The High Court (Queen’s Bench Division) has recently dismissed an attempt by Barclays Bank to strike-out an interest rate hedging product (IRHP) mis-selling claim for being issued more than six years after the IRHP was sold to the customer. The judgment in Kays Hotels Ltd v Barclays Bank PLC is relevant to any bank customer who was sold an IRHP more than six years and did not understand that they might consequently have a legal claim against their bank for mis-selling.
The Derivatives Contract sold by Barclays
In August 2005, Barclays sold a 10-year amortising collar for a notional amount of £1 million to its customer, a private limited company operating a hotel in Suffolk. If the base rate fell below 4%, then the customer was obliged to make a payment to Barclays. If base rate rose above 5.5%, then Barclays was obliged to make a payment to the customer. If base rate remained between 4% and 5.5%, then neither party would make a payment to the other.
ADR: The Interest Rate Hedging Product Review
At the end of June 2012, the Financial Services Authority (as it was then; now the Financial Conduct Authority) announced its agreement with several major banks (including Barclays) for the Banks to review their own past sales of interest rate hedging products to non-sophisticated customers. The IRHP review scheme was (and still is) notoriously dogged by delay. The claimant subsequently issued a legal claim against Barclays in relation to mis-selling of the collar on 8 November 2012.
The Bank’s Limitation Defence
According to section 5 of the Limitation Act 1980, the limitation period for issuing a legal claim in relation to a contract is six years after the parties entered into that contract, failing which the claim would be time-barred.
Barclays applied to the High Court for (i) summary judgment on the claim in its favour under CPR 24.2 and/or (ii) to have the claim form struck out under CPR 3.4(2) on the grounds that it was issued more than six years after the collar was sold to the claimant, and therefore was (in its view) indisputably time-barred and so should be summarily dismissed.
Section 14A of the Limitation Act 1980
In bringing its claim, the claimant sought to rely on section 14A of the Limitation Act, under which the limitation period is extended to three years after the date when the claimant knew (or ought to have known) the facts necessary to investigate the possibility of issuing a claim, i.e. the material facts about the damage suffered and that the damage was potentially attributable to an act or omission by Barclays.
Barclays attempted to argue that the collection of payments under the collar from November 2008 meant that the claimant knew (or ought to have known) the necessary facts for investigating a claim from that time, and that the claim was also time-barred pursuant to section 14A of the Limitation Act.
Application Judgment: Kays Hotels Ltd v Barclays Bank
However, Mr Justice Hamblen disagreed with Barclays’ argument and stated at paragraph 26 of his judgment that:
“If the complaint had simply been that the claimant had been advised that he would incur no interest rate loss, then one could understand that as soon as it became apparent that the claimant was having to pay interest rate losses, he would or should have known the facts necessary to investigate into such a claim…
In my judgment the mere fact that it was known that some interest payments were being made for a period of about a year does not give rise to an unanswerable case that the claimant knew or ought to have known sufficient facts to make the requisite investigation for the purpose of Section 14A”
It was held that the claimant did have a real prospect of establishing that the claimant could rely on section 14A of the Limitation Act, and Barclays’ application to strike out the claim was dismissed.
A copy of the full judgment is available to download or view here: Kays Hotels Ltd (Trading As Claydon Country House Hotel) v Barclays Bank Plc [2014] EWHC 1927 (Comm) (16 May 2014)
Legal Comment on Swaps Limitation
The court’s decision makes it even more difficult for banks to summarily strike out ‘swaps mis-selling claims’ on the basis of time bar where the claimant relies on section 14A of the Limitation Act 1980 to seek to extend the limitation period. Ultimately the court will have to determine the validity of the section 14A argument (unless of course the parties settle before trial as is commonplace with strong claims brought by experienced specialist swaps solicitors).
LEXLAW have conducted and settled substantially more derivatives litigation than any other law firm in England & Wales and are the leading law firm acting against banks in derivatives mis-selling claims.