same period the claimant entered into three interest rate hedging agreements (the collars) with the bank, before closing these out and entering into a further interest rate agreement in 2010 (the swap).
In 2014 the agreements were reviewed (along with similar contracts entered into with borrowers with a number of banks) pursuant to an agreement that the major banks had reached with the Financial Services Authority (now the Financial Conduct Authority (FCA)). Following this review, in August 2014 the claimant accepted an offer of redress from the bank in relation to the collars. The claimant signed a compromise agreement which was stated to be in "full and final settlement" of claims connected with the sale of the collars, but reserved its rights to claim for additional losses under the review. A claim in the FCA review for such additional consequential loss was subsequently made by the claimant, but rejected by the bank. Similarly, a claim in the FCA review for redress in relation to the swap was also rejected.
The claimant subsequently launched legal proceedings against the bank and in July 2015 served particulars of claim. No defence was filed, but instead the bank applied to strike out the claim. The claimant subsequently applied to amend its particulars.
The claims being advanced were as follows:
- The collars and swap amounted to contracts for differences and were thus wagers at law. The claimant argued that all interest rate hedging agreements amount to contracts for differences and all such contracts are wagers at common law. As such, the contracts are subject to implied terms that the chances are equal and that the parties possess equal ignorance and/or equal knowledge of the odds. The claimant argued that these implied terms had been breached, as the bank had not disclosed to the claimant that the market value on day one was in the bank's favour and there was not equal uncertainty to both sides, with the result that the contracts were voidable and damages payable by the bank.
- The bank either represented or was subject to an implied term in the swap that it would not manipulate Libor. (The collars did not reference Libor.) The claimant argued that the bank had, in breach of the implied representation and implied term, manipulated Libor to its own advantage, causing the claimant loss. The bank argued that this aspect of the case was "incoherent".
- The bank owed the claimant a tortious duty of care in connection with the manner in which it had conducted its review of the collars and swap, which it had breached, causing the claimant loss. The bank argued that it did not owe the claimant a duty of care in respect of the review.
- The claimant claimed rescission of a property participation agreement that it had entered into with a subsidiary of the defendant, West Register (Investments) Ltd, and also of guarantees given by the claimant's directors and shareholders.
In its defence to each of the claims regarding the collars, the bank relied on the terms of the compromise agreement. The claimant argued in response that the settlement did not exclude the possibility of additional losses being claimed for, but the bank argued that additional losses in relation to the collars could be claimed only within the FCA review and that such claims had already been rejected.
The judge ruled that the claims in respect of the collars had been settled under the compromise agreement entered into by the claimant with the bank.
In respect of the remaining claims relating to the swap, the judge found as follows:
- The judge noted that the High Court and Court of Appeal had previously rejected the argument (made in different claims, but by the same counsel) that interest rate hedging agreements are wagers and had struck out such claims. The judge noted that although this case involved different parties and a different contract, he regarded it as a further attempt to raise substantially the same arguments as on previous occasions and therefore pointless. He noted that Morgan Grenfell v Welwyn Council(2) set out the modern test in relation to such matters: an interest rate swap agreement is not a wager where at least one party entered into the contract for a genuine commercial purpose and not to speculate. Although previous decisions were not binding, they were highly persuasive. Accordingly, the judge held that this claim had no real prospect of success.
- The judge was critical of the Libor claim as pleaded. He found that the allegations were repetitive, vague, couched in highly generalised terms and unclear, opaque or difficult to comprehend. In his view, the implied representation aspect of the claim was not fully or properly pleaded. The judge also held that the case for implying such a wide term as alleged was not made out on the pleaded case; nor, in the judge's view, was any relevant breach unequivocally and clearly alleged. The judge therefore found that this claim had no real prospect of success.
- The judge noted that the tort claim as initially advanced was vague and incoherent. However, the claimant advanced in oral argument a case that the bank had not complied with the FCA's requirements for the FCA review. The bank's counsel objected, as this was not the case that he had come to meet and counsel for the claimant accepted that the case on this point would need further thought and amendment. The bank conceded (generously, in the judge's view) that there was in principle nothing stopping the claimant from attempting by fresh proceedings to bring a separate independent claim based on alleged deficiencies in the way that the FCA review had operated, but it would argue that no duty of care was owed. The judge ruled that the case had no prospect of success as presently formulated.
- The judge found that there was no legal basis or cause of action pleaded in support of the claim for rescission of the property participation agreement and the shareholder and director guarantees.
Accordingly, the judge refused permission to amend and struck out the claimant's claim in its entirety.
The court has now made it very clear that it will not entertain swap claims based on the proposition that interest rate hedging agreements should be treated as wagers at law, as long as at least one party entered into the relevant agreement for a genuine commercial purpose (eg, hedging the risk of a change in the interest rate on an underlying loan) and not to speculate.
The court in this instance also took a dim view of the claims based on breach of an implied term not to manipulate Libor and for breach of duty of care owed in respect of the conduct of the review of interest rate hedging agreements, as pleaded. However, the court's decision to strike out these claims was based on the way that they had been pleaded and gives only limited insight into the approach that the court may take to such claims more generally. It will therefore be interesting to see the approach that the court takes to such claims in other cases, in what continues to be a developing area of case law.
As regards the conduct of the FCA review and duties allegedly owed to claimants pursuant to it, the approach taken by the court in this case can be contrasted with those taken by the court in Suremime Limited v Barclays Bank plc(3) and CGL Group Ltd v Royal Bank of Scotland plc.(4) In Suremimethe court allowed the amendment of a claim to include a new claim that in agreeing to provide redress in accordance with the specification for the conduct of the FCA review, the bank in that case owed the claimant a duty of care in tort, which it breached, holding that it was arguable; in CGL the court did not allow this.
The claim can also be contrasted with Holmcroft Properties Limited v KPMG LLP,(5) in which the claimant had taken the different approach of arguing that as it was acting pursuant to the FCA review, the conduct of the independent reviewer (in this case KPMG) was susceptible to judicial review. However, the Administrative Court dismissed the claimant's application for judicial review brought against KPMG on the basis that there was no direct public element to KPMG's role and that in any event, there was no particular error in KPMG's handling of the claimant's case that could support a finding that any of the alleged public law duties had been breached.
As regards swap claims arising from the manipulation of Libor, a key case of particular interest is Property Alliance Group Limited's long-running claim against the Royal Bank of Scotland, in which one of the claims is based on alleged representations made by the bank concerning Libor in relation to interest rate hedging agreements entered into by the claimant, breaches of implied warranties that these representations about Libor were true and breach of various implied terms of the relevant customer agreement in relation to Libor. As avid followers of these proceedings will be aware, the bank won the latest skirmish in January 2016 when, on its application (opposed by the claimant), the case was transferred to the new Financial List of the Commercial Court. The trial in this case is due to commence on May 23 2016.
For further information on this topic please contact Simon Hart or Alan Williams at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1)  EWHC 376 378 (QB).
(2)  1 AER 1.
(3)  EWHC 2277 (QB).
(4)  EWHC 281 (QB).
(5)  EWHC 323 (Admin).
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