UK: High Court upholds contractual clause precluding banks' liability for negligent advice in swaps mis-selling claim

In Crestsign Limited v (1) National Westminster Bank Plc and (2) The Royal Bank of Scotland Plc, the UK High Court upheld contractual clauses (known as "basis clauses") disclaiming responsibility for any advice given by the defendant banks to the Claimant borrower during negotiations for a swap agreement. This was despite the Court's finding that, without these clauses, the banks would have owed the claimant a duty of care to give reasonably competent advice and that duty would have been breached. The case demonstrates the effectiveness of basis clauses in complex commercial transactions and confirms the difficulty in making successful mis-selling claims where such clauses exist.

Facts

In 2008, the Claimant, a small family-run company which invested in commercial property, entered into a five-year loan agreement and a separate ten-year swap agreement with the Defendant, with a view to refinancing its existing £3.3 million debt. Under the swap agreement, interest was paid at a discounted rate for the first two years and at a fixed rate of 5.65% thereafter. However in 2011, due to interest rate changes, the swap agreement became substantially more expensive for the Claimant than originally foreseen. The Claimant's directors claimed that the banks' salesperson (Mr Gillard) mis-sold the swap agreement to them. At trial, the Court found that the Claimant did not understand Mr Gillard's explanations as to the various products offered. Nor did the Claimant fully grasp the implications of the loan and swap agreement being separate contracts or the terms of these contracts.

Issues

The key issues were:

• whether the banks owed the Claimant a duty to use reasonable skill and care when giving advice and/or making recommendations about the suitability of the swap agreement; and
• what duty the banks owed the Claimant when giving information about the swap and whether that duty was breached.

Decision

The Court held that:

• Contractual provisions aside, the banks owed the Claimant a duty at common law to give advice carefully. This is because the requirements for the duty to arise (established in the seminal case of Hedley Byrne & Co v Heller Partners Ltd [1964] AC 465) were met: "[t]he disparity in knowledge and expertise and the respective roles of the two men was such that it was reasonably to be expected that Mr Parker would rely on Mr Gillard's skill and judgment and, aside from the documents, it would be reasonable for him to do so." On the facts, this duty had been breached given the unsuitability of the products recommended to the Claimant.
• However, the basis clauses in the documents provided to the Claimant during the transaction prevented the duty of care from arising. Basis clauses are clauses which define the factual basis on which dealings take place. These clauses were found in the terms of business and the swap contract itself. They made clear that the relationship between the parties was not that of advisor and advised party and that it was for the Claimant to make its own assessment of the suitability of the products offered. This was so even though Mr Gillard "crossed the line" by presenting information "in such a way as to amount to a recommendation". These clauses also meant that the Claimant was contractually estopped from asserting the existence of a duty of care.
• Regarding the duty owed when giving information about the swaps, and applying Cornish v Midland Bank Plc [1985] 3 All ER 513, Mr Gillard owed a duty to take reasonable care to do so fully, accurately and properly. However, this only applied to those products he wished to sell to the Claimant. Mr Gillard did not have a duty to explain fully other products that the Claimant might have wanted to purchase but which Mr Gillard did not want to sell. Further, whilst Mr Gillard owed a duty to correct any obvious misrepresentations communicated by the Claimant, he did not owe a "duty to educate in the sense of giving a comprehensive "tutorial" and satisfying himself that [the Claimant] understood every aspect of the products."

Comments

The case demonstrates the difficulties in succeeding in a mis-selling claim in the face of the usual contractual framework used by banks. The presence of an effective basis clause can be fatal to claimants and the Court's narrow definition of the bank's duty when providing information also presents obstacles for customers making mis-selling claims. Therefore, it is important for parties purchasing financial products to obtain proper and independent advice in order to understand fully the risks of the products being offered and the alternatives.

Further, whilst the judgment is favourable to banks and other financial institutions offering financial products, brokers will still have to ensure that they explain fully to their clients those products they intend to propose and to correct, and not make, any misrepresentations.

If you wish to discuss, please contact Gareth Thomas or Dominic Geiser of our Hong Kong Dispute Resolution team.