The recent English Court decision Nextia Properties Limited v National Westminster Bank plc and The Royal Bank of Scotland plc  EWHC 3167 (QB) is the third consecutive bank victory for RBS following on from Green & Rowley and the Scottish case of Grant Estates Limited. Swap claimants should be thankful that Court rules do not mirror baseball as the Nextia defeat would have resulted in a strikeout for Claimants.
The Nextia decision sends out a strong signal to would-be Claimants that it will take a Herculean effort to defeat the banks in the inhospitable legal terrain of contract and the common law. It should be flagged up at the outset that as Nextia were a limited company they were unable to succeed with a claim for statutory breach (they did still give it a go but the argument was rejected) which would have been a far easier task than contractual or common law legal remedies like misrepresentation.
The “Zero Premium” Argument
Nextia, a small property development company, were persuaded to enter into an interest rate swap by their banks Natwest and RBS. Before entering the Swap, they were shown a number of interest rate management products, namely: a Base Rate Swap, Base Rate Collar and a Base Rate Cap. The Bank informed Nextia the collar and the cap would allow it to benefit if Base Rate fell (unlike the Swap). However, they were advised that these products, unlike a swap, would require an up-front payment. They argued that NatWest and RBS’ descriptions of a swap as a "zero premium" or "lower cost" were misrepresentations.
The rationale behind Nextia’s misrepresentation argument was that the banks’ "undisclosed profit" (i.e. the positive day one mark to market value (MTM) of the Swap) amounted to a fee or premium. In addition, they alleged that the fact the Bank did not inform Nextia it was making a profit on the Swap was a breach of contract.
Nextia’s arguments were rejected by the Court as the view reached was that it could not be inferred from either the documentation or the parties’ conversations (during the sales process) that Nextia would have understood premium to mean anything other than an up-front fee that would have been payable had it entered into a collar or a cap. The breach of contract argument floundered as there was no term in the contractual documentation signed by the parties that prohibited the Bank from agreeing the Swap at a rate which gave it a positive MTM.
The “Protection From Interest Rates” Argument
The Claimant advanced a further argument that the Banks made misrepresentations by allegedly describing the Swap as providing "protection" against fluctuating interest rates. Again, it was also argued that this amounted to a breach of contract.
This argument was also dismissed by the Court because it was held that the bank had not stated that the swap would give the Claimant’s “protection”. However, even if the Courts had found the Bank to have made this statement, the Claimant would have been undone by the banks’ disclaimers.
The ancillary breach of contract argument was also given short shrift as there was no express term in the contractual documentation stating that the banks had to provide a swap that reduced the risk from interest fluctuations, and no such term could be implied.
Swap Was A Bet Argument
The Claimant also argued that the swap was essentially a bet and this gave rise to additional duties of fairness and disclosure. The Court agreed with the banks position which was that the general position is that there is no duty of disclosure (and no exception to that rule arose here) and it was not a bet.
No Breach of Statutory Duty
As mentioned earlier, an attempt was made by the Claimant to argue that the banks breached the Conduct of Business Sourcebook rules (COBS) and they were entitled to bring a claim for statutory breach. However, the Court followed decisions in Titan Steel Wheels and Grant Estates Limited, that a limited company is not able to advance a statutory breach claim under the Financial Services and Markets Act 2000 (FSMA).
Mismatch Between Underlying Loan And Swap Argument
The Claimant argued that the duration of the loan should have matched the duration of the swap rather than being over-hedged (i.e. swap duration is longer than duration of the loan). The Court held that there was no term in the Swap contract that stated the banks would provide the Claimant with a swap that matched the maturity of its loans and it was made quite clear to Nextia the Swap was independent of any other contract, including the underlying loans.
If potential Claimants were under any illusions as to the difficulties they will encounter with litigating a swaps claim then this case serves as a sobering reminder of how challenging it can be to defeat the banks using contractual and common law remedies. Unfortunately we have yet to see a Claimant unleash the formidable remedy of statutory breach either because they are time-barred or they are limited companies and are prevented from doing so by s.150 (now s.138D) of FSMA. The banks may find their winning streak comes to an end if the statutory breach remedy can be advanced by a Claimant.
While Nextia is yet another morale-sapping blow to victims of swap mis-selling (and their advisers), there will be many businesses with more favourable facts, witness evidence and perhaps contemporaneous supporting documentation who will be in a better position to take on the banks in Court or negotiate a satisfactory out of Court settlement.
If you are considering making a claim for interest rate swap mis-selling then MBM's experienced Financial Services and Banking Disputes Team are happy to briefly discuss matters with you to see if we can be of assistance to you in negotiation, Financial Ombudsman Service Complaint or litigation in the Courts. Please call a member of our Team on 0131 226 8200.
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