• Court Of Appeal Hands down Judgment in First Interest Rate Swap Case
  • October 24, 2013
  • Law Firm: Dentons Canada LLP - Toronto Office
  • The Court of Appeal1 has dismissed the appeal brought by Mr Green and Mr Rowley (G&R) against the decision of HHJ Waksman QC (the Judge) that The Royal Bank of Scotland plc (the Bank) had not mis-sold them a 10-year base rate swap (the Swap).2 This is the first time the Court of Appeal has decided a case regarding the sale of an interest rate management product (commonly known as a swap).

    G&R sought to appeal the Judge's decision on two grounds:

    1. Ground one: whether the Bank's duties under COB 2.1.3 and COB 5.4.3 of the Conduct of Business Rules (the COB Rules), in force at the time, relating to communicating in a clear, fair and not misleading fashion and taking reasonable steps to ensure a customer understands the risks of a transaction, give rise to a common law "Concurrent Duty" of care owed by a bank to its customers.
    2. Ground two: if there is a "Concurrent Duty" what the "Information Threshold" (the quality and extent of the explanation of risk (specifically in relation to break costs)) is that a bank should satisfy, so as to comply with its duties under the COB Rules or the "Concurrent Duty". The Financial Conduct Authority (FCA) intervened in the appeal to make submissions on this second ground.

    The Court of Appeal (Richards LJ, Hallett LJ and Tomlinson LJ) delivered judgment last week explaining why it rejected "Ground one" by refusing to create a new common law duty based on the COB Rules. The judgment does not deal with "Ground two" as G&R's failure on the first ground meant that the Court decided (with the agreement of all the parties) not to hear the second ground. The impact of this is that the FCA did not make any oral submissions to the Court of Appeal on break costs. The Court of Appeal's judgment has not disturbed the Judge's first instance findings that the Bank gave G&R sufficient disclosure about break costs as well as the essential risk of the Swap (that, if interest rates fell, G&R would do worse overall).

    The background

    On 25 May 2005, G&R entered into the Swap with the Bank. The meeting at which the Bank explained the Swap took place on 19 May 2005. Exactly six years after the Swap was entered into, on 25 May 2011, G&R issued proceedings against the Bank. At the trial, counsel for G&R conceded that their claim for breach of statutory duty, based on alleged breaches by the Bank of COB Rules 2.1.3 and 5.4.3, was time-barred. As such, G&R found themselves in the same position as companies that have been classified as private customers3 to which the COB Rules apply but that are disqualified from bringing claims because of the definition of a "private person" within the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001.

    G&R had to fall back on a claim that the Bank had breached its common law duty of care and submitted that the COB Rules should be incorporated as part of that duty. The Judge rejected this argument and said that COB 2.1.3 (to the extent it required anything beyond the Hedley Byrne duty) and COB 5.4.3 formed no part of the common law of negligent misstatement.

    The appeal

    Counsel for G&R, relying on the speech of Lord Browne-Wilkinson in X (Minors),4 submitted that "conventional jurisprudence holds that a breach of statutory duty is actionable as a breach of a concurrent common law duty of care where either the purpose of the statute is to confer protection on a defined class of individuals (sounding in the entitlement to damages) or (in like circumstances) where the statutory duty has been carelessly executed". He, accordingly, tried to persuade the Court that, in circumstances where failure to comply with a statutory duty (such as COB 5.4.3) is likely to give rise to damage to a counterparty, robbing it of its informed choice, a duty of care arises at common law which is coextensive or concurrent with that imposed by statute.

    The Court of Appeal regarded this argument as "misconceived". The Court of Appeal's view was that G&R's counsel's submission amounted "to saying that the mere existence of the COB Rules gives rise to a coextensive duty of care at common law". The Court of Appeal regarded section 150 (now 138D) of the Financial Services and Markets Act 2000 (FSMA) as providing a perfectly adequate remedy for contravention of COB 5.4.3, in circumstances in which the Bank did not "cross the line" and give advice to G&R but had simply relayed information in relation to the Swap. In fact, the Court of Appeal regarded G&R's counsel's argument that the Court should find the existence of a coextensive duty to allow a limited company to pursue an action under section 150 of FSMA (pursuant to which only individuals can generally bring claims) as "an invitation to the court to drive a coach and horses through the intention of Parliament to confer a private law cause of action upon a limited class".

    Conclusions

    The Court of Appeal's judgment resoundingly rejects the suggestion that the Bank owed G&R a common law duty of care which involved taking reasonable care to ensure that they understood the nature of the risks involved in entering into the Swap. This is a useful judgment for banks as it confirms recent decisions in cases involving currency and interest rate swaps, namely Titan Steel Wheels5 and Grant Estates,6 in which the courts have refused to allow companies to bring claims for breach of section 150 of FSMA. The Court's decision (with the agreement of the FCA and the other parties) not to hear any submissions in relation to break costs also means that the ruling by the Judge at first instance, that the disclosure of potential break costs given to G&R was sufficient to comply with both COB Rules, remains intact.

    1 John Green and Paul Rowley v. The Royal Bank of Scotland plc (Registered in Scotland 90312) [2013] EWCA Civ 1197.
    2 John Green and Paul Rowley v. The Royal Bank of Scotland plc [2012] EWHC 3661 (QB).
    3 The Conduct of Business Sourcebook Rules which apply with effect from 1 November 2007 use the term "retail" rather than private customers.
    4 X (Minors) v. Bedfordshire County Council [1995] 2 AC 633 at 730.
    5 Titan Steel Wheels Ltd v. The Royal Bank of Scotland plc [2010] EWHC 211 (Comm).
    6 Grant Estates Ltd. v. The Royal Bank of Scotland plc. [2012] CSOH 133.