A recent decision of the High Court has, consistent with previous authorities, found in favour of the bank in relation to allegations of interest rate hedging product (“IRHP“) mis-selling: Marz Limited v Bank of Scotland plc. However, the judgment helps to clarify some previously unclear points.
The decision represents a useful summary of the key legal issues arising in IRHP mis-selling litigation, and highlights the challenges for claimant customers hoping to widen the scope of duties owed by financial institutions.
In particular, the court in the current claim refused to extend in a non-advisory relationship the imposition of an “intermediate” or “mezzanine” duty – i.e. a duty to provide adequate information to enable the recipient to make an informed decision (for example, as to the suitability of a product bought and sold). In other words, the duty in such transactions remains a duty not to mis-state information provided by the bank and not a “duty to speak“. This particular issue is now likely to need to be resolved at appellate level due to conflicting decisions at first instance. The judgment also helpfully confirms that a bank’s internal assessments, income and credit lines should not ordinarily be disclosable to customers.
Marz has been granted permission to appeal.
The claimant, Marz Limited (“Marz“), was a catering business and its director was Mr Raja Adil (the “Director“), the main principal and a qualified solicitor. Marz brought a claim against Bank of Scotland plc (“BoS“) in connection with the sale of an interest rate swap executed in June 2008 (the “Swap“), following a period of negotiation with BoS in relation to Marz’s banking facilities.
As part of the proposed lending facilities with BoS, Marz agreed to a hedging condition, which provided that Marz would enter into either a 5-year interest rate swap or an interest rate cap over a minimum notional amount of £12.5m. There was a period of communication between BoS’s treasury team, the Director and Marz’s third party advisers in relation to potential interest rate hedging products.
Prior to Marz’s entry into the Swap, BoS sent the Director copies of its Terms of Business for retail clients (the “Terms of Business“), which contained the following:
(a) BoS “will advise and deal with you on the basis that we are meeting your objective to manage risk“; and
(b) where BoS makes “a recommendation or suggestion to [Marz], [BoS] will take reasonable steps to assess whether such services are suitable for [Marz]”.
The Terms of Business also provided that in “the event of any conflict between these Terms of Business and any other agreement between us relating to a particular transaction or series of transactions (for example an ISDA agreement) the terms of that other agreement shall prevail“.
Subsequently, BoS also sent to the Director an ISDA Master Agreement, which contained a standard non-reliance clause (which has previously been the subject of judicial comment). Pursuant to this clause, each party represented that it was acting for its own account, making its independent decision to enter into the Swap, based on its own judgment and it was not relying on any communication of the other party as investment advice or as a recommendation to enter into the Swap (“Part 5(2) of the ISDA“).
This ‘non-reliance’ provision was commonly used by banks in relation to IRHP transactions around this time. In accordance with prevailing practice, after Marz entered into the Swap, BoS sent a written trade confirmation letter, which contained terms and representations in materially identical terms to those included in Part 5(2) of the ISDA.
The effect of the global financial crash in late 2008 and subsequent fall in interest rates to historical lows was that Marz ended up paying interest rates considerably above base rate. It subsequently claimed that the Swap was unsuitable and that BoS has mis-sold the product to it. Broadly, the case turned upon whether in explaining the available hedging products and providing the Swap to Marz, BoS owed and breached its duties to Marz by way of:
(a) express contractual duties under its Terms of Business to take reasonable steps to ensure that it was suitable (which arose where the sale was an advised one); and/or
(b) common law duties to take care in allegedly advising and/or providing information and/or explaining the options so as to enable Marz to make an informed decision.
The court dismissed the claim in full. The case raised similar issues to those seen in other IRHP claims and the key issues are set out below.
(1) Advisory duty
The court dismissed the claim that BoS had owed and breached a duty to Marz to advise it in relation to its entry into the Swap.
The court started from the basis that banks do not ordinarily owe any duty to advise customers as to the prudence of taking out a particular loan, or the soundness of the transaction that they propose to finance. The court acknowledged that bank salesmen frequently offer statements of opinion and ‘advice’ without assuming legal responsibility for such advice.
Marz was therefore required to prove that BoS had assumed responsibility as an adviser in respect of the choice and terms of the Swap. In finding that there was no such advisory duty in this case, the court made the following observations:
- The contractual documentation (specifically the ‘non-reliance’ ISDA wording) set out above weighed against the existence of an advisory duty.
- Marz was not assisted by: (a) the regulated status of BoS’s salespeople; or (b) the fact that the Terms of Business and internal bank policies contemplated the sales people at BoS assessing whether the transactions were suitable.
- The content of pre-contractual information, in the form of product profiles and updates on pricing and products was inconsistent with the existence of an advisory relationship. In particular, the non-contractual disclaimers contained within the product profile were consistent with the court’s overall assessment of the relationship between the parties as not giving rise to a duty of care to advise.
- The absence of a written advisory agreement and the absence of payment of an advisory fee to BoS also weighed against an advisory duty. In fact, the evidence suggested that Marz was in receipt of advice from its third party (unregulated) advisers, rather than BoS, in relation to hedging.
(2) Intermediate duty to provide information
The court also added further weight to the notion that there is no intermediate information-related duty (referred to in some commentary as a “mezzanine” duty, sitting somewhere between an information duty and a duty to advise). In particular, the court commented that in the absence of an advisory relationship, a salesman providing information does not have to explain fully the products he wishes to sell, including alternatives and comparisons. The salesman’s duty is a more limited duty not to misstate.
In this regard, the court expressly noted the reasoning in Property Alliance Group Limited v Royal Bank of Scotland plc  EWHC 3342 (Ch) and Thornbridge Ltd v Barclays Bank plc EWHC 3430 (QB). This was in contrast to the judgment in Crestsign Limited v National Westminster Bank plc  2 All ER, which found that the bank “came under a duty to explain fully and accurately the nature and effect of the products in respect of which [it] chose to volunteer an explanation“.
The estoppel defence related to whether, pursuant to Part 5(2) of the ISDA, the parties should be taken as having agreed that their relationship was not an advisory one and the bank should not be taken to have provided advice relied upon by the customer so as to assume any duty of care. The court held that it was bound by Springwell Navigation Corporation v JP Morgan Chase Bank and others  EWCA Civ 1221. The court noted that the Court of Appeal in Springwell appeared to endorse in this context the doctrine of so-called contractual estoppel, under which the parties to a contact are bound by agreeing that a certain state of affairs should form the basis for a transaction, whether that state of affairs was in fact the case or not, and could not deny the existence of the state of affairs upon which they agreed.
However, the court in the instant case commented that it regarded Part 5(2) of the ISDA and the wording set out in the trade confirmation letter as “more a matter of contract rather than estoppel“.
(4) Basis clause or exclusion clause?
Consistent with previous authority, the court found that Part 5(2) of the ISDA defined the parties’ relationship, rights and duties, as a matter of contract – it was therefore a basis rather than exclusion clause (and therefore not subject to any test of reasonableness under the Unfair Contract Terms Act 1977 (“UCTA“)). However, the court nevertheless subjected Part 5(2) to the UCTA reasonableness test and held it to be reasonable. The court commented that Part 5(2) is enshrined in the industry standard ISDA and was well known to Marz’s Director.
(5) Alternative arrangement
Marz alleged that the Swap was unsuitable and instead that properly advised by BoS, Marz would have entered into an alternative arrangement, namely an interest swap of £5 million and amortising interest rate cap of £7.5 million with the premium payable in deferred instalments (the “Alternative Arrangement“).
The court rejected these arguments and in particular found that the main factual obstacle for Marz on this issue was that the Alternative Arrangement did not comply with the hedging condition to which Marz had agreed as part of the proposed banking facilities. Accordingly, this counterfactual was not persuasive, as Marz was required to enter into a hedging product in order to satisfy the hedging condition.
Marz attempted to amend its counterfactual to meet the condition after conclusion of the trial, but this was rejected by the court as it would have required reopening the matters subject to investigation which would have been a “wholly inappropriate procedural course“.
(6) Credit line/income/metric of internal assessment
The court also rejected Marz’s submission that that BoS’s credit line should have been disclosed to Marz. The court cited Crestsign, in which the experts agreed that a credit line was “an internal measure not normally disclosed to a bank’s customers“. In addition as per Thornbridge and Property Alliance Group: there is no obligation on a salesperson to explain either the amount of income, or to provide information about the mechanics of its internal risk assessment of the transaction.
This is consistent with the reasoning provided in the recent Privy Council case of Deslauriers and another (Appellants) v Guardian Asset Management Limited (Respondent) (Trinidad and Tobago)  UKPC 34 (see our e-bulletin) in which the bank was found not to have owed a duty to disclose internal lending policies to the customer.
(7) Break costs
Marz’s claim that BoS failed to explain the risk of break costs in entering into a swap was found to be contradicted by the evidence. The documents provided to Marz’s Director by BoS included explanations and warnings about the risk of break costs, including the risk of “significant” costs in the event of an early termination. These disclosures were held to be sufficient in the circumstances.
(8) Causation and quantum
The court rejected Marz’s primary submission that properly advised Marz would not have entered into any hedging transaction (and the hedging condition would have been “abandoned“) – holding this to be an unrealistic proposition.
The court also rejected Marz’s secondary submission that BoS would have agreed to amend the hedging condition to enable Marz to enter into the Alternative Arrangement. The court was not persuaded that BoS would have agreed, retrospectively, to vary the hedging condition to accept the Alternative Arrangement.