In a judgment handed down on Friday  the High Court has again found in favour of a Bank following a claim in respect of its selling of interest rate hedging products (IRHP).
In 2008 the borrower, Thornbridge Limited (Thornbridge) entered into a loan with Barclays Bank PLC (Bank) for approximately £5.6m with an applicable interest rate of 1.5% above the Bank’s base rate (Loan). It was a condition of the Loan that Thornbridge enter into an IRHP acceptable to the Bank for the first 5 years of the 15 year Loan term.
Thornbridge was referred to Barclays Capital, the investment division of the Bank to discuss its hedging requirements. Telephone discussions (which were recorded, retained and subsequently disclosed by the Bank) took place between Thornbridge and Barclays Capital, as did exchanges of e-mails including a written presentation produced by the Bank concerning different options for IRHP (Presentation). Thornbridge subsequently entered into a 5 year fixed rate interest rate swap (Swap) with the Bank. The terms of the Swap included a clause confirming that Thornbridge entered into the Swap on the basis of its own judgment and was not relying on any communication from the Bank as advice or a recommendation (Contractual Clause).
Initially there were issues with the loan payments remaining constant even though the Bank’s base rate was reducing and the Swap payments were increasing as the Bank of England base rate declined in late 2008 and early 2009. Initially this, coupled with different dates for transactions under the Loan and the Swap, caused Thornbridge cash flow pressure (Mismatch). The Bank addressed the position by effectively re-advancing funds to Thornbridge and adjusting its payments under the Loan. Thornbridge expressed a wish to refinance its borrowings but were unwilling to pay the breakage costs associated with the Swap.
Thornbridge issued a wide ranging claim against the Bank. In summary, Thornbridge alleged that the Bank breached Hedley Bryne  advisory and information duties by failing to advise it to purchase a suitable product and/or failing to take reasonable care to ensure that information was not misstated by actual misstatement, omission or partial omission.
Thornbridge alleged that the Bank had failed to advise on a suitable product by providing inadequate warning as to breakage costs, potential restrictions on the ability to refinance and restrictions on the portability of the lending. Thornbridge alleged that the Presentation did not describe the advantages of IRHP fairly, clearly and accurately. Thornbridge further claimed that the Bank had a duty to provide sufficient information/advice to allow Thornbridge to understand the financial consequences of the differences between the fixed profile of the Swap and the variable repayment profile of the Loan. Thornbridge finally alleged that the Bank owed them duties of the same scope in tort (i.e. negligence), contract and under the Financial Services and Markets Act 2000 (Act).
The Judge reviewed the authorities, including the recent cases of Crestsign  and Bailey , before concluding as follows:
- The Bank did not assume an advisory role, they were merely providing information to Thornbridge and on the facts did not recommend or advise Thornbridge to enter into any specific IRHP. The recordings of the telephone conversations particularly assisted the Judge on this point.
- The statements made by the Bank in the sale of the Swap did not go beyond “the normal recommendations..given in the daily interactions between an institution’s salesforce and a purchaser of its products” as per Gloster J in Springwell .
- The Contractual Clause was not an exclusion clause. It provided the basis for the parties’ dealings and gave rise to a contractual estoppel preventing Thornbridge from bringing the claim against the Bank.
- If the Judge was wrong and the Contractual Clause was subsequently held to be an exclusion clause, the Judge held that it satisfied the reasonableness test set down in Unfair Contract Terms Act 1977.
- There was no separate duty on the Bank to provide information over and above the duty not to give inaccurate or misleading information – an important contraction from any suggestion of a broader information duty in Crestsign.
- The terms of the Swap did not give rise to a contractual right in respect of the Bank’s obligations to comply with the FCA rules.
- As reflected in a number of recent cases, Thornbridge did not have a direct right of action under the Conduct of Business Rules under section 138D of the Act as it was not a private person.
Against that legal matrix the Judge made three specific findings:
- The information provided by the Bank to Thornbridge regarding the break costs on the Swap was not inaccurate or misleading.
- The Presentation did contain one misleading statement. However that did not cause Thornbridge any loss on the facts, as its director did not pay any attention to the relevant statement when deciding to enter into the Swap.
- The financial consequences of the Mismatch had been resolved by the re-advance and restructure of the Loan, and did not result from any unsuitability of the Swap.
It remains to be seen whether Thornbridge will seek to appeal this judgment to the Court of Appeal. The Crestsign and Bailey cases are due to be heard before the Court of Appeal next year. These appeals will cover lots of the same ground as the Thornbridge case. The Crestsign appeal will be heard in April 2016 and concerns basis clauses, the scope of the duty to provide information and explanation relating to different IRHP and the duty to provide information in relation to break costs. The Bailey appeal will be heard in July 2016 and relates to the private person exclusion from the right of action under section 138D of the Act.
The case law on IRHPs and the implementation of the FCA redress scheme will continue to develop through next year but at the current time this is a very positive decision for financial institutions facing similar claims.
For more information, email firstname.lastname@example.org.
1 – Thornbridge Limited -v- Barclays Bank PLC  EWHC 3430 (QB)
2 – Hedley Byrne -v- Heller  AC 465
3 – Crestsign Limited -v- National Westminster Bank Plc and RBS Plc  EWHC 3043 (Ch)
4 – Bailey -v- Barclays Bank Plc  EWHC 2882 QB
5 – JP Morgan Chase Bank v Springwell Navigation Corporation  EWHC 1186 (Comm)