High Court strikes out claims relating to the mis-selling of interest rate hedging products

In a recent decision, Elite Property Holdings Ltd & Anor v. Barclays Bank plc [2016] EWHC 3294 (QB), the High Court struck out the majority of the claimants' claims relating to the sale by Barclays of interest rate hedging products ("IRHPs"), in particular, three structured collars and three swaps. This decision adds to the growing body of cases providing certainty in this area of the law.

Three features of the decision are likely to be of particular interest:

• The Court upheld the terms of a settlement agreement previously entered into by the parties, finding that the claimants' attempt to set it aside on the basis of alleged "sharp practice" by the bank was "hopeless". This was because the claim which the claimants said Barclays ought to have revealed at the time of the settlement agreement was the very one that they had agreed to settle by that agreement. In this respect, the decision follows recent authority in IRHP mis-selling cases, including Marsden v. Barclays [2016] EWHC 1601 (QB) and Marshall v. Barclays [2015] EWHC 2000 (QB).
• The Court did not attempt to resolve the conflicting authorities concerning the question of whether a bank owes a duty of care to a claimant whose IRHPs were reviewed as part of the 2012 Financial Conduct Authority ("FCA") Review into IRHPs (Suremime Limited v. Barclays Bank plc [2015] EWHC 2277 (QB) and CGL Group Limited v. Royal Bank of Scotland[2016] EWHC 281 (QB), see our e-bulletin here), but noted that the latter case is subject to appeal.
• Related to the above, the Court held that Barclays did not owe the claimants any similar contractual duty as a result of its entering into an agreement to provide redress to the claimants. While Barclays did have an obligation to review the claimants' IRHPs as a result of its agreement with the FCA, a clear expression of intention would be required before the Court would find that Barclays had assumed a separate contractual obligation to the claimants over and above conducting the Review in accordance with its agreed terms.

The case is discussed in more detail below.

Background

Between 2006 and 2008, Barclays provided loan facilities to the two claimant companies. In connection with those facilities, the claimants entered into three structured collars with the bank.

Subsequently, the claimants raised several concerns with the collars. Following discussion, they agreed with Barclays that they would break the collars and refinance the break costs, but sought to reserve their rights to complain about the sale of the collars. Barclays offered to finance the break costs, but on the condition that the parties agree to a full and final settlement of the complaints around the sale of the structured collars. Following discussion, settlement was concluded by all parties in 2010 (the "2010 Agreement") and the collars were terminated, with the break costs being financed by further loans from Barclays. The refinanced loans were hedged by the claimants entering into three interest rate swaps.

In June 2012, in common with several other banks, Barclays agreed with the FCA to undertake a past business review in relation to its sales of IRHPs to small and medium-sized enterprises. Following that review, Barclays offered redress to each of the two claimant companies, which covered:

a) Past payments in respect of the structured collars and swaps ("Basic Redress"); and

b) Compensatory interest, calculated as a flat percentage rate of the Basic Redress, and intended to be in lieu of consequential loss.

The claimants accepted the offer of Basic Redress, but rejected the offer of interest, requesting that Barclays conduct a detailed assessment in relation to consequential loss. The parties then signed acceptance forms in November 2014, acknowledging that the Basic Redress payments were in full and final settlement of all claims connected to the IRHPs, but excluding any claims for consequential loss ("2014 Agreements"). Barclays paid the Basic Redress to the claimant companies in December 2014.

Following a review of the evidence submitted by the claimants, Barclays rejected the claimants' claims for consequential loss, and the claims were ultimately treated as closed. The claimants then issued proceedings to recover the consequential losses.

The claimants' claims

The claims were based on three grounds:

• Barclays owed and breached an advisory duty in respect of the collars and swaps, which caused the claimants losses as a result of stresses placed on their cash flow by the obligations under the structured collars ("Advisory Claims").
• Barclays owned and breached a duty of care to the claimants in carrying out the FCA Review, resulting in losses to the claimants when consequential losses were not compensated and LPA receivers appointed ("Review Claims").
• Barclays combined with the LPA receivers to inflict intentional harm on the claimants, thereby committing the tort of unlawful interference and causing the claimants loss ("Conspiracy Claims").

Barclays applied for summary judgment or to strike out the Advisory Claims and the Review Claims, and to require the Claimants to re-plead or withdraw the Conspiracy Claims.

Decision

Advisory Claims – the structured collars

The claimants conceded that any potential claims in relation to the structured collars were time-barred, but alleged sharp practice on the part of Barclays, such that the bank could not rely on the terms of the 2010 Agreement.

Referring to BCCI v. Ali [2002] 1 AC 251, the Court noted that in order for a claim of sharp practice to succeed, the claimants would need to show an arguable case that at the time the 2010 Agreement was entered into:

a) Barclays knew that the claimants had or might have a claim against it;

b) The claimants did not know that they had or might have such a claim; and

c) Barclays knew that the claimants did (or might) not know about the claim.

The Court also referred to recent authority dealing with mis-selling of IRHPs, Marsden v. Barclays [2016] EWHC 1601 (QB) and Marshall v. Barclays [2015] EWHC 2000 (QB). In both cases, the Court found that there was no sharp practice on the part of the bank, because the customer already knew that it had a potential mis-selling claim at the point that the relevant release was entered into.

The Court held that the claim of sharp practice in the current claim was "hopeless", because the claim that the claimants argued Barclays ought to have revealed was the very one that the claimants had themselves brought to the Bank's attention (thus failing limbs (b) and (c) of the BCCI test). In reaching that conclusion, the Court referred to the following key pieces of evidence:

• Evidence that the claimants had raised complaints about the collars in 2010, which fell broadly under the category of "mis-selling".
• Evidence that the claimants had in mind from as early as December 2008 the need to take legal advice in respect of the structured collars.
• The fact that 2010 Agreement expressly referred to the claimants' desire to reserve their rights to complain about the structured collars.

Advisory Claims – the swaps

As to the swaps, the claimants pleaded loss arising from breaches of duty said to be owed in respect of the structured collars alone. However, prior to Barclays' application being heard, the claimants sought leave to amend their Particulars of Claim to include a plea that the losses incurred under the collars were "repackaged" by the swaps and accordingly continued after the swaps were sold. The claimants described these as "legacy losses", and argued that they were attributable to the bank's breach of duty when selling the swaps.

The Court rejected this argument, citing the principle that a claimant seeking damages must prove a causal connection between a defendant's breach and the loss suffered by the claimant. The Court concluded that (on the claimants' own case) the chain of causation started when the structured collars were sold; the fact that the loss carried on after the swaps were entered into was irrelevant to the chain of causation.

Review Claim

The Review Claim related to both the collars and the swaps. The Court noted the conflicting authority on the question of whether a bank owed a customer a duty of care in tort in respect of the FCA Review: Suremime Ltd v. Barclays Bank Plc [2015] EWHC 2277 (QB) and CGL Group Ltd v. Royal Bank of Scotland [2016] EWHC 281 (QB). In Suremime, the Court found that it was arguable that a bank did owe a customer such a duty of care; in contrast, in CGL, the Court rejected that a bank owed such a duty. CGL is now subject to appeal.

In the current case, the bank did not attempt to strike out the plea and accordingly the Court did not attempt to resolve the conflict between the two previous authorities. Nevertheless, the Court held that any such claim against the bank was compromised by both the 2010 Agreement (in respect of the collars) and the 2014 Agreements (in respect of the collars and swaps). As regards the 2014 Agreements, the Court considered whether the damages claimed fell within the carve-out for "consequential loss", and was satisfied that they amounted to a fresh claim (i.e. were not "consequential losses"). In reaching that conclusion, the Court found that the definition of "consequential loss" was expressed in clear language and required the losses to be "the knock-on effect of the mis-sale". The losses sought in respect of the Review Claim were not a knock-on effect of the mis-sale, but were, on the claimants' own case, a consequence of the bank's alleged failure to conduct the FCA Review properly. They were therefore settled by the broad terms of the 2014 Agreements.

The Court also considered the claimants' argument, introduced by way of proposed amendment to the Particulars of Claim, that when they submitted the acceptance forms for Basic Redress as part of the 2014 Agreements, contracts were entered into between the claimants and the bank subject to certain express and implied terms which imposed on the bank a duty of care owed to the claimants in respect of the FCA Review. The claimants argued that, in breach of those contractual terms, Barclays failed to assess fair and reasonable redress, and thus to act with reasonable care and skill when carrying out the FCA Review.

In rejecting this argument, the Court found that, while Barclays had an obligation to investigate the consequential loss arising out of the sale of the collars and swaps, the source of that obligation was the bank's agreement with the FCA to conduct the review, and was therefore already in place when the parties entered into the 2014 Agreements. The Court agreed with the decisions in Marsden and Marshall that the FCA Review was undertaken as part of the participant banks' regulatory obligations and agreement with the FCA, and noted that the agreement with the FCA expressly excluded the right of any person who was not a party to the agreement enforcing any of its terms. Any finding that the bank had assumed a new contractual obligation to the Claimants to carry out the FCA Review with particular care and skill would therefore require a clear expression of that intention.

Conspiracy claims

For completeness, the Court agreed that the conspiracy claims were inadequately pleaded, noting that the claimants had "pleaded the bare bones of these claims because they are in no position to do more", but that they were "not entitled to wait for disclosure to see what turns up". The claimants were given time to clarify this aspect of the Particulars of Claim.

Conclusion

Whilst not setting out new law, the case is a useful further decision in the body of IRHP mis-selling claims, including around how the Court will view previous settlement agreements, and the FCA Review.