PAG v RBS: Court of Appeal dismisses IRHP mis-selling and LIBOR manipulation claim

The Court of Appeal has dismissed the entirety of the long-awaited appeal in Property Alliance Group v The Royal Bank of Scotland [2018] EWCA Civ 355. The result is that all claims against the defendant bank have failed. This is the first substantive decision involving allegations of LIBOR manipulation and interest rate hedging product (“IRHP”) mis-selling to reach the Court of Appeal, and it offers a number of points of binding authority, which are helpful from the perspective of financial institutions.

In this executive summary, we highlight the key legal and factual points decided by the Court of Appeal which are likely to have wider application to claims involving alleged mis-selling of financial products, together with potential commercial implications.

We have prepared a more detailed case analysis in our banking litigation e-briefing, which can be accessed via the hyperlink.

1. The Court of Appeal has confirmed that the expression ‘mezzanine’ or intermediate duty of care is best avoided. There is no “continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end”. Absent an advisory relationship or special circumstances in which a specific broader duty is established, a financial institution owes no duty to explain the nature or effect of a proposed arrangement to a prospective customer. This restates the orthodox position, from which earlier cases had seemed to depart.
2. The extent of the duty owed in a non-advised sale of financial products will therefore typically be a duty not to misstate (Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465). In order to establish a specific broader duty of care, claimants will need to satisfy one of the traditional tests for establishing a duty of care (as set out in Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28). Further, claimants will need to distinguish the instant case, in which no such broader duty of care was found on the facts.
3. Of particular interest was the decision of the lower court (flowing from the point above) that, absent special circumstances, there was no positive duty on the defendant bank when selling the IRHPs to disclose to the claimant the bank’s internal contingent liability figure for the IRHP. The Court of Appeal noted that several first instance judgments had reached the same conclusion and could find no basis for interfering with the High Court’s decision on this point. Absent special circumstances, this decision - along with the previous decision of the Privy Council in Deslauriers and Anor v Guardian Asset Management Limited (Trinidad and Tobago) [2017] UKPC 34 (see our e-bulletin) - means that it will be extremely difficult for claimants to argue that these figures ought to have been provided (indeed, the Court of Appeal noted that it remains the defendant bank’s practice not to do so).
4. This case should therefore help focus the issues in ‘mezzanine’ duty claims. It may be appropriate for defendant banks to review the scope of any more onerous information-related duties which have been alleged, and make clear in correspondence that the burden is on the claimant to prove the existence of a specific duty of care (and this burden is likely to be reasonably onerous). Such claims may be amenable to strike out and/or summary judgment. Addressing such issues early in proceedings may help reduce the scope of disclosure and the evidence to be served, ultimately reducing time and cost.
5. Departing from the judgment of the High Court, the Court of Appeal did find that in selling GBP LIBOR linked products, the bank made the narrow implied representation (at the time of entering into the IRHPs) that it was not itself seeking to manipulate GBP LIBOR and did not intend to do so in the future. However, on the current facts, the claimant could not prove that the representation (concerning GBP LIBOR) was false. The Court of Appeal held that falsity will need to be specifically proven; it would not be sufficient to invite the court to draw inferences on the basis of conduct relating to other benchmarks (such as LIBOR in a different currency) or indeed findings of the regulator. It is thus likely that claimants will continue to face significant hurdles to succeed in such claims. In particular, proving reliance on any representations (which is likely to be fact specific) and that the representations were in fact false, will be onerous.
6. Although the Court of Appeal did not overturn the High Court’s decision, it emphasised a point likely to arise in other cases involving an exercise of a contractual discretion – namely that such a contractual power needs to be exercised for legitimate commercial aims and not used maliciously. In the current case, the bank exercised a power in the relevant loan agreement to instruct a valuer to prepare a valuation of the claimant’s assets which were charged to it. The claimant argued that the bank had no reason to do so and thus the exercise of the power was wrongful. On the facts, the Court of Appeal disagreed. However, the rule may be of wider application.

For a more detailed analysis of the decision, read our banking litigation e-briefing.