High Court holds tortious claim unsustainable in respect of interest rate hedging product redress scheme
In the recent case of CGL Group Ltd v (1) Royal Bank of Scotland plc (2) National Westminster Bank plc, the High Court was satisfied that a bank did not owe its customer a tortious duty of care in operating a redress scheme for alleged mis-selling of interest rate hedging products (IRHPs).
A version of this article was previously published by Practical Law, and is reproduced with the permission of the publishers.
In July 2006 and April 2007, CGL Group Ltd (CGL) purchased two hedging products from the defendants (collectively, the Bank), a base rate collar trade and an amortising base rate swap.
Around February 2009, CGL's payments to the Bank increased significantly, following an unprecedented decrease in the Bank's base rate. In July 2009, one of CGL's directors complained to the Bank about "hedging funds mis-sold to me", a complaint which he described as of a "serious nature". In a subsequent discussion with the Bank in November 2009, CGL's director said he felt he had "been misled and mis-sold…because [he] didn't want it and they pestered [him] and pestered [him] and it was just put in front of [him] to sign, and…it wasn't really explained".
The collar was subsequently closed out on 12 July 2010 at a cost of £53,000 and half of the base rate swap was closed out on 4 August 2010 at a cost of £142,000.
The redress scheme
In 2012, the FSA (the predecessor to the FCA) undertook a review of the sale of IRHPs to small businesses. This ultimately led to compromise agreements between the FSA and a number of banks whereby the banks agreed to carry out a review of sales of IRHPs to "non-sophisticated" customers and pay redress where mis-selling was found. As part of the review, the FCA served on each bank a notice under section 166 of the Financial Services and Markets Act 2000 requiring the bank to appoint a skilled person to report to the FCA on the bank's conduct of the review. The skilled person also reviewed each final determination of redress made by the bank.
In November 2013, CGL was told that it would qualify for review under the redress scheme. In August 2014, it was informed that it qualified for redress in respect of the collar trade but not the swap.
The claim and the current applications
On 5 January 2015, CGL issued proceedings against the Bank. In October 2015, the Bank applied for the claim to be struck out on the basis that it was statute barred, or alternatively, for summary judgement. CGL cross-applied to amend its claim to allege that the Bank had breached a common law duty of care, arising from its agreement with the FSA, to:
- conduct the review in accordance with undertakings given to the FCA;
- provide CGL with appropriate, fair and reasonable redress; and
- conduct the review with reasonable skill and care.
An application for a similar amendment had been successful in Suremime Ltd v Barclays Bank plc  EWHC 2277 (QB), decided in July 2015.
Was the original claim statute-barred?
Under section 14A of the Limitation Act 1980, a claimant must bring a claim for negligence either within six years of the cause of action accruing or, if later, within three years from the earliest date on which it had both the knowledge required for bringing an action for damages and the right to bring it. "Knowledge" includes knowledge that the claimant might reasonably have been expected to acquire from facts observable or ascertainable by it (generally considered 'actual' knowledge) and from facts ascertainable by it with the help of expert advice that it would be reasonable for it to seek (generally considered 'constructive' knowledge).
CGL accepted that the primary limitation periods had passed for its principal claim of mis-selling (that is, six years from breach of contract or from damage). However, it argued that the earliest it could have known to attribute its losses to the Bank's negligence was in June or July 2012 (around the time the FCA announced the results of its review of sales of IRHPs). If that was correct, CGL had a further three years from that point to bring a claim in negligence. The claim had been brought within that time period.
After a brief review of the authorities, the court was satisfied that by mid-November 2009 CGL had had sufficient knowledge to bring a claim against the Bank, based on the complaints made by its director to the Bank at that time. Unless CGL succeeded in amending its claim to include a breach of duty by the Bank in operating its redress scheme, therefore, its claim was statute barred from November 2012 (or April 2013 in respect of the second hedging product).
The test for amending CGL's claim
It was accepted by the parties that the relevant test amending CGL's claim was the summary judgment test. Under this test, the amendment should not be permitted if the new claim had no real prospect of success and there was no other compelling reason why the case or issue should be disposed of at a trial (Civil Procedure Rule 24.2).
Any prospect of establishing a duty of care?
CGL invited the court to follow Suremime in accepting that a duty of care owed by the Bank in the operation of the redress scheme was arguable. The court was not willing to do so and considered, from first principles, whether CGL had any prospect of establishing a duty of care on the Bank at trial.
CGL argued that a duty of care arose because:
- the Bank had assumed responsibility for the outcome of the review; or
- the threefold test (foreseeability, proximity, fairness) in Caparo Industries v Dickman  2 WLR 358 had been met; or
- imposing a duty under the circumstances was an incremental development in the law of negligence.
Alternatively, CGL argued that a duty of care arose under White v Jones  2 AC 207, where a duty was held to be owed by a solicitor who negligently drafted a will not only to the testator, but also to the disappointed beneficiary. Here, if the Bank failed to operate the redress scheme properly, the FSA, as party to the agreement with the Bank, would have a contractual claim, but no loss, while CGL would suffer a loss, but, in the absence of a duty of care, no claim.
The court was satisfied that "no duty of care can arguably be said to arise" for the following reasons:
- Clause 9 of the agreement between the Bank and the FCA stated that "a person who is not a party to this agreement has no right under the Contract (Rights of Third Parties) Act 1999 or otherwise to enforce any term of this agreement" (emphasis added). Although the terms of the agreement were not known to CGL before the proceedings, the court considered that the drafting amounted to an express disavowal of responsibility. Further, the court saw the process as controlled not by the Bank, but by the skilled person, who would approve every determination made by the Bank, a division of responsibility that was inconsistent with the Bank assuming a duty of care to CGL.
- The circumstances in which a customer may bring proceedings in respect of a bank's obligations to a regulator are tightly constrained by statute and did not apply in this case. To impose a duty of care in the circumstances would, the court held, drive the proverbial coach and horses through the statutory scheme.
- The court saw no need to extend the principles of White v Jones to this case, as CGL had originally had a cause of action against the Bank. It had merely lost the ability to bring the action as a result of limitation.
Comparison with Suremime
This result is at odds with the decision in Suremime, where the court had held that a duty of care in operating a redress scheme was at least arguable (although establishing the existence of such a duty would await trial). In particular, in Suremime:
- Drafting identical to Clause 9 was not seen as so determinative in excluding a duty of care; nor was the existence of the claimant's original cause of action seen as prohibiting any extension of White v Jones.
- The court was much influenced by the possibility that some customers, who satisfied section 138D of the Financial Services and Markets Act 2000, could bring a claim against the bank in respect of the operation of the redress scheme, while others, who did not satisfy section 138D, could not if no duty existed. This potential discrepancy was not mentioned by the court in CGL.
- The court suggested that the case for a duty of care would be strengthened if no claim for judicial review lay against the independent reviewer/skilled person, as has indeed proved to be the case recently, in R (Holmcroft Properties Ltd) v KPMG LLP  EWHC 323 (Admin). The court in CGL did not comment on any public law remedies.
- The court saw the question of whether customers had private law remedies in the context of the redress scheme as a question of "some public importance", referring to other claims seeking to make similar arguments. It therefore considered there was a compelling reason for permitting the claim to proceed to trial. In CGL, the court did not consider this aspect of the summary judgment test.
In Suremime, however, the court was at pains to emphasise that it did not have all the facts before it. The court in CGL considered that it did have the full factual and regulatory matrix before it and so held that Suremime was constrained by the limited facts then before the court. However, the court in CGL went on to comment that if all of the available facts were before the court in Suremime, it was wrongly decided.
Interestingly, in an even more recent case, WW Properties Investments Ltd v National Westminster Bank Plc  EWHC 378 (QB) (1 March 2016), the court refused to allow a similar amendment, albeit that the decision seemed largely based on the incoherence of the draft pleading and neither Suremime nor CGL were cited. However, the court in WW Properties did not automatically exclude the possibility of fresh proceedings being brought contending for such a duty of care.
Numerous claims have arisen out of the banks' (alleged) mis-selling of IRHPs before the financial crash. While many may have been resolved through the redress schemes, others have not, with claimants mounting a variety of lines of attack, including:
- the impact of LIBOR-fixing in Property Alliance Group Ltd v Royal Bank of Scotland (ongoing);
- the 'mezzanine duty' in Crestsign Ltd v National Westminster Bank plc and Royal Bank of Scotland plc  EWHC 3043 (Ch) (covered in The beginning of the end to mis-selling claims? (now under appeal));
- the judicial review of the independent review in R (Holmcroft) v KPMG LLP  EWHC 323 (also under appeal); and
- claims by individual shareholders of companies affected in Sivagnanam v Barclays Bank plc  EWHC 3985 (Comm).
As time passes, however, more and more potential claims are likely to be time-barred and claimants will be looking to bring claims in respect of more recent related failures by the banks. This poses a difficult policy decision for the courts. Some judges, as in CGL, may see such attempts as a cynical attempt to circumvent the limitation of the original mis-selling claim. Others, as in Suremime, may consider it unjust for claimants, who were encouraged to wait for the outcome of the redress scheme rather than commencing proceedings, to be deprived by limitation of any remedy if the scheme was improperly applied. The issue seems set for an appeal.