IRHP Litigation

December 12, 2016

Back in 2011 when I was a trainee solicitor a lot of people were talking about Interest rate swaps.  “Swaps” became the word used to describe Interest Rate Hedging Products.  Even the regulator started using the word, despite that a swap is one of many types of hedging.  IRHPs are products that hedge against movements in interest rates.  You can buy a hedge to hedge against practically any financial measurement, such as foreign exchange, commodities, currency, debt, mortgages, Future contracts for interest, Covered Calls on equities, Short Straddles on equities or indexes.  This article only deals with interest rate hedging, but the common law rules being developed by these cases do have substantial impact upon all forms of hedging due to the rules relating to ISDA master agreements and the rules (COBS) governing the sale of these products.

If you have acquired a hedging arrangement and would like to discuss it, call Muldoon Britton on 0161 826 6922.

When I started working on these products the Courts had not really made many rulings specifically about IRHPs.  Since then there have been some cases that have developed the law relating to the sale of hedging arrangements.  There are still other cases to be determined by the High Court and some more by the Court of Appeal.  I am unaware of any that are heading to the Supreme Court, but if any do I will be updating the Muldoon Britton website about them.  You can also see regular news updates from Muldoon Britton on our Twitter account HERE .

The decided cases are too numerous to mention.  The cases that are relatively new and should be considered if you wish to discuss this are of law are as follows:

 Thornbridge Limited vs Barclays Bank PLC

[2015] EWHC 3430 

 This case was heard at the High Court (Mercantile Court, Manchester District Registry) and the case decided by Her Honour Judge Moulder (sitting as a Judge of the High Court).  Judge Moulder made significant findings of fact, and decided the case resoundingly in favour of the Bank.  This is important for an appeal, because the Court of Appeal and the Supreme Court cannot change a finding of fact except in some restricted circumstances.  (Indeed, in Carlyle v RBS the Scottish Appeal Court and the Supreme Court had Judges all saying they would not have made the same finding of fact, but could not over-turn those findings of fact).  The appeal in Thornbridge is due to be heard shortly.

Judge Moulder found that the statements by the Bank’s salesman about future interest rate movement was not advice but a personal prediction that would not have been understood to be advice.  The Judge then found that even if it was advice, that the Bank had contracted with the claimant to ensure the claimant did not enter into the hedging arrangement based upon things said by the bank and would go and get independent advice if they had any queries (these being the ISDA contractual requirements).  The Judge also found that if the Bank was offering advice it would have charged a fee for this, and its failure to charge a fee and have an advisory contract is evidence that no advisory relationship existed.

Thornbridge is likely to be the most important case to try and challenge the current Court of Appeal case law on advisory relationships since thru ling in the Crestsign case that settled just before it was due to be heard at the Court of Appeal.  It may be that due to the significant number of cases already decided that it may need to go to the Supreme Court to change the law.  However, as the very poor practices relating to the sale of IRHPs changed in 2012, it is unlikely that a Supreme Court ruling would have any impact on IRHP sales, but would likely have a huge impact upon hedging for other areas, like foreign exchange hedging.

The important issue in this case is also the findings in regards to the statements and whether the exclusion of liability through the ISDA contracts and whether such arrangements were unlawful per COBS.  The Judge found that the contractual arrangement did not amount to an exclusion of liability and thus was not unlawful under COBS.  This is likely to be one of the more important aspects of the appeal, and again is likely to have an impact upon future cases involving all kinds of hedging.

Without an advisory relationship the Bank had no broad information duty (but did have a duty not to mislead) and the claimant had no contractual right to expect or require the bank to comply with its regulatory duties under COBS:  (paras 137, 141).  This is perhaps the part that the majority of clients do not understand. The Bank has regulatory duties imposed upon it by its regulator, but the consumer, if it is a company, has no rights in regards to expecting the bank to comply with those duties.  It is unfair, but unfortunately the framers of the legislation (and its future amendments) elected to specifically exclude such rights and this has been upheld multiple times by the Courts.

WW Properties Ltd v National Westminster bank plc [2016] EWHC 378 (QB)

This is an unusual case.  It was decided at the High Court ([2016] EWHC 378 (QB)) but only in respect of two applications.  One application was by the Claimant to amend its particulars of claim (the written statement of its claim).  The other, by the Bank, was to strike out the claim.  The claim was duly struck out.  The application to amend the claim was rejected by His Honour Judge Kaye QC, sitting at the High Court, Leeds District Registry.  Leave to appeal was granted by Lord Justice Briggs and Lord Justice Christopher Clarke on an application direct to the Court of Appeal, having been rejected by the trial Judge.  It is relatively unusual for a judgment to be handed down and published for an application for leave to appeal (though not unknown).  Such a move happened here, partly to allow the Courts to make a final statement about one aspect of this case (the claim regarding a wager) and partly because it is of general interest.  The ruling is not binding, but it is very helpful to see what may be raised at the Court of Appeal.

The case involved a LIBOR claim, a GRG Property Participation Fee Agreement claim, a  claim that the hedging arrangements were a wager (a type of bet), a claim in tort and a claim (by the bank) that the claim  itself was compromised by the FCA led review.

It is important to note that this case was all decided based upon the two applications before the High Court and not following a full trial.

The wager claim was once again resoundingly defeated at the High Court and in the leave to appeal application.

Para 65: It seems to me that, in the light of the comprehensive [regulatory] regime … there is now no room for any common law rule (if there ever was one) that wagering contracts in which there is unequal knowledge are invalid. … There is no room for some common law regulation.”

The Claimant’s barrister has brought this claim (about an IRHP being a wager) before the courts numerous times, and it was for this reason that the Court of Appeal elected to issue a judgment just on the leave to appeal application.  The Court of Appeal rejected the wagering argument.  Given the number of times it has been raised by the same barrister but not by any other barristers, this is likely to be the last time it will be judicially ruled upon.

The rest of the case should be of great interest to those in banking litigation.

The High Court Judge rejected the argument that there are misrepresentations in respect of LIBOR by NatWest.  NatWest was never found to be party to manipulation of LIBOR, but it is a part of the Royal Bank of Scotland Group Plc, and Royal Bank of Scotland Plc was found to have manipulated LIBOR.  The Court of Appeal found that the LIBOR allegations did not have any prospect of succeeding (paras 71-72, 76).

Para 76: “In short, in my judgment, the judge was right to find that the LIBOR Claim as pleaded had no real prospect of success.”

The Court of Appeal ruled that it was arguable that it was an implied term of the swap that the bank would not manipulate the LIBOR rates used to calculate obligations under it but the way that the Particulars of Claim had been drafted was “obscure”.  Its application for leave to appeal was rejected.

This issue is about to be decided by the High Court in PAG v Royal Bank of Scotland Plc (expected imminently by the specialist Financial List Judge, Mrs Justice Asplin).  It is likely that the PAG decision will have a impact on any future allegations about RBS manipulating LIBOR.  This is because RBS was not found to have manipulated GBP Sterling LIBOR and each case to date has involved GBP Sterling LIBOR.  So, both PAG at the High Court and WW Property at the Court of Appeal may have an impact regarding future LIBOR cases.  The Court of Appeal case in WW Property is not binding, so Mrs Justice Asplin’s ruling is eagerly anticipated.  There is also the case of the Hockin family against RBS which is likely to also be heard in 2017.  It was due to be heard in January 2017, with the PAG decision being handed down in December 2016.  Muldoon Britton has been advised that agreement has been reached to stay the Hockin case, so it is not possible to know when Hockin will be heard at trial.  You should keep checking Muldoon Britton’s website and Twitter account, as we will be reporting on the PAG decision when it is handed down.

Of most relevance to the IRHP lawyers and claimants is the ruling that it may be argued that the Bank had a duty to the claimant to undertake the IRHP review in line with the rules of the scheme.  Previously Suremime v Barclays Bank [2015] EWHC 2277 (QB) had ruled there was an arguable duty, but this was never decided following a trial.  It appears Suremime was either stetled before trial or is imminently due to go to trial.  The High Court ruled that there was no such duty in CGL Group Ltd v Royal Bank of Scotland Plc [2016] EWHC 281.  In the Court of Appeal in WW Porperty, it was said at paragraph 78:

“There is in my view a reasonable prospect of establishing that NatWest owed WW a duty of care of the type relied on and this court has recently given permission to appeal against the contrary decision of Judge Bird in CGL Group Ltd v Royal Bank of Scotland [2016] EWHC 281.”

This judgment also stats that CGL and WW Property are to be heard on appeal together.  We have had a suggestion that the Court of Appeal has also enquired of the parties if they object to a third case also being heard (Bartels v Barclays Bank plc 2016 EWHC 1360 (QB) – decided by Judge Waksman entirely in favour of the bank) – also being heard at the same time in the Court of Appeal with CGL and WW Property.  The ruling from that case is likely to be of great significance.

As such, even though the FCA review is complete, the case law is not.  The FCA has said it will undertake a review of the IRHP review, so future cases may benefit from these three cases being heard at the Court of Appeal in 2017.  These rulings will then have further impacts upon LIBOR cases being heard and FX manipulation cases also likely to be heard.

If you have any questions about FX hedging, FX manipulation, LIBOR manipulation or any IRHP cases, please do contact Muldoon Britton today.

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