7 Rolls Buildings, Fetter Lane
London, EC4A 1NL
B e f o r e :
(Sitting as a Deputy Judge of the High Court)
|(1) NATIONAL WESTMINSTER BANK PLC|
|(2) THE ROYAL BANK OF SCOTLAND PLC||Defendants|
RICHARD EDWARDS (Instructed by Slater & Gordon (UK) LLP, 50-52 Chancery Lane, London, WC2A 1HL) appeared on behalf of the Claimant
ANDREW MITCHELL QC and LAURA JOHN (Instructed by DLA Piper, 3 Noble Street, London, EC2V 7EE) appeared on behalf of the Defendants
Hearing dates: 21-24 July 2014, 28-29 July 2014
Crown Copyright ©
Mr Tim Kerr QC:
1. Any transaction terms agreed between us verbally are legally binding contract terms. Following execution of a trade you will be required to sign legal documentation (which may include a confirmation and Master Agreement) to confirm those terms.
2. Any hedging contract that you enter into with RBS is a separate legal contract from any borrowing it may relate to. In particular, they may be terminated independently of each other and early termination of one does not automatically terminate the other.
3. The cost to you of the overall hedging structure and any borrowing is the sum of the cost of the borrowing and the net cost to you of the hedging contract, whether this is a swap, cap, collar or any other hedging structure.
4. If you are hedging an interest rate exposure:
- You will be exposed to interest rate risk if there is a mismatch between the start dates or end dates of the underlying debt and any interest rate protection. This mismatch may be caused by circumstances such as a deferred start to the agreed protection or alternatively by delay in drawing down the loan.
- You will be exposed to interest rate risk if there is a difference between the value of the debt that is to be protected and the notional principal of your interest rate contract with us.
5. If you enter into an over-the-counter derivative transaction with us and decide to close out the transaction before its scheduled termination date, you may have to pay breakage costs. These will be calculated by reference to prevailing market conditions and include costs incurred by us in terminating any related financial instrument or trading position. Please note that such break costs may be substantial.
6. Where you enter into a derivative transaction with us for the purposes of hedging debt and you subsequently wish to repay the debt (whether through a refinancing or otherwise) or discharge all other obligations to us, you should be aware that it may be necessary for us to terminate the hedging transaction prior to its scheduled termination date and satisfy any liabilities that you have to us with respect to such transaction (including break costs) before we will release any security you have provided to us with respect to such liabilities.
7. You are acting on your own account and will make an independent evaluation of the transactions entered into and their associated risks, and you have the opportunity to seek independent financial advice if unclear about any aspect of the transaction or risks associated with it and you place, or will place, no reliance on us for advice or recommendations of any sort.
8. We would also draw your attention to our terms of business.
is intended for your sole use on the basis that before entering into this, or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. [RBS] will not act and has not acted as your legal, tax, accounting or investment adviser or owe any fiduciary duties to you in connection with this, or any related transaction, and no reliance may be placed on RBS for advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information, and disclaims all liability for any use you or your advisers make of the contents of this document.
We will not except where we have specifically agreed to do so, provide you with advice on the merits of a particular transaction or the composition of any account, or provide you with personal recommendations (as defined by the FSA) in relation to any transaction or account. Accordingly, you should make your own assessment of any transaction that you are considering or of the composition of any account and should not rely on any opinion, research or analysis expressed or published by us or our affiliates as being a recommendation or advice in relation to that transaction or account.
it [the counterparty] has made its own independent decisions to enter into this the Transaction and as to whether the Transaction is appropriate or proper for it based on its own judgment and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of the Bank as investment advice or as a recommendation to enter into the Transaction; it being understood that information and explanations related to the terms and conditions of the Transaction shall not be considered investment advice or a recommendation to enter into the Transaction .
[a]s mentioned at our meeting these structures obviously involve a 10 year commitment and the bank only has a financing commitment for 5 years at this moment. .
The Issues: Reasoning and Conclusions
(1) Did the banks owe a duty to use reasonable skill and care in giving advice and/or making recommendations about the suitability of the swap?
if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person, as he knows or should know, will place reliance upon it, then a duty of care will arise. (Hedley Byrne v. Heller & Partners  AC 465 per Lord Morris at 502-3)
(2) If the banks did owe Crestsign a duty of care in relation to giving advice and/or making recommendations, were they in breach of the duty in advising on the suitability of the swap?
(3) What duty did the banks owe when giving information about the swap?
in cases involving information which falls short of advice, a bank which undertakes to explain the nature and effect of a transaction owes a duty to take reasonable care to do so as fully and properly as the circumstances demand.
to give the customer sufficient information to enable the customer to make a properly informed choice between these unfamiliar and complex products. That should mean all the products, not every product under the sun, but at least all the vanilla products that he himself agreed are likely to be most appropriate for this client base: that is the collar, the swap and the cap, but especially the cap . .
The duty to take care not to mis-state is much narrower than the advisory duty where one would expect that relevant professional standards would form part of the assessment as to whether it has been broken. . . The Hedley Byrne duty does not include any duty to give information unless without it the statement is misleading. Equally the duty under Rule 5.4.3 [of COB] to take reasonable steps to ensure that the counterparty to a transaction understands the nature of its risks is well outside any notion of a duty not to misstate.
I reject the suggestion that the bank here owed to the claimants a common law duty of care which involved taking reasonable care to ensure that they understood the nature of the risks involved in entering into the swap transaction.
The bank here was marketing to existing or prospective purchasers derivative products of its own devising which were both novel and complex. The analysis of the relationship is in the circumstances one of some delicacy.
In short, a bank negotiating and contracting with another party owes in the first instance no duty to explain the nature or effect of the proposed arrangement to that other party. However, if the 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. How far that duty goes must once again depend on the precise nature of the circumstances and of the explanation or advice which is tendered.
(4) Did the banks breach their duty when giving information about the swap?
(5) Measure of damage; causation and quantum