Successful limitation defence in swaps mis-selling claim
25 July 2016
In Qadir & anr v Barclays Bank plc  EWHC 1092 (Comm) the High Court struck out a claim for negligent advice on suitability in connection with the sale of interest rate hedging products (IRHP), due to the expiry of the limitation period. The claimants had the knowledge required to bring their claim more than three years prior to commencement, in that they were aware: (i) that the IRHP were loss-making; and, (ii) that there were alternatives to the particular IRHPs purchased. At this point they were in a position to make enquiries as to the adequacy of the product suitability advice given to them. The complaint related to advice given in spring 2008 by the defendant (the Bank) to Mr Qadir and Mr Hussain (the claimants) in connection with their entry into two interest rate swaps (the Swaps).
The claimants had refinanced two existing facilities with the Bank and taken out a fresh loan to cover a new hotel acquisition. All three loans included express conditions requiring hedging, and three types of IRHP were discussed between the Bank and the claimants. The claimants ultimately entered into the Swaps (with terms of ten and 15 years respectively) thereby fixing their interest rate at 5.42% regardless of fluctuations in variable interest rates. Following the October 2008 global financial crisis, variable interest rates fell to unprecedented lows, leading to the claimants being substantially out of the money.
On a number of occasions between 2009 and 2011, the claimants sought to restructure the Swaps, discussing breakage fees with the Bank, and in March 2010 one additional swap (not the subject of this claim) was partially terminated.
In 2012, the Financial Services Authority (as it was then known) announced it had found failings in the sale of IRHPs to SMEs and that four banks (including the Bank) had agreed to carry out a review (the Review). While redress was offered and accepted for a swap not the subject of the claim, the Swaps were found to have met the agreed sales standard. The Swaps were ultimately terminated (with breakage fees) in October 2014. The claim was commenced on 5 January 2015.
The Bank applied to strike out the claim on the basis that the limitation period had expired. While it was agreed that the primary six-year limitation period had expired, the claimants sought to rely on the 'safety net' of the s14A Limitation Act 1980 which provides a supplemental time limit of three years from the date where a claimant has the “knowledge required for bringing an action for damages”. Such knowledge must include
- material facts about the damage (which pertains primarily to quantum); and
- knowledge that the damage was attributable in whole or in part to the act or omission alleged to constitute negligence. This requires the claimants to know the factual essence of the claim, to realise that the damage was capable of being attributable to the Bank and to begin to investigate further.
Factual essence of the claim
It was agreed between the parties that the factual essence of the claim was the suitability of the Swaps: that is, whether they were inherently unsuitable products to be recommended and sold to the claimants.
Therefore, to determine when the s14A period began to run, the Court needed to identify the relevant “building blocks” of knowledge necessary for the claimants to be in a position to investigate whether a complaint was viable.
Sara Cockerill QC (sitting as a Deputy Judge of the High Court) held that there were two building blocks required to enable the claimants to question whether a better route had been open to them: (i) that the Swaps were loss-making; and, (ii) that there were alternatives to the Swaps which might have been advised to them.
The first criterion was easily satisfied in the factual matrix, given that the claimants had made enquiries as to the cost of breakage, the amount paid out under the Swaps, and the fact that it was apparent to them that a movement in interest rates such as to make the Swaps profitable was highly unlikely.
On the second, the Court found that the claimants had been aware from the time they entered the Swaps that they had received advice from the Bank, and that they had been advised of alternatives to the Swaps. Even if they did not recall the details of the specific products or their relative merits, that knowledge of the existence of a choice of products was sufficient to commence the running of the limitation period. The Court rejected the claimants' argument that they needed specific awareness of the cap alternative which they pleaded should have been advised, or the merits of alternative products – this was a matter of particulars which would emerge during the course of their enquiries, rather than the “thrust” of their claim.
The claimants contended that the Bank was estopped from raising a limitation defence on the basis that statements made in three letters sent by the Bank in the course of the Review caused them to believe that they would later have time to bring a legal action. The Court rejected these arguments: the statements (which related to the use of claims management companies and the claimant's ability to take action through the courts) were not unequivocal representations that the Bank would not enforce its strict legal rights.
As such, the Bank's application was successful and the claim was struck out in its entirety.
In the context of numerous IRHP mis-selling claims now making their way through the courts, the case is a helpful elucidation of the knowledge required on the part of a claimant to trigger the commencement of the limitation period under s14A. While the broader application of such decisions can be circumscribed where the facts are unique (and in this case, the Court was able to distinguish two recent similar mis-selling limitation decisions on just such a basis), the “building blocks” set out in this case are sufficiently general and non-factually specific so as to enable the case to be a useful precedent going forward.
In addition, the Court's rejection of the claimants' arguments on estoppel at a strike-out stage is particularly helpful to banks in their on-going defence of numerous post-Review mis-selling claims.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information please contact Sarah Garvey email@example.com, or tel +44 20 3088 3710.