Posted on Aug 28, 2012 by | 0 Comments
Many bank customers are currently considering whether they should raise a court action against their bank for mis-selling of interest rate swap agreements (IRSAs) or wait on the outcome of the FSA review scheme. However mis-sold customers need to be aware that they risk losing their right to bring a legal action against their bank by waiting on the FSA outcome.
BREACH OF CONTRACT
Scotland - 5 Years
The general position in Scotland (subject to exceptions discussed further below) is that the right to bring a legal action for mis-selling is lost 5 years after the occurrence of the breach of contract and the loss.
England - 6 years
The general position in England (subject to exceptions discussed further below) is that the right to bring a legal action for mis-selling is lost 6 years after the breach of contract (12 years if the contract is a deed under seal – this is rare though).
This is a subtle but distinct difference between the two legal systems which may be of benefit to those customers raising actions in Scotland where the loss was suffered some time after the initial breach as it may extend the period in which they could bring an action. Customers should check the jurisdiction clauses of their contract to confirm whether Scots law or English law applies.
WHEN DID THE BREACH HAPPEN?
The breach of contract would arguably occur when the IRSA was agreed as that would be when the implied term to exercise reasonable care and skill when advising the customer would likely be breached.
The breach of duty of care (delict/tort) should be assumed to arise when the first discussions took place with the bank about the IRSA.
Scottish customers may argue that the breach of contract (or duty of care) was a continuing one in which case the loss is deemed to have occurred when the breach ceases (and so the time-bar clock would only start running at that point). However the breach is a failure to advise when the IRSA was agreed and this would appear to be a single breach. The subsequent interest payments suffered by the customer is the consequence of the breach rather than a continuing breach so it is unlikely this argument could be advanced to delay the time-bar clock. It should be emphasised that the losses that can be recovered are those within 5 years of the moment the breach and loss occurred. If there are further losses outwith the 5 year period these cannot be recovered.
There are further exceptions to the general position that some customers in Scotland may be able to rely upon. Firstly, if the bank acted fraudulently or acted in a way which made the customer refrain from making a mis-selling claim then the clock does not start during that period of time. There may be cases where this exception may be relied upon if the customer has complained or enquired about exiting the IRSA but has been misled by the bank.
LACK OF AWARENESS
Secondly, if the customer was not aware of the loss and could not with reasonable diligence have been aware that loss had occurred caused by the IRSA then clock will only start to run when the customer becomes aware or could with reasonable diligence have become aware. The loss would be sustained when the original rate the customer was on differs detrimentally from the IRSA rate. On any view, an ordinary prudent customer ought to have realised there was a loss when the interest rate payments they were paying to the bank increased or when the interest rate fell rather than increasing as they had been advised (thus causing a notional loss from their original rate and the new IRSA rate).
Claims in Scotland based on duty of care (or delict) such as negligent misrepresentation should be raised within 5 years of the date the loss, injury or damage is suffered. Under English law, claims based on duty of care (or tort) should be raised within 6 years of the date that the claimant suffers damage.
LACK OF AWARENESS
However there is a possible extension under English law if the allegation relates specifically to negligence and the customer has suffered “latent damage”. It should be emphasised that this is very much a last resort as it is often difficult to prove. The customer needs to prove that he or she was ignorant of their claim during the 6 year period (which is broadly similar to the Scottish lack of awareness exception) but if successful then the customer has three years from the moment they became aware they had a claim or ought to have been aware they had a claim. Unfortunately it is unlikely customers will be able to avail themselves of the extension as the customer is usually aware they have a potential claim within the 6 year period.
England has a similar safeguard to Scotland that where fraud or deliberate concealment has occurred then the clock does not start running until the fraud or concealment is discovered, or could with reasonable diligence have been discovered by the customer (this applies to both breach of contract and tort).
THE CLOCK IS TICKING...
While there are exceptions to the general position which some customers may be able to avail themselves of, the vast majority will clearly be at risk of losing their right to bring an action. For example, if the IRSA was entered into in early 2007 then in England then the breach of contract and tort claims would be lost in early 2013. In Scotland, if the IRSA was entered into in early 2007 then assuming the first interest payment loss was sustained shortly after the IRSA was taken out then the right to bring an action would be lost in early 2012.
STICK OR TWIST?
Many customers will be reluctant to take action due to concerns it will affect their business relationship with the bank and they will be treated less favourably in the future. However given the risk of many claims being time-barred, customers should now give serious consideration to raising a court action to preserve their right and then put the action to sleep until the outcome of the FSA review is known. If customers fall outwith the FSA scheme or the compensation awarded by the bank is derisory then misplaced faith in the FSA scheme could leave those customers without a right of redress if their claim is time-barred due to failing to raise court proceedings within the specified statutory time.
It should be borne in mind that the law relating to time bar of the right to bring court proceedings is complex. It is necessary to take legal advice on your own specific circumstances and accordingly this article is for general information only and does not purport to be legal advice.
If you require further information on interest rate swap agreement mis-selling, please contact a solicitor in the dispute resolution team on 0131 226 8200.