The High Court recently considered the scope for argument that a bank owed a duty to advise its customer, this time in the context of the sale of an interest rate management product.
Property Alliance Group Ltd v The Royal Bank of Scotland  (PAG v RBS) considers many of the arguments typically run by claimant firms against banks in mis-selling claims and also the key implications of the existence of a non-reliance clause within the contract. The case provides further comfort to banks and demonstrates that the Court will require exceptional circumstances before implying a duty of care in banker/customer relationships. The case is also a timely reminder for Banks to consider reviewing current contractual documentation to ensure a detailed non reliance clause is included which covers each of the forms of advisory duties commonly alleged by claimants to clearly define the relationship between the parties as non-advisory.
Property Alliance Group Ltd (PAG) is a property investment and development business with a varied portfolio of properties including retail, leisure, industrial and office space. PAG had substantial outstanding variable rate borrowing to facilitate its operations and so interest rate movements could have a significant impact on its cash flow. Between 2004 and 2008, PAG entered into four interest rate swaps with The Royal Bank of Scotland (RBS) to manage its interest rate risk.
The case concerned the sale of those swaps, allegations about loss associated with LIBOR manipulation and the management of PAG's relationship with RBS once the relationship was transferred to RBS's business support unit (known as GRG). Read our related insight for more information on the GRG aspect of this case..
The judgment contains lengthy consideration of the pre-sale conduct in relation to the four swaps as well as they key terms of the ISDA master agreement and trade confirmations. This factual background was considered in the context of various allegations made by PAG, specifically that RBS had made misrepresentations and misstatements about the nature of the swaps and also that terms should be implied into the swap contracts to create certain obligations on RBS in relation to their sale.
Ultimately PAG's claim against RBS was unsuccessful because the Court found that:
In making these findings against PAG, the Court provided a detailed assessment of the application of relevant existing case law as well as identifying the key considerations in assessing the appropriateness and scope of a non-reliance clause.
Interestingly, the Court commented that amongst the factors that counted against PAG in its consideration of the existence of and potential scope of any duty of care was PAG's failure to seek clarification from RBS about the potential Mark to Market (MTM), i.e the break cost payable on early exit of the swaps, either priority to entry into the swaps or during their term.
Additionally the Court noted that it was generally not market practice at the time of the sale to give information about potential break costs or the MTM at the outset of a sale. These two factors are important considerations in the context of many mis-selling cases given that most sales under consideration pre-date the more rigorous sales processes which are standard today.
The current form of pre-sale disclosure given by most banks is more extensive and is often standardised for the sale of certain types of financial products which is in contrast to the pre-sale discussions which typically would have taken place pre- 2008. That the Court took this into account when considering the existence and scope of a duty of care demonstrates that it is not correct to assess the adequacy of disclosure at the time of the sale by comparing it to current sales processes. Rather, this suggests that the issue for consideration should be whether the information provided by the bank was sufficient for a customer to understand the product in question, taking into account all the circumstances of the sale (including customer sophistication).
Another key aspect of the judgment is the Court's consideration of the effect of the non-reliance clause in the context of the alleged misrepresentations. The non-reliance clause was contained in the ISDA master agreement and repeated in each trade confirmation issued in respect of the swaps. In reliance on the clause, RBS contended that PAG was contractually estopped from relying on representations or statements made by RBS. The Court found that the alleged representations, if made, were in the nature of investment advice or recommendations and so were caught by the non-reliance clause.
The Court then went on to find that the non-reliance clause contained "clear words which should be constructed to mean that explanations of the terms of the Swaps and oral statements made about them could not be relied upon as investment advice or recommendations". The Court did clarify that the clause would not be effective in the case of any fraud (which wasn't alleged in this case).
Finally, the Court also considered whether a term should be implied into the contract to the effect that RBS had a duty to act in good faith and in accordance with fair dealing. Helpfully for RBS in this case, the contractual framework was detailed and expressly defined the relationship as non-advisory. Applying the existing case law, the Court found that such a duty could not be implied given it would be "contrary to the spirit of the express terms of the Facility Agreement excluding equitable or fiduciary duties". In assessing whether to imply a duty "not to withhold or fail to disclose important information about the hedging under the Hedging Requirement", the Court went further and stated that "in effect, PAG is seeing to achieve by the back door what cannot be achieved by the front and runs contrary to express terms".
The case is therefore another important precedent for banks defending the wave mis-selling cases brought by claimant firms. It is also an important reminder to banks to ensure that an effective non-reliance clause is contained within the contract and that the sales process is designed to be consistent with the non-advisory relationship.
Contributor: Rachel Carter
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions.