Property Alliance Group Ltd (“PAG”) has recently filed leave to appeal to the Court of Appeal against a decision of Mrs Justice Asplin in the High Court in December 2016.
The underlying litigation, the outcome of which is being appealed, centred on:
- Claims of mis-selling of interest rate swaps by the Royal Bank of Scotland PLC (“RBS”) who were found by the Financial Conduct Authority to have mis-sold derivatives, along with other major banks, in 93% of cases examined.
- PAG also made claims relating to LIBOR manipulation by RBS, which claims were also backed by global regulatory findings against RBS of widespread LIBOR misconduct that resulted in £390m fines from UK and US regulators and the US Department of Justice.
- Further, PAG complained about its treatment by RBS’ Global Restructuring Group (“GRG”).
The High Court dismissed all of PAG’s claims and this decision is now being appealed.
In contrast to most SME claimants, PAG was classified by RBS as a professional client and had received hedging advice from financial risk management consultants before the disputed trades. In addition, PAG also had the benefit of significant in-house financial expertise, albeit not specifically in derivatives. The judge ultimately held that PAG had made its own decisions based on its managing director’s strong views on wanting to achieve a certain rate without paying a premium.
The Swaps Mis-Selling Claims
PAG alleged that RBS had misled it at the pre-contractual stage, by failing to make PAG aware of various adverse features of the products being sold, including potentially massive break costs and the extent to which the products would eat into the customer’s credit limit. However, PAG struggled to identify specific false statements made by RBS employees. The judge held that merely using the word ‘hedge’ to describe the product did not imply that it would operate as a hedge in the technical sense. The Court also held that RBS’s standard terms of business allowed the bank to exclude any claim based on pre-contractual statements. It is clear that Claimants should base their claims on specific statements, rather than only claiming that the whole course of the bank’s communication gave a misleading impression.
RBS admitted that the Claimant was not informed of the scale of the potential breakage costs, the mark-to-market value or the extent of the bank’s internal credit line (which in fact is not an internal event as portrayed by RBS but a process of credit limit utilisation which affects the customer’s creditworthiness massively without the customers knowledge). However, the judge held that banks are not under a duty to advise customers of these risks merely because they provide information about a product. The judgment stressed that any duty going beyond the duty not to misstate is “entirely fact sensitive and turn[s] upon the precise nature of the circumstances and of the explanation or advice which is tendered.” We would anticipate that this finding (which in effect allows banks to sell products without making any attempt to inform customers of the associated risks) is likely to be central to any appeal.
Having determined that the existence of a duty was fact-sensitive, the Court went on to find that none existed in this case for the following reasons:
- PAG was a substantial property company;
- PAG had a series of banking advisors (albeit not derivatives specialists);
- PAG never sought information about the mark-to-market values;
- PAG was under no time pressure;
- it was not general market practice to give information about potential break costs and mark-to-market values;
- PAG had received specific warnings about break costs, mismatch and other matters from their financial risk management consultants before the trades;
- extensive explanations were given; and
- the duty to advise had been expressly excluded by RBS’s standard terms.
These factors will of course vary from case to case and claimants in different positions may still seek to establish the existence of an advisory duty in their own particular circumstances.
The RBS GRG Claims
PAG argued that RBS had breach an implied duty of good faith, firstly in transferring a fundamentally sound business to GRG and then in requiring revaluations and a security review (at PAG’s expense), with the effect of putting the business under additional pressure, rather than supporting it. The judge held that there was no implied duty of good faith in the relationship between PAG and RBS, as any such duty would be contrary to the express terms of the contract (namely RBS’s standard terms stating that the bank was not acting in an advisory or fiduciary capacity).
It was held a duty of good faith can only be implied into the contract where the contractual documents provide for the exercise of discretion (which in this case they did not). RBS was able to rely on its records of the reasons for the transfer as showing that it had proper motives and so this claim also failed. “[A] number of cryptic remarks” in the bank’s internal emails were dismissed by the Court as the Court will not form a judgment based on isolated remarks, but will look at the whole course of the documents.
Given the widely publicised criticisms of GRG’s treatment of its customers (including in a report by Lawrence Tomlinson, Entrepreneur-in-Residence at the Department for Business, Innovation and Skills), it is likely that this finding will also be highly contested on appeal, as it could be portrayed as allowing RBS to get off scot-free. Meanwhile claimants should be aware that they may not be able to rely on generalised assertions of improper motives for banking decisions they dislike. Any such claims must be clearly grounded in the specific facts of the individual case.
The LIBOR aspect of PAG v RBS was widely watched and took up several weeks of court time, but ultimately brought no joy to claimants. The judge held that, while RBS did come under a duty not to manipulate LIBOR, this was limited to the currency and tenor of the contracts in issue (in this case, 3-month sterling LIBOR). The judge went on to hold that as a matter of fact RBS did not manipulate sterling LIBOR (despite having been previously found to manipulate Yen and Swiss Franc LIBOR). Therefore this aspect of PAG’s claim also failed.
Because the Court of Appeal will not reconsider the judge’s findings of fact (since the trial judge had the benefit of seeing the witnesses give their evidence) it may be that this aspect of the case is less likely to be successfully appealed, although PAG may attempt to argue that LIBOR manipulation in other currencies is sufficient to establish its claim. Of course, the situation may well be very different for claims against banks known to have manipulated sterling LIBOR.
Certainly by no means does the decision in PAG spell the end of LIBOR manipulation claims against the rate setter panel banks that manipulated the rate. All such claims should be investigated and such claims are often settled without going to trial.
Comment from Financial Services Litigation Specialists
The judgment in PAG v RBS draws a clear line between the duties of salespersons and the duties of advisers. It shows judicial support for clear and properly drafted exclusion clauses and that reliance will be placed on the contemporaneous documentary evidence (rather than recollections after the event) when assessing the nature of the relationship between the parties.
However, the judge repeatedly stressed the fact-sensitive nature of her findings, and PAG were unusual as compared to typical claimants in these cases, not least in having had the benefit of internal and external financial advisers. We wait to see whether the Court of Appeal will take a different view to that of the High Court and overturn the current decision.
It is important for anyone considering a claim to seek specialist legal advice from the outset to ensure that the claim is presented in the right way, based on a careful factual and legal analysis of the specific case and not on generalised assertions of banking malpractice. Potential claimants should also be aware that there are time limits within which to bring claims of this nature. If a claim is allowed to expire, it will not subsequently be possible to revive it following any more favourable decision by the Court of Appeal. Anyone who thinks they might have a claim should therefore immediately seek specialist advice.
Financial Services Litigation Team, LEXLAW