High Court dismisses IRHP mis-selling and unlawful means conspiracy claims against bank

The High Court has dismissed claims brought by a business against a bank alleging the mis-selling of interest rate hedging products (IRHPs) and an unlawful means conspiracy regarding the transfer of the business to the bank's internal restructuring unit: CJ And LK Perks Partnership & Ors v Natwest Markets plc [2022] EWHC 726 (Comm).

This decision continues the trend of past IRHP mis-selling decisions, in which the court has refused to impose additional obligations on banks that were providing general dealing services on an execution-only basis (see blog posts here). It highlights the difficulty for customers in bringing mis-selling claims in circumstances where the bank has provided accurate information and stated clearly that it is not providing advice on a transaction.

In the present case, the court was satisfied that the bank had not breached its duties towards the customer. The bank had provided full explanations of the costs and risks involved with each of the IRHPs. The bank had underlined in the contractual and non-contractual documentation that it was not assuming a duty to provide advice to the customer in relation to the IRHPs. The court also found that the defaults on loan repayments and the likelihood of the customer's insolvency were genuine and compelling reasons for the bank's decision for the transfer of the customer's business to its restructuring group.

We consider the decision in more detail below.

Background

In 1999, the defendant bank (the Bank) provided finance to a Scottish legal partnership (the Partnership) and two companies (together, the Claimants) for (i) the expansion of a chain of chiropractic clinics across Scotland and North-East England,  and (ii) the acquisition of  commercial property. In 2007, the facilities were consolidated into a £2m variable interest rate loan. One of the conditions of the loan required that the Partnership enter into an IRHP (the 2007 swap). This would provide the Partnership with protection from any increase in interest rates. However, the Partnership would not be able to benefit from any decrease in interest rates, as there would be a corresponding increase in the payments due to the Bank under the swap.

Between 2008 and 2009 interest rates fell rapidly to reach a low of 0.5% in March 2009, placing the Partnership in a less advantageous position than it would have been if its only commitment had been to pay a floating rate under the loan. Following a cashflow crisis, in 2009 the existing loan was restructured into a new package, under which the Partnership entered into a new IRHP with costs for breaking the 2007 swap "blended in" (the 2009 swap). Following a default on loan repayments, in November 2009 the Bank transferred the management of the Claimants to its Global Restructuring Group (GRG). At the Bank' request, the Claimants engaged the services of an independent business consultant who assisted with the negotiation of further restructuring, which concluded in mid-2011. The Claimants continued to suffer from financial difficulties and went into administration in 2013.

In due course, the Claimants commenced legal proceedings against the Bank regarding: (i) the alleged mis-selling of the 2007 and 2009 swaps (the Mis-selling Claim); and (ii) an alleged conspiracy concerning the conduct of GRG following the transfer of the management of the Claimants to GRG in 2009 (the Conspiracy Claim).

The Bank denied each of the claims and brought a counterclaim for the sums outstanding under the loan.

Decision

The court found in favour of the Bank and dismissed each of the claims. The court said that the Claimants had failed to establish liability in relation to their various causes of action. Since the claims failed, the Claimants were liable in principle for the sums owed to Bank.

The key issues which will be of broader interest to financial institutions are summarised below.

1) Mis-selling Claims

The Claimants argued that the Bank: (i) failed to explain the risks involved and advise properly in respect of both the 2007 and 2009 swaps; and (ii) in relation to the 2007 swap only, made a negligent misrepresentation at a meeting in October 2007 that interest rates were going to rise, when the Bank was in fact aware that a fall in base rate was imminent.

Misrepresentation

The court found that there had been no misrepresentation by the Bank.

The court said that, on the balance of probabilities and in light of the documentary evidence: (i) it could not make a finding that the representation relied upon (i.e. the direction of interest rates) was made in 2007 or at any time; and (ii) the claim would have also failed on causation as the Claimants would have entered into the swap if the relevant misrepresentation had not been made.

Failure to explain

The court found that there had been no breach of duty by the Bank.

Duty not to misstate and to give advice fully, properly, and accurately

The court noted that, as per Hedley Bryne v Heller [1963] UKHL 4, there may be factual circumstances arising out of the position of the defendant in relation to the claimant, combined with the defendant's conduct or omissions that give rise to an assumption of responsibility and the imposition of a tortious duty. This is a duty not to carelessly make a misstatement. What amounts to a misstatement will depend on the factual circumstances of the relationship and identification of the matter for which the defendant has assumed responsibility.

The court also highlighted that, as per Bankers Trust International plc v PT Dhamala Sakti Sejahtera [1996] CLC 518, that if a bank does give an explanation or tender advice then it owes a duty to give that explanation or tender that advice fully, accurately and properly. However, how far that duty goes will depend on the precise nature of the circumstances and of the explanation or advice which is tendered.

2007 swap

The court rejected the Claimants' arguments that the Bank failed to explain the risks of the applicable break costs, the impact of a "Contingent Obligation" on future lending decisions, restrictions on property sales and fees charged by the Bank.

The court noted that the documentation provided to the Claimants clearly highlighted the risks of the 2007 swap. There had been a meeting in October 2007 to discuss the advantages and disadvantages of the different types of IRHPs, the potential for breakage costs, the mechanics of how a breakage cost would be calculated, and a recommendation that the Partnership seek independent advice before proceeding.

On the basis of the above, the court said it did not consider that there had been any misstatement in the information provided by the Bank in relation to break costs, nor any tortious duty which required more detail as to the size of possible break costs to be provided. Also, the key person acting on the Claimants' behalf was capable of understanding financial matters including the consequences of the swap as explained to him.

2009 swap

The court said that, on the evidence, the Bank had sufficiently explained the substantial break costs for breaking the 2007 swap and the lengthening of the swap period. The court also highlighted that it did not consider that the Claimants would not have acted any differently if given any further details on the risks.

Failure to advise

The court found that there had been no breach of duty by the Bank.

Duty to provide advice

The court noted that, as per Fine Care Homes Ltd v National Westminster Bank PLC [2020] EWHC 3233 (Ch), the ultimate question was "whether the particular facts of the transactions, taken as a whole and viewed objectively, show that the bank assumed a responsibility to advise the customer as to the suitability of the transaction".

The court also pointed out that, as per London Executive Aviation Ltd v RBS [2018] EWHC 74 (Ch), even if advice was given by the bank, whether such advice was of a kind to attract a duty of care on the bank would depend on a number of factors including: (i) the sophistication or otherwise of the claimant; (ii) the presence or absence of a written advisory agreement; (iii) the availability of advice from other sources; (iv) the indicia of an advisory relationship; and (v) the contractual documentation and agreed basis of dealing.

2007 and 2009 swaps

The court said that any single instance of advice given by the Bank in respect of swaps was not sufficient to attract a duty of care. The court highlighted: (i) the general absence of any advisory language in the Bank's communications with the Claimants; (ii) the Bank's recommendation to the Claimants that they seek independent advice prior to proceeding; (iii) both the contractual and non-contractual documentation made it clear that the Bank was providing an execution-only service and was not acting as an advisor to the Partnership; and (iv) the contractual documents contained the Partnership's agreement that it had made its own decision to enter into the swaps and had not relied on any advice from the Bank when doing so.

The court said that, since the claim failed irrespective of the effect of the contractual documents, it was not necessary to consider in detail the parties' arguments in relation to the validity of the terms relied upon. In any event, the court would have reached the same conclusion as Fine Care Homes, which confirmed that the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel (so that no duty of care to advise the customer as to the suitability of the IRHP arose) and that this clause was not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 when relied upon in the context of a breach of advisory duty claim.

2) Conspiracy Claim

The court found that the Bank had not engaged in an unlawful means conspiracy. In the court's view, there were genuine and indeed compelling business reasons for the Claimants' transfer to GRG.

Test for unlawful means conspiracy

The court recalled that the test for conspiracy, as per Lakatamia Shipping Co Ltd v Nobu Su and others [2021] EWHC 1907 (Comm), requires (i) a combination or understanding between two or more people; (ii) an intention to injure the claimant, for which intention to advance economic interests at the expense of the claimant is sufficient; (iii) unlawful acts carried out pursuant to the combination or understanding; and (iv) loss to the claimant suffered as a consequence of those unlawful acts.

Transfer to GRG

The court said that the Conspiracy Claim failed on the grounds that: (i) there was no relevant combination; (ii) individuals at the Bank including the consultant did not act unlawfully; and (iii) there was no intention on the part of the Bank to cause loss.

The court noted that the two core reasons for the transfer to the GRG were: (i) the inability of the Claimants to generate sufficient turnover and profit to repay its debt over an acceptable time frame; and (ii) a concern that the Bank had a security shortfall in respect of its lending to the Claimants.

The court said there was no evidence whatsoever that the transfer to GRG, and the 2011 restructuring, was driven by an ulterior motive on the part of the Bank, or was part of an internal conspiracy within the Bank, to profit from and at the expense of the Claimants. On the contrary, the court concluded that given the actual default on loan repayments and the likely insolvency of the Claimants, the Bank had a "commercially reasonable and rational basis" for the transfer to GRG and what became the 2011 restructure.

Moreover, the court found no evidence that the consultant furthered the Bank' interests to the detriment of the business. The court pointed out that the consultant had worked positively in favour of the Claimants a number of times.

Accordingly, for all the reasons above, the court found in favour of the Bank and dismissed the Mis-selling and Conspiracy Claims.

Note: In June 2022, the claimants applied to the Court of Appeal for permission to appeal.

In November 2022, the Court of Appeal refused the claimants' application for permission to appeal.