Framing the arguments around swaps mis-selling

Framing the arguments around swaps mis-selling
Are we beginning to see some clarity in the court’s approach to swaps mis-selling claims? Following the High Court decision in Bailey v Barclays Bank, Paul Choon Kiat Wee, a barrister at 3 Verulam Buildings, points out that as the case law on swaps mis-selling evolves, the proper boundaries of the arguments available to claimants and defendants alike become clearer.

Original news

Bailey v Barclays Bank plc [2014] EWHC 2882 (QB), [2014] All ER (D) 151 (Aug)

The claimant, Mr Bailey, had arranged a loan with the defendant bank. He subsequently sought to transfer the loan from himself to a company that he controlled (MTR). Mr Bailey and the company brought proceedings against the bank for, among other things, misrepresentation. In the course of proceedings, the bank sought to strike out the claim, and the claimants sought permission to amend the particulars of claim. The Queen’s Bench Division held that the application to amend would be dismissed, and judgment would be given for the bank.

What issues did this case raise?

This judgment (on MTR’s application for permission to amend its particulars of claim, and on the defendant bank’s application for strike out and summary judgment) concerned the sustainability of several claims advanced by MTR in relation to the alleged mis-selling of an interest rate swap, which had originally been sold to Mr Bailey, MTR’s owner, in 2007 and later novated to MTR itself in 2011. The swap had originally been purchased by Mr Bailey in 2007 in connection with borrowings from the bank in his own name. In 2011, Mr Bailey sought to transfer his borrowings with the bank to MTR. The bank informed Mr Bailey that in order to do this, the swap would either need to be novated to MTR, or terminated early with breakage fees of $560,000. Mr Bailey alleged that his preference had been for the swap to be terminated, but that in view of the breakage fees, he had no option but to agree to the novation of the swap to MTR. Mr Bailey had initially made claims in these proceedings in his own name, but accepted a redress offer that had been made after the bank’s review of the 2007 sale of the swap. The judgment was accordingly limited to considering MTR’s claims alone.

MTR sought to bring claims based on alleged breaches of the Conduct of Business Sourcebook (COBS) rules, said to be actionable under:

  • statute and/or contract
  • economic duress
  • unconscionable conduct
  • misrepresentation
  • unjust enrichment
  • breach of fiduciary duty, and
  • a claim under the Financial Services and Markets Act 2000, s 27 (FSMA 2000)

for a declaration that the swap was unenforceable.

To what extent is the judgment helpful in clarifying the law in this area?

In confirming that none of MTR’s claims had any real prospect of succeeding, the judgment of HHJ Keyser QC provides further useful clarification as to which causes of action commonly advanced in swaps mis-selling claims are properly sustainable, and which are not.

The judgment must be understood in its proper factual context, namely that the ‘original’ sale of the swap was to MTR’s owner, with the swap being novated to MTR at a later date (with the nature of this novation being in issue before HHJ Keyser QC). This context, which does not feature in every swaps mis-selling case, imposed restrictions on the causes of action properly available to MTR. However, subject to this caveat, the judgment provides the following helpful guidance.

Private person

HHJ Keyser QC rejected MTR’s argument that it was a ‘private person’ within the meaning of FSMA 2000, s 150(1) (now s 138D(1)) and the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, SI 2001/2256, reg 3 (1)(b) (2001 Regulations). The statutory restriction of the right of action in FSMA 2000, s 150(1) to ‘private persons’ is a common hurdle to be surmounted in swaps mis-selling claims. Regulation 3(1)(b) of the 2001 Regulations provides that a person who is not an individual can comprise a ‘private person’ for these purposes if he does not suffer the loss in question ‘in the course of carrying on business of any kind’. HHJ Keyser QC applied the decision of David Steel J in Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2010] All ER (D) 137 (Feb) in holding that the words ‘in the course of carrying on business of any kind’ are to be given a wide meaning. Consequently, the facts that MTR was not engaged in the business of financial services, and that MTR’s use of hedging products was only for purposes incidental to its main business, did not suffice to give MTR a direct statutory right of action under FSMA 2000, s 150(1).

The true state of affairs

HHJ Keyser QC rejected MTR’s alternative argument that it could bring a claim under FSMA 2000, s 150(3) and regs 6(2) and 6(3)(a) of the 2001 Regulations, on the ground that the bank contravened a rule that prohibited it from seeking to make provision excluding or restricting any duty or liability to MTR. The alleged contravention for these purposes was that in seeking to rely on its non-reliance/advisory and non-fiduciary clauses, the bank was seeking to falsify the correct factual position and therefore to establish the existence of a state of affairs that did not exist. This argument failed because the bank was not seeking to falsify the true state of affairs.

COBS breaches not actionable by contract

HHJ Keyser QC rejected MTR’s attempt to argue that breaches of the COBS rules were actionable by MTR in contract—whether on the basis that they were expressly incorporated into the agreement between MTR and the bank, or on the basis that the requirements of the COBS rules comprised the standard of reasonable care and skill that the bank would be required to exercise under its standard implied obligation to exercise reasonable skill and care under its agreement with MTR.

Taken together, these first three grounds provide important clarification as to the proper basis for advancing claims based on breach of COBS (and other Handbook provisions).

Economic duress, unconscionable conduct and misrepresentation

HHJ Keyser QC rejected MTR’s arguments based on economic duress, unconscionable conduct and misrepresentation. Although the judge’s reasons rested principally on the alleged facts of the case, the judge observed that even on the facts asserted by MTR, arguments based on economic duress, unconscionable conduct, undue influence and misrepresentation were wholly untenable.

Unjust enrichment

HHJ Keyser QC rejected MTR’s argument based on unjust enrichment. By this argument, MTR sought to contend that the purpose of the swap had been to hedge MTR’s interest rate liabilities—and that since the fixed interest rate under the swap had at all material times been much higher than the prevailing base rate, the basis of the swap had wholly failed. HHJ Keyser QC concluded this was unarguable because (among other reasons) in fixing the interest rate payable by MTR, the swap had in fact achieved precisely what the parties intended—the fact this had resulted in a poor outcome for MTR simply meant the swap was a poor deal for the losing side.

Breach of fiduciary duty

HHJ Keyser QC rejected MTR’s claims based on breach of fiduciary duty. He held that whatever the position might have been when MTR’s owner first purchased the swap in 2007, there could be no question even on the alleged facts of MTR having reposed trust and confidence in the bank when taking over the swap by novation in 2011. Rather, on MTR’s own case, it had taken on the swap because there was no other way to extricate Mr Bailey from its terms. It was therefore not necessary to consider the bank’s argument that the terms of the contractual documentation negatived the existence of any fiduciary relationship.

These latter three points provide important further guidance as to the breadth of arguments that are properly available to a claimant in a swaps mis-selling case.

Partial novation

HHJ Keyser QC rejected MTR’s contention that the novation of the swap from Mr Bailey to MTR had not been a true or ‘complete’ novation, but rather a ‘partial’ novation. This argument had been deployed in response to the point that the effect of a true novation is to destroy the original contract and create a new contract between the new parties to the novated agreement, with the result that any equities that might have existed in relation to the original agreement (such as an equity to rescind the contract for misrepresentation) would not be available under the new, novated agreement. This would have precluded MTR from relying on (for instance) any entitlement to rescind the original swap for misrepresentation that Mr Bailey might have enjoyed. MTR therefore sought to argue that the novation had been a partial novation that had not destroyed any equity of rescission to which Mr Bailey might have been entitled. HHJ Keyser QC rejected this argument, holding that the terms of the novation were consistently only with a true novation.

What are the implications of this case for lawyers?

As the case law on swaps mis-selling evolves, the proper boundaries of the arguments available to claimants and defendants alike become clearer. It is common for claimants in these cases to advance a large number of different causes of action, each seeking to articulate a slightly different basis of liability. However, this decision demonstrates that care must be taken when advancing a swaps mis-selling claim.

It is becoming clear that certain arguments are unlikely to succeed. For example, this decision adds further weight to David Steel J’s judgment in Titan Steel on the scope and effect of reg 3(1)(b) of the 2001 Regulations, and it must be doubted whether any further attempt to argue for a wider interpretation of this provision will succeed. Furthermore, this case illustrates the importance of ensuring that the arguments advanced are compatible with the facts that have been alleged. A good claim based on a strong cause of action is not made stronger through the assertion of alternative causes of action that are unlikely to succeed.

Are there any patterns or trends emerging in the law in this area?

A similar trend will continue as further cases result in judgment. We are likely to see a continuing crystallisation of the arguments and issues that are properly arguable, and the resulting narrowing of issues will assist practitioners acting for claimants and defendants alike.

Paul Choon Kiat Wee has a broad commercial practice encompassing litigation, arbitration and advisory work, with a particular emphasis on banking, financial services, civil fraud, insolvency and private international law. His practice has a growing international dimension. In addition to advising on jurisdiction and choice of law in the English courts, Paul receives instructions from and works with foreign law firms in relation to matters involving English law taking place abroad.

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First published on LexisPSL Restructuring and Insolvency.

Interviewed by Kate Beaumont.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.