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"A case based on hindsight" - misselling claim rejected

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Victoria Williams

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02 February 2016

The High Court in Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB), 27 November 2015 has rejected an interest rate swap misselling claim for losses allegedly arising as a result of the defendant bank having acted negligently, in breach of contract or in breach of statutory duty. The court held that the bank had not assumed an advisory duty; it was only under a duty not to provide inaccurate or misleading information. In light of the historically low interest rates since the 2008 financial crisis, this case was considered to be a "case based on hindsight". The judge doubted whether the ruling in Crestsign v Royal Bank of Scotland [2014] EWHC 3043 (Ch) was correct, finding instead that “a salesman has no obligation to explain fully the products which it is trying to sell”.

In May 2008 the claimant, Thornbridge Limited (a property investment business run by Mr and Mrs Harrison), entered into an interest rate swap with the defendant, Barclays Bank, to hedge its interest rate exposure on a real estate financing, worth GBP 5.7 million. The loan was for 15 years, with interest under the loan agreement accruing at a floating rate calculated by reference to Barclays’ base rate plus a margin of 1.5%, payable quarterly. It was a condition of the loan that the claimant enter into an interest rate hedge for at least five years. The claimant therefore entered into a five-year interest rate swap with the defendant, under which the claimant paid a fixed rate of 5.65% and received from the defendant a floating rate calculated by reference to the base rate.

Following the 2008 financial crisis, interest rates fell to historically low levels and as a result the swap proved to be expensive for the claimant. The claimant subsequently requested a restructuring of the swap but was quoted breakage costs of GBP 565,000. The claimant did not want to pay the breakage costs and the swap continued to maturity.

The claimant issued proceedings against the defendant, claiming damages for losses arising as a result of the defendant allegedly having acted negligently, in breach of contract or in breach of statutory duty in respect of information given and advice provided when the swap was sold to the claimant.

Did the defendant assume an advisory role?

Moulder J noted that a bank does not generally owe a duty of care to advise on the merits of transactions but if they undertake to do so they owe a duty to advise with reasonable skill and care (Hedley Byrne v Heller [1964] AC 465).
The judge considered telephone conversations and email exchanges between the parties, and concluded that the defendant had not assumed an advisory role on the facts of this case:

− The personnel with whom the claimant liaised at the bank were salespeople, not advisers, notwithstanding the fact that they worked in “Corporate Risk Advisory”. They were very familiar with the distinction between execution only and advised transactions.
− The defendant had not received a fee for advice – a relevant factor in finding a non-advisory relationship.
− The defendant had provided information and made predictions in relation to the swap, but had not crossed the line from sales to advice.
− It was clear from the exchanges between the parties that the claimant had understood the interest rate hedging options that he was being offered by the defendant.
− Even if advice had been given in these communications, the giving of advice is not sufficient to establish a duty of care. Applying the dicta of Gloster J in JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm), the salesperson had not gone beyond the “normal recommendations…given in the daily interactions between an institutions sales force and a purchaser of its products”.
− The defendant classified the claimant as a “retail client” and notified the claimant of such by a letter, which enclosed a copy of the defendant’s terms of business. Although clause 3 of those terms stated that the defendant “may from time to time provide you with advice”, this did not amount to a notification that the defendant was advising the claimant in relation to this specific transaction.

Contractual estoppel

The terms of the swap were contained in a written confirmation which incorporated the 1992 ISDA Master Agreement. The confirmation contained a mutual representation stating that each party “is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into the Transaction…”. The judge considered the effect of the clause and held that it created a contractual estoppel, such that even if the defendant had assumed an advisory role on the facts, the claimant would be contractually estopped from arguing that the defendant had assumed an advisory relationship (relying on the judgment of Gloster J in Springwell).

Basis clause or exclusion clause?

The judge also considered that the clause was a basis clause rather than an exclusion clause. The judge stated that the test for whether the clause was a basis clause or an exclusion clause is not whether the clause attempts to rewrite history, but rather as a matter of construction whether the terms defined the basis upon which the parties were transacting business (ie a basis clause), or whether they were clauses inserted as a means of evading liability (ie an exclusion clause). The judge held that in this case it was the former. Nothing turned on the fact that the confirmation was not received back from the claimant until some months after the deal was entered into.

As the clause was held to be a basis clause, it was not subject to the reasonableness test under Unfair Contract Terms Act 1977 (UCTA). However, even if it had been an exclusion clause (and therefore subject to UCTA 1977), the judge held that it would have been reasonable.

FSA rules: claims in contract and for a breach of statutory duty

The claimant also argued that the defendant was in breach of contract for failing to comply with the FSA rules (as applied at the time). The claimant asserted that such rules were incorporated into the contract by a clause in the defendant’s terms of business, which stated that the terms of business and all transactions were “subject to Applicable Regulations”. “Applicable Regulations” was defined to include the FSA rules and any other rules of the relevant market or relevant regulatory authorities, together with all other applicable laws, rules and regulations.

The judge held that this clause did not incorporate the FSA rules into the contract. If the contract was interpreted to incorporate the FSA rules, it would also have to incorporate “all other applicable laws, rules and regulations” which would make the contract unworkable.

Furthermore, the court held that there was no direct right of action for any alleged breach of the FSA’s COBS rules under s138D of Financial Services and Markets Act 2000 (FSMA) as the claimant was not a “private person” (the same also applies in respect of the FCA’s COBS rules).

Was there a broader duty on the defendant to provide information?

Following Hedley Byrne, the court held that the defendant was obliged to ensure that any information it gave to the borrower was accurate and not misleading; the defendant did not by reason of that limited obligation also undertake a positive duty to provide full information about the competing advantages and disadvantages of the products. It was not, on the facts of this case, an advisory relationship.

On considering Crestsign v Royal Bank of Scotland [2014] EWHC 3043 (Ch), Moulder J stated that “each case must depend on its facts but to the extent that the Deputy Judge [in Crestsign] was making a point of general application… the Deputy Judge would in effect have elevated the duty of a salesman to that of an adviser…. in my view the duty of a salesman is not to mislead but in the absence of an advisory relationship, a salesman has no obligation to explain fully the products which it is trying to sell”.

The judge considered whether or not the information provided by the defendant was inaccurate or misleading and concluded that it was not, except for a presentation which contained some incorrect information. On the facts, the judge held that this information was not relied upon and did not cause any loss.


Although cases of this kind are heavily fact dependent, it is interesting to see the High Court applying previous misselling case law. Of particular note are:

− The absence of a fee paid by the claimant to the defendant for advice was relevant to the judge’s decision that there was no advisory duty. The judge considered that the bank’s salespeople were able to express views and predictions on interest rate movements, give explanations on how the interest rate swap worked, and even “endorse” the suggestion of an interest rate swap, without it resulting in the finding of an advisory relationship when taken in the context of the entire dealing (including, importantly, the absence of a fee).

− The judge seems to have doubted aspects of the ruling in Crestsign v Royal Bank of Scotland [2014] EWHC 3043 (Ch) where it was decided that if a bank undertook to explain a particular hedging product, it owed a duty to do so fully, accurately and properly. Moulder J seems to doubt whether “full” information is required in the absence of an advisory relationship, preferring instead the approach (as per Hedley Byrne) that banks are under no obligation to provide full and comprehensive information as regards interest rate hedging products. However, they must ensure that the information that is provided is not misleading or inaccurate.

− The basis clause protected the bank. Even if documentation is agreed after the transaction is entered into (as was the case here), such non-reliance wording may still be considered by the court to form the basis of the relationship between the parties.

In the conclusion to her judgment, Her Honour Judge Moulder stated that “this was a case based on hindsight”. While interest rates have fallen to historically low levels since the financial crisis, it is easy to forget that in 2008 there was also opinion that interest rates would go up. In those circumstances, an interest rate swap of the kind described in this case would have been very profitable to the claimant. It is interesting to see that the courts recognise that hindsight has been the driving factor behind much of this litigation.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey, or tel +44 20 3088 3710.