London Executive Aviation Ltd v The Royal Bank of Scotland PLC [2018] EHWC 74 (Ch) is the latest in the line of unsuccessful claims against financial institutions based on allegations of mis-selling interest rate hedging products (“IRHPs”). The bulk of the reported cases in this field to date are interlocutory decisions, so the full reasoned judgment in this case provides a helpful summary of the current law and the court’s approach. Key points of general application to note are as follows:

  • It is well-established that banks do not generally owe any duty to advise on the merits of investments. However, if it is alleged that a bank actively agreed to give advice in relation to the investment and therefore took on the duty to advise with reasonable care and skill, a claimant must be “able to identify words of advice”.

  • If advice has been given by a bank, the claimant must still prove that there was a relationship of proximity between the parties giving rise to a duty of care on the part of the bank. Factors pointing against such a duty in the instant case included the fact that there was no written agreement to advise (the bank would only be remunerated for its time and effort if the customer in fact purchased an IRHP) and the sophistication of the claimant.

  • Significantly, the court endorsed the formulation of the ‘mezzanine’ duty articulated in Property Alliance Group v Royal Bank of Scotland EWHC 3342 (Ch): the potential duty of care under consideration is wider than a duty not to misstate, is fact dependent and is a duty “falling on the advisory spectrum”; thus a bank salesperson is not always under a duty to explain fully the products he/she wishes to sell. In the instant case, the court did not expressly decide whether the so-called mezzanine duty existed, because it found that there was no potential breach on the facts. There are conflicting first instance decisions as to whether or not the so-called mezzanine duty may arise in this context, the trend has been to find against such a duty (see our recent e-bulletin), but the issue is likely to need to be resolved at appellate level.

  • The court will be alive to the fact that witness evidence may be affected by hindsight and is prepared to make inferences from the contemporaneous correspondence and documentation, even where this contradicts oral testimony at trial.

Against the growing body of authority in favour of the banks, claimants have been creative in their attempts to get around the legal obstacles. An argument recently adopted by claimants concerns the alleged failure by banks to disclose internal credit liabilities at the time the IRHP was sold. Claimants allege that if the magnitude of the credit liability had been disclosed, they would have recognised that the IRHP was too risky and effectively wiped out any benefit. This argument was made in the current case on two different footings. Firstly, the claimant alleged that the bank had breached its so-called mezzanine duty by failing to disclose the bank’s contingent liability for the IRHPs in question (known in the defendant bank as the credit line utilisation (“CLU”)). Secondly, the claimant alleged that the bank had fraudulently or negligently misrepresented the benefits of entering into the IRHPs, in particular by failing to disclose the CLU.

Both arguments failed on the facts, with the court emphasising that a claimant must be able to show that an appreciation of the contingent liability (the CLU) would have made a difference to how the claimant would have proceeded with the transaction. This firm stance in relation to contingent liabilities follows a recent decision of the Privy Council, which confirmed that in a commercial relationship between experienced lenders and borrowers, the lender will not ordinarily owe a duty of care to disclose information about its internal lending policies or its approach to evaluating loan applications (see Deslauriers and another v Guardian Asset Management Limited (Trinidad and Tobago) [2017] UKPC 34, read our e-bulletin).


The parties

London Executive Aviation Ltd (“LEA”) was a small private aircraft chartering business with annual profits of circa £1 million. In 2007 and 2008, it took out two loans (the “Loans”) with Lombard North Central plc, part of the Royal Bank of Scotland group, for a total of £12.9 million to purchase more aircraft to expand the business. Under the Loans, interest was calculated at a variable rate (subject to a minimum base), but LEA paid fixed monthly instalments with a single balloon payment at maturity. The size of the balloon payment was dependent on whether interest rates fell or rose through the term of each Loan. If interest rates rose, the fixed payments would pay off less capital and more interest and the balloon payment would be higher. If rates fell, the balloon payment would be smaller as the fixed payments would service more of the capital.

LEA was introduced to an FSA authorised IRHP adviser at one of the companies in the Royal Bank of Scotland group (the “Bank”), Mr Brindley, to discuss hedging the original Loan in July 2007, to mitigate the risk of a large balloon payment. Mr Brindley had extensive communications with LEA’s directors (including Mr Margetson-Rushmore) in 2007 and then again in 2008, which included hedging the second Loan. Mr Margetson-Rushmore’s wife was also party to those discussions. She was a qualified solicitor (having trained at Linklaters) with a subsequent 15-year banking career, including working in the field of Eurobonds and heading the UK leveraged finance team at UBS AG. However, she had not been involved with banking or financial services since 2004 and had no direct experience of IRHPs.

The Swaps

In February 2008, LEA entered into two relatively complex IRHPs (together, the “Swaps”):

  1. A 10-year ‘dual rate swap’ under which LEA paid a fixed rate of interest of 4.69% if the floating rate stayed between a floor of 4% and a ceiling of 6.25%. If the floating rate fell below the floor or above the ceiling, LEA paid 5.35%. The notional amount of capital was £4 million for years 0-5 and £6 million for years 6-10. It was cancellable by the Bank after five years and quarterly thereafter.

  2. A 10-year ‘value collar’, again for an initial notional amount of £4 million and then £6 million and cancellable by the Bank on the fifth anniversary only. Under the value collar:

  • If the floating rate fell below a floor of 3.75% LEA paid the difference between that rate and 5.49%.
  • If the floating rate rose above 5.75% (the ceiling), the Bank paid LEA the difference between that base rate and 5.75% (effectively capping LEA’s rate at 5.75%).
  • If the floating rate remained between 3.75% and 5.75%, neither party made payment.

At the time LEA entered into the Swaps, circa £7.1 million remained outstanding under the Loans. Subsequently, interest rates fell to unprecedented levels, with an adverse impact on demand for private aircraft charters. While the fall in rates facilitated an early repayment of the Loans by LEA (the fixed monthly payments paying off more capital), it also meant that LEA was significantly out of the money on the Swaps (paying the higher rate under both Swaps, being 5.35% under the dual rate Swap and 5.49% under the value collar Swap).

The claim

LEA brought proceedings against the Bank alleging that Mr Brindley, on behalf of the Bank:

  1. Negligently advised LEA to enter into the Swaps which were unsuitable (the advice claim).

  2. Negligently provided information about the Swaps because the information provided was inadequate to enable LEA to make an informed decision (in particular, in relation to the risks if interest rates fell and the potential magnitude of break costs) (the mezzanine claim).

  3. Misrepresented the benefits of entering into the Swaps, either fraudulently (in the tort of deceit) or negligently (in the tort of negligent misstatement or under the Misrepresentation Act 1967) (the deceit and misrepresentation claims). In particular, this claim focussed on an allegation that Bank failed to disclose that it had attributed a contingent liability of £1.6 million to the Swaps (the CLU).


The court dismissed the claims in full. A summary of its detailed reasoning now follows.

The advice claim

The court dismissed LEA’s claim that advice was given or that any advisory duty arose on the facts.

The court recited the well-established proposition that banks do not generally owe any duty to advise on the merits of investments, but that if they choose to do so in the course of business, they owe a duty to advise with reasonable care and skill. The first issue to consider was therefore whether any of the statements alleged by LEA amounted to advice. The court had sympathy with the Bank’s complaint that it was not clear precisely what advice was alleged to have been given to LEA by Mr Brindley, noting that LEA had failed to identify any advisory language from Mr Brindley’s discussions of the merits of the Swaps. The court commented that, while background and context are important, they “cannot be a substitute for being able to identify words of advice”, without which “it makes the claim almost impossible for a defendant to contest”.

The court proceeded to consider the instances of advice in the particulars of claim which seemed to have the most potential to count as advice, but again found that there was no evidence to support the allegation. It also considered LEA’s allegation that Mr Brindley gave advice about the likely future course of interest rates, in particular by expressing his view that interest rates were unlikely to drop below 5%. The court held that this did not constitute advice that interest rates were bound to rise.

In case it had been wrong to find that no advice had been given, the court considered briefly whether (had the Bank given advice about the Swaps) there was a relationship of proximity between the parties giving rise to a duty of care on the part of the Bank (Standard Chartered v Ceylon Petroleum [2011] EWHC 1785 (Comm)). The court held it was clear from the absence of a written advisory agreement that no advisory relationship existed. In particular, the parties had agreed that the Bank would only be remunerated if the customer in fact purchased an IRHP; that incentive meant that the Bank’s interests to some extent diverged from LEA’s. In any event, there were no indicia of an advisory relationship and no objective evidence that LEA treated Mr Brindley as someone who was advising them on whether or not to enter into the Swaps.

LEA’s sophistication also pointed against an advisory relationship: Mrs Margetson-Rushmore was “keen to convey [that she] could drive a hard bargain”. She had requested a ‘live’ spreadsheet so as to stress test the proposed IRHPs in different interest rate scenarios. She also requested various forward curves and then discussed with the Bank the significance of those being inverted. Part of LEA’s case was that the Swaps contained features which made them entirely unsuitable for LEA’s business and the fact LEA had agreed to enter into such products must mean that they were not sophisticated enough to assess whether the products were appropriate. It was in this context that Mrs Margetson-Rushmore’s sophistication was most relevant, the court finding that each element of the IRHPs offered by Mr Brindley was in response to her desire to reduce the floor of the range in each of the trades as low as possible.

However, even though the court found that there was no cause of action based on the unsuitability of the Swaps, it went on to consider LEA’s complaints about various features of the Swaps, because these complaints appeared to be at the heart of LEA’s claim. In this regard, the court noted:

  • The specific terms of the Swaps that favoured the Bank, in particular its callable feature, were the quid pro quo for achieving a lower floor rate. The notional amount of the overhedge also allowed LEA to benefit from a lower floor. These features did not make the Swaps unsuitable.

  • While not critical of LEA’s witnesses, the court found their evidence to have been affected by hindsight and the impact of low interest rates on LEA – had interest rates risen, LEA would have benefited from the Bank being bound by the Swaps. As such, the alleged inflexibility of the Swaps did not make them unsuitable.

The court therefore concluded that the negligent advice claim failed. Accordingly, the court did not have to opine on whether or not contractual terms estopped LEA from claiming advice was given.

The mezzanine claim

Under this head, LEA claimed that the Bank was negligent in providing information about the Swaps because the information that had been provided was inadequate to enable it to make an informed decision. LEA’s argument was based on the proposition that a bank that undertakes to explain the nature and effect of a transaction owes a duty to take reasonable care to do so, even if what is said does not equate to advice to enter into the transaction.

The court endorsed the formulation of the so-called ‘mezzanine’ duty articulated by Asplin J (as she then was) in PAG v RBS:

The potential duty of care under consideration is wider than a duty not to misstate, is fact dependent and is a duty “falling on the advisory spectrum”. [Asplin J] rejected a formulation of the duty which suggests that once information is provided by a bank, a salesman is always under a duty to explain fully the products he wishes to sell even where no broader advisory relationship has arisen. I agree with Asplin J’s comment that to take such an approach is to blur the line between a salesman and an advisor.”

The court did not expressly accept that a mezzanine duty applied on the facts of the instant case. It approached the claim by considering the three categories of information which LEA claimed that Mr Brindley had failed to fully and properly explain. Again, without accepting the existence of the duty on the facts of the case, the court held that there was no potential breach of the so-called mezzanine duty in relation to any of the three categories of information, as explained below.

1. Failure to explain what would happen if interest rates fell

The allegation was that Mr Brindley failed to explain what would happen if interest rates fell and the Bank chose not to exercise the call option. The court held that this allegation lacked substance, since it was common sense that if the Swaps were not cancelled then they would continue until they expired after 10 years. Mr Brindley said nothing unfair or inaccurate in his discussions with LEA regarding the callable feature.

2. Failure to explain the full terms of the ISDA agreement

The court held that while Mr Brindley’s description of the governing ISDA was wrong, LEA received the agreement well in advance of the trades and Mrs Margetson-Rushmore was clearly familiar with ISDA from her banking experience. There was no evidence that anyone at LEA was influenced by what Mr Brindley said. In fact, Mr Margetson-Rushmore’s evidence was that he did not rely on the statement – contrary to LEA’s pleaded case.

3. Failure to disclose the CLU or otherwise explain potential breakage costs and other risks

LEA submitted that one of the poor sales practices identified by the then FSA in its 2012 investigation into mis-selling of IRHPs, was a failure to explain the potential magnitude of breakage costs, and one way in which the Bank could have done this would have been to disclose the CLU. However, as a matter of fact, the court held that the Bank had provided numerous qualitative written and oral warnings about the potential for break costs, whose magnitude was in part dependent on market conditions. The court commented that it was not “complicated or surprising” that a customer may have to compensate the bank if it terminated a contract early. Nor would it be surprising if the size of that payment was greater if the deal was profitable for the bank.

LEA also alleged that if it had known that the risk of the CLU (calculated by the Bank at £1.65 million) was greater than the risk of the increased balloon payment under the Loans, it would not have entered into the Swaps. The court noted that LEA had put this part of the case very high, alleging that Mr Brindley was dishonest and misleading by failing to identify the risks.

The court did not accept that an appreciation by LEA of either the value of the CLU or more generally the potential breakage costs would have made any difference. Mrs Margetson-Rushmore had made calculations showing the potential for a £1.7 million exposure under the Swaps. In any event, even if Mr Brindley had laboured the point about breakage costs, the court found that this would not have affected LEA’s decision, as at that point LEA was not contemplating breaking the contracts before maturity.

The deceit and misrepresentation claims

LEA’s “core allegation” under this head was that the Bank had fraudulently or negligently misrepresented to LEA the benefits of entering into the Swaps. The most important aspect of this was the allegation relating to the CLU. The evidence showed that Mr Brindley had told LEA that the Loans’ balloon payment might be £1.6 million higher than expected, based on a 95% worst case scenario prediction. However, the Bank did not disclose that it had allocated a contingent liability of £1.65 million (the CLU) to the Swaps. LEA argued that, while the Swaps were presented as ways to avoid the potential £1.6 million balloon liability, the Swaps themselves created a potential liability of equal value. LEA submitted that Mr Brindley acted dishonestly and deceitfully (or alternatively negligently) in failing to tell LEA about the CLU.

No express misrepresentation was alleged and therefore the court had to consider whether or not there was an implied representation. The court opined that the only implied representation that could be in play was that the balloon payment was “more than [LEA] might ever have to pay under the hedging products if interest rates went down very substantially”.

Applying the established principles summarised in Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd [2011] EWHC 484 (Comm), the court found no such implied representation had been made. No reasonable person would infer that a statement about the potential balloon liability was saying anything about the size of break costs that LEA might face if it decided to terminate the Swaps early when interest rates had fallen. The balloon payment was a liability that LEA was tied into. By contrast, break costs were not something that LEA was bound to make under the Swaps and LEA was not, at that time, contemplating breaking before maturity. There was also a lack of evidence that any of LEA’s witnesses understood Mr Brindley to be saying that the risk LEA faced under the Loans was greater than the risk it faced under the Swaps. The implied misrepresentation claim could therefore not succeed.

Accordingly, the court dismissed all claims.


The judgment provides a helpful overview in relation to the law applicable to IRHP mis-selling claims. Key points of general application are set out in the introduction.