In the case of Kays Hotels Ltd v Barclays Bank PLC the High Court refused an application to strike out the claim for the negligent mis-selling of an interest rate hedging product on the grounds that it was time-barred as, despite making substantial repayments, the customer had not acquired the requisite knowledge of any claim.
Kays Hotels Ltd (K) was a family-owned company, which ran a country house hotel. In 2005, K had entered into a loan agreement with Barclays Bank PLC (B) to borrow £1.34 million repayable over 20 years. K’s case was that it was given the impression that there would be no drawdown under the loan until a protective hedge had been put in place.
Later in 2005, the parties entered into an interest rate hedging product in the form of a collar that lasted for 10 years. The effect of the product was that if interest rates remained between 4 and 5.5%, as they did from 2005 to 2007, neither party paid. If interest rates rose above 5.5%, as they did in 2007, B made payments to K. In 2008, when rates fell below 4%, K started making payments to B.
K issued proceedings in November 2012 alleging that the product had been mis-sold. The sale of the product was reviewed by the Financial Services Authority (now the Financial Conduct Authority) and the claim was stayed. B then applied for summary judgment to strike out the claim against it on the grounds that it was statute-barred. It contended that K knew or should have known that it had a claim before proceedings were issued since by that date it had made payments totalling £36,000.
Section 14A of the Limitation Act 1980 provides for a special limitation period in the tort of negligence for those who have suffered a loss but do not have the requisite knowledge relating to that loss. The theoretical test is set out in the leading House of Lords case of Haward v Fawcetts  UKHL 9.
The test was whether the claimant had been alerted to the factual basis of his claim, sufficient for him to take advice and put proceedings in train. What he had to know to set time running was the essence of the act or omission to which his damage was attributable, the substance of what ultimately came to be pleaded as his case in negligence.
Where a claimant acted on professional advice he must have had some reason to question the advice and to think that something must have gone wrong as a consequence of it. The pivotal moment was when he had reason to begin to investigate.
In reaching its decision, the court made the following observations:
- B had not explained adequately how the product worked and the risks involved over the whole life of the product;
- B had not considered its suitability for K; and
- K had been required to take out the product.
K knew that there would be some risk, but its complaint was of excessive risk. The fact that there had been some loss because K had been required to make payments to B did not indicate a lack of suitability. The issue of suitability was not limited to the risk of having to make payments. In the light of the authorities B's approach to the requisite knowledge was too narrow.
The court held that K had a real prospect of establishing that it could rely on s.14A and its claim could not be summarily dismissed as bound to fail on limitation grounds.
This case raises some interesting issues. First, it confirms that where a party’s constructive knowledge needs to be determined then this cannot easily be achieved on a summary judgment application. Such an application is based on written, not oral, evidence. The issue requires the full consideration of the circumstance of that party’s knowledge, which will need to be established at a trial with the Court having heard oral evidence.
Interest rate swaps were taken out in significant numbers in the years prior to the 2008 financial crisis. These interest rate swaps will be approaching their sixth year anniversary and therefore limitation will be a significant factor in whether or not any claims for mis-selling arising from these products will be upheld by the Court. The fact that this Court has determined that a customer may be unaware that they have a claim against their bank for mis-selling, even though they signed the interest rate swap and made payments pursuant to the same, is encouraging news for customers who may wish to bring mis-selling claims in relation to products they signed over six years ago. That said, it is imperative that any customer seeks legal advice on their position as soon as possible.
The other interesting issue relates to the fact that the customer in this case had already received damages pursuant to the Financial Conduct Authorities Review, which was announced in the summer of 2012. No details of those damages have been made available but it appears that despite receiving such damages, the customer is still able to pursue its claim against the bank in these proceedings. That is somewhat contrary to the recent decision by the Court of Appeal in Clark v In Focus Asset Management  EWCA Civ  whereby the Court held that any compensation payable by the Financial Ombudsman Service, if accepted, would curtail that customer’s ability to pursue the financial institution for any shortfall in their losses.
This case represents a small but welcome victory for the customer.