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Contractual Terms Exclude Liability for Negligent Advice

Crestsign Ltd v National Westminster Bank plc and Royal Bank of Scotland plc [2014] EWHC 3043, 26 September 2014.

Liability for negligent advice provided by banks in respect of interest rate swaps sold to a retail customer was successfully disclaimed by the contractual terms of business which stated that the banks had a non-advisory role. This was despite the advice pre-dating the parties entering the swap. Obiter the court ruled that whilst the banks did not have a "duty to educate", they did have a duty to give full and accurate information on products which the banks chose to present.

Mr and Mrs Parker owned and were directors of Crestsign Ltd (Crestsign), a property investment company. Crestsign financed its investments through interest-only bank loans secured against the investment properties. In 2007 Crestsign sought to refinance the loans and, after discussions with National Westminster Bank plc (NatWest), entered into a five year, GBP 3.5 million loan facility. One of the conditions for the loan was for Crestsign to agree to an "Interest Rate Management" product provided by The Royal Bank of Scotland plc (RBS, an associated company of NatWest). Mr Parker, who took responsibility for discussions with the banks, was unfamiliar with such products.

Mr Parker discussed the potential swap structures with Mr Gillard, an interest rate risk manager for RBS, and Mr Flack, a relationship manager for NatWest. Mr Parker then received a number of documents. The "Risk Management paper" set out four potential structures, emphasising that two in particular were suitable for Crestsign. It warned that potential break costs could be "substantial". Further, a number of documents included the terms on which business was to be entered into. In particular, the Terms of Business for Retail Clients included the following disclaimer, in bold:

"We will not… provide you with advice on the merits of a particular transaction or the composition of any account… in relation to any transaction or account. "

Crestsign entered into a callable swap on 6 June 2008 for ten years (the Swap) by way of a "trade call". A written acknowledgment was sent to Crestsign and contained wording to the same effect as the terms of business. By 5 February 2009, the Bank of England's base rate had fallen to 0.5% and Crestsign benefitted from the initial variable rate.

However, under the terms of the Swap, after the second anniversary, and for the remainder of the Swap, Crestsign had to pay RBS the difference between the base rate and fixed swap rate of 5.65% on a "debt profile" of GBP 3.5 million, on top of interest of 2% on the underlying loan. When Mr Parker attempted to refinance Crestsign's borrowings with another lender, the Swap's break costs were prohibitive.

Crestsign claimed it had suffered economic loss as a result of negligent advice given or statements made by the banks. At the time of the case, Crestsign was also seeking redress through the banks' internal complaints procedures and the Financial Conduct Authority's review into interest rate hedging products, although the judge noted that this did not affect his decision making.

Did the banks owe a duty to use reasonable skill and care in giving advice about the suitability of the swap?

First, Mr Tim Kerr QC, sitting as a Deputy Judge of the High Court, found that the banks, represented by Mr Gillard and Mr Flack, had provided "advice" in a series of meetings and communications with Crestsign. This was primarily on the basis that Mr Gillard recommended specific swap structures for Crestsign's business, guiding Mr Parker towards certain choices by choosing not to provide information about products other than fixed-rate swaps. Moreover, Mr Gillard was brought in specifically as an expert on potential products with the task of explaining them to Crestsign.

The judge found that the banks owed a duty to use reasonable skill, relying on the established principles set out in Hedley Byrne v Heller & Partners [1964] AC 465. As the judge noted, "the disparity in knowledge and expertise and the respective roles of the two men was such that it was reasonably to be expected that Mr Parker would rely on Mr Gillard's skill and judgment and… it would be reasonable for him to do so."

However, as held in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, "an assumption of responsibility may be negatived by an appropriate disclaimer." In Crestsign the banks had successfully disclaimed responsibility for the advice they provided because it was "unequivocal" that the disclaimers were "basis" clauses rather than exclusion clauses; "they defined the relationship as one in which advice was not being given". These clauses had been drawn to Mr Parker's attention in a cover letter to the Terms of Business for Retail Clients and Standalone Derivate Terms documents sent to Crestsign two days before the transaction completed; they were also repeated in other transaction documents. The cover letter stated that the terms would apply to all dealings between the banks and Crestsign. Mr Parker understood that the terms were intended to have legal effect.

The judge made two interesting comments in obiter. First, had the disclaimer been found to be an exclusion clause, challengeable under s2 Unfair Contract Terms Act 1977 (UCTA), the judge would have found it to be an "unreasonable" exclusion of liability for negligence. This was because the market for derivative products was complex and poorly understood by inexperienced customers such as Crestsign, and expert advice was not readily available to Crestsign. Secondly, if the judge had not found that the duty of care in relation to the giving of advice had been successfully disclaimed, there would have been a breach. It was obvious that, at the time of discussions, any of the proposed structures bore an unacceptable risk of locking Crestsign into a ten year swap with potentially very high interest payments and potentially prohibitive break costs, when the loan was for only five years. The judge considered whether the regulatory regime applying to Mr Gillard and Mr Flack, namely the Financial Standards Authority's (as it was then) Conduct of Business Sourcebook (COBS), assisted the court in assessing whether the common law duties of care asserted by Crestsign arose and, if they did, whether they were breached. However, the judge held there was a breach without a detailed analysis of the COBS rules. The judge also said that common law duties and COBS duties are not to be treated as co-terminous and that breach of a COBS duty is not necessarily common law negligence. This is in line with case law where courts have been reluctant to import regulatory standards into common law in non-advised sales by banks (see Green v Rowley v Royal Bank of Scotland [2013] EWCA Civ 1197).

What duty did the banks owe when giving information about the swap?

The judge, noting that the specific duty would depend on the circumstances of the person giving the information, found that Mr Gillard's duty was to explain fully and accurately the nature and effect of the products which he selected to present.

The banks did not owe a duty to explain other products that Crestsign might have wanted to purchase, but which the banks did not want to sell, nor did the banks owe a "duty to educate" Mr Parker about the products they did want to sell. Both of those would stray into the territory of advice giving, which was excluded under the documents. However, the bank's duties did extend to correcting any obvious misunderstandings of Mr Parker and answering any reasonable questions he might ask about the products that the banks had chosen to provide information about.

Did the banks breach their duty when giving information about the swap?

The banks did not act in breach of this duty. The judge considered the correspondence between the banks and Crestsign, and the documents provided. The judge found  that Mr Gillard's communications were not inaccurate or misleading. Further, the banks were not under a duty to explain the obvious, for example that the bank may cancel the Swap if it was no longer valuable to them. Importantly, the judge noted that there were multiple occasions on which Mr Parker could have asked reasonable questions but did not.

Contractual estoppel

The banks' alternative argument was that the terms of business in the post-contract acknowledgement contractually estopped Crestsign from asserting the existence of the duty of care on which it then relied, applying Raiffeisen Zentralbank v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm). Crestsign argued that the terms attempted to "rewrite history" (see Raiffeisen) by trying to define the relationship as one in which advice was not given, when in fact the advice had been given, and therefore could not contractually estop Crestsign from relying on the duty of care owed to it by the bank not to provide negligent advice. Whilst Crestsign argued that it was clear that the banks were providing advice contrary to the terms of business, the judge found that it was not always clear when the provision of information became the giving of advice, and as such it would be incorrect to say the terms attempted to "rewrite history". The judge supported the banks' contractual estoppel argument; however, given the finding that the terms of business disclaimed any assumption of responsibility by the banks, this finding was obiter.

Comment: This was a pyrrhic victory for Crestsign: it won in principle but was defeated by the facts. The court found that the banks had given negligent advice, but the "basis clauses", which had been drawn to the claimant's attention, saved them. This was so, despite the fact that, by the time the contract was entered, the negligent advice had already been given.

For banks to successfully disclaim responsibility for any advice given, it is important for basis clauses to clearly define the non-advisory relationship and be drawn to the customer's attention before the contract is entered, although it should be noted that each case is highly fact dependent.

The ruling is also interesting for its confirmation that, when acting in a non-advisory role, banks do not have a duty to:

·         "educate" their clients;

·         explain other products that a client might want to purchase; or

·         explain the obvious.

A bank must, however, correct any obvious misunderstandings and answer any reasonable question. Any information that a bank provides must be accurate and not misleading.