Lessons learned from Property Alliance Group v RBS
This article assesses the key aspects of the High Court's judgment and considers their implications for similar claims.
The key claims made by Property Alliance Group Ltd (PAG) in Property Alliance Group Ltd v The Royal Bank of Scotland plc  EWHC 3342 (Ch) (21 December 2016) were:
- For breach of a "mezzanine" duty of care, as described in Crestsign Limited v National Westminster Bank plc and The Royal Bank of Scotland plc  EWHC 3043 (Ch) (see The "mezzanine" duty claim below).
- Relating to RBS' Global Restructuring Group (GRG) (see The GRG claims below).
- Relating to LIBOR manipulation (see The LIBOR claims below).
The "mezzanine" duty claim
Where a bank explains to its customer the terms and features of financial products it wishes to sell, it will invariably owe a duty of care to its customer not to make negligent misstatements in what it chooses to say.
Since the decision of the High Court in Crestsign Limited v National Westminster Bank plc and The Royal Bank of Scotland plc  EWHC 3043 (Ch), many misselling claimants have alleged a further duty, which was held to exist in that case on the basis of dicta of Mance J (as he then was) in Bankers Trust International plc v PT Dharmala Sakti Sejahtera  CLC 518. This further duty is the duty of a bank that embarks on an explanation of financial products it wishes to sell to take reasonable care to give that explanation accurately and as fully and properly as the circumstances demand. This duty is therefore a halfway house between a duty not to make negligent misstatements and a full advisory duty, and is therefore often referred to as a "mezzanine” duty of care.
The existence of this duty is controversial, and authorities subsequent to Crestsign are divided. In Thornbridge Limited v Barclays Bank plc  EWHC 3430 (QB), the court held that Bankers Trust (on which the decision in Crestsign was based) was not "authority for a wider or broader duty to provide information in the absence of an advisory relationship". However, in Wani LLP v The Royal Bank of Scotland plc  EWHC 1181 (Ch), the court held that "the intermediate common law duty of explanation which the High Court identified and applied in Crestsign was not a jurisprudential novelty" and was "firmly based on the judgment [in Bankers Trust]".
In PAG, the court reviewed these authorities in detail, concluding (at ) that a bank that provides information about products it wishes to sell will not always be under a duty to explain those products fully, in the absence of an advisory relationship. Whether such a duty arises will depend on all the facts and circumstances of the case. Applying the threefold test from Caparo Industries plc v Dickman  2 AC 605 (that is, foreseeability, proximity and what is fair, just and reasonable), the court held (at ) that RBS did not owe such a duty to PAG. The court did not hold that such a duty could never exist, but instead that claimants alleging the duty would need to show that it arose based on the application of general principles to their specific facts. The court did not offer any express guidance on the circumstances in which such a duty might arise.
It is not clear from the decision whether the court considered the mezzanine duty alleged by PAG to be a species of advisory duty or not. Accordingly, the interplay between the mezzanine duty and potential defences of contractual estoppel and based on banks' standard contractual terms is also unclear. The court noted (at ) that it would be a duty "on the advisory spectrum" and (immediately before expressing its conclusion that RBS did not owe such a duty) noted (at ) that "it is important to bear in mind that any duty to advise had been expressly excluded by the terms of the parties' contractual arrangements".
However, the court also expressed the view (obiter, at ) that the duty of care alleged "would not have fallen naturally" within the standard form ISDA non-reliance clause on which the bank relied. This suggests that, if the court had found that PAG had a good claim for breach of a mezzanine duty, then it would not have been contractually estopped from bringing that claim.
Ultimately, the mezzanine duty warrants consideration by the Court of Appeal. However, PAG is a further decision (after Thornbridge) in which the duty has been interpreted narrowly. Although this decision is not helpful to claimants alleging a mezzanine duty, it is not fatal to their claims. However, it will be important for claimants to be able to identify particular features of their relationship with their bank which distinguish them from PAG.
The GRG claims
RBS' former turnaround division, the Global Restructuring Group (GRG), has been the focus of considerable attention since the publication in November 2013 of the independent report of Lawrence Tomlinson, who was then the Entrepreneur in Residence at the former Department for Business, Innovation and Skills.
In November 2016, the FCA published a statement providing an update on the review of GRG's treatment of small and medium-sized enterprise (SME) customers. The review was carried out by Promontory, who were appointed by the FCA in January 2014 as a skilled person under section 166 of the Financial Services and Markets Act 2000 (FSMA).
PAG represents the fullest judicial consideration to date of claims relating to the alleged mistreatment of RBS customers by GRG. PAG's GRG claims failed in all respects. The court found (seemingly with little hesitation) that the implied contractual terms on which PAG relied - broadly, to act in good faith and in a non-arbitrary and capricious manner - could not be implied into its agreements with RBS and that, in any event, those terms would not have been breached by the conduct complained of.
The court reaffirmed that there is no general doctrine of good faith in English contract law, an issue that has been of particular debate since Yam Seng PTE Ltd v International Trade Corporation Ltd  EWHC 111 (QB). Although such a term can be implied into some contracts in the normal way, based on the presumed intention of the parties, the court's analysis suggests that it will be very difficult to do that in the context of standard form agreements between sophisticated commercial parties acting at arm's length.
The court was also clear in its view that an obligation to act in a non-arbitrary and capricious manner (often referred to as a Socimer implied term, after Socimer International Bank Ltd (in liquidation) v Standard Bank London Ltd  EWCA Civ 116, can only be implied in respect of specific contractual rights which require a party to exercise a discretion, in the sense of making an assessment or choosing from a range of options. If that analysis is correct, then such a term can only be implied in relation to the exercise of relatively limited set of contractual rights, such as carrying out a valuation (as was in issue in Socimer itself), as opposed to requiring a valuation or instructing a third party to conduct one.
Generally, PAG illustrates the difficulty in converting complaints about perceived unfair treatment by a lending bank into successful legal claims in the absence of breaches of express contractual terms.
The LIBOR claims
PAG also represents the fullest judicial consideration to date of claims based on implied representations and contractual terms in relation to the integrity of LIBOR. With minor exceptions, PAG's claims again failed in all respects.
The court noted (at ) that it was not sufficient to give rise to an implied representation to show that something (for example, the integrity of LIBOR) would be assumed by the reasonable representee given the context. Rather, there had to be identifiable words or conduct on the part of the bank from which the representations could be inferred.
PAG was unable to point to any words or conduct beyond the proffering of swaps referenced to 3M GBP LIBOR, and, in the context of PAG's case, the court did not consider that this was conduct from which the representations alleged could be inferred by a reasonable representee. PAG's case also suffered from difficulties as a result of the widely cast, detailed and highly technical nature of the representations alleged (although that may have been necessary to improve PAG's prospects of demonstrating that the representations were false). For example, the first representation alleged was that:
"On any given date up to and including the date of each of the [swaps]: LIBOR represented the interest rate as defined by the BBA, being the average rate at which an individual contributor panel bank could borrow funds by asking for and accepting intrabank offer in reasonable market size just prior to 11am that date."
The court held that there had been no words or conduct from which the representations PAG alleged could have been implied. However, the court noted (at ) that it did not agree with RBS' position that "the use of a LIBOR benchmark was no more than a reference to a number on a screen" and did consider that "it was capable of giving rise to much more limited and less technical representations".
Specifically, the court stated that, had there been sufficient conduct, it would have found that there had been implied representations that "LIBOR in relation to the tenor and currency to which the transaction related was set at the date of the transaction and would be set throughout its term in accordance with the relevant definition, being the BBA definition"  and "RBS had no reason to believe that LIBOR in relation to the tenor and currency to which each Swap related would be anything other than the interest rate as defined by the BBA during the life of the Swap" . The court did not make any suggestions as to what conduct might have formed the basis for the alternative implied representations it set out.
The technical nature of the representations alleged was also fatal to PAG's case on reliance. The court held that PAG's main witnesses simply understood LIBOR to be "a commercial rate of interest" which they assumed would be set in a "straightforward and proper manner".
Accordingly, they could not have understood the representations alleged, gave no thought to them and therefore could not have relied on them.
The court's analysis suggests that the claims most likely to succeed are those in which the claimant's principals were sophisticated and had a detailed understanding of what LIBOR was and how it was (supposed to be) generated. Also, although the court did not go so far as to say that merely proffering LIBOR as a benchmark could never carry with it any implied representations, it is likely to be preferable for claimants if there have been substantive discussions with the bank about what LIBOR is and why the bank is proposing it as a benchmark rate.
Falsity and breach
It is clear from the court's detailed factual summary that there was a significant volume of evidence before it in relation to alleged wrongdoing by RBS in relation its LIBOR submissions. However, the court was ultimately not satisfied that PAG had discharged its burden of proof in relation to 3M GBP LIBOR (to which the swaps were referenced) and was not prepared to draw the required inferences from CHF and JPY LIBOR (in respect of which adverse regulatory findings have been made). This suggests that claimants with claims in respect of specific benchmarks for which there have already been adverse regulatory findings against the defendant bank are likely to find it easier to establish falsity/breach of any implied representations/contractual terms.
Damages for breach of implied contractual terms
Generally, claims in misrepresentation relating to LIBOR manipulation are considered preferable to claims for breach of contract because of the availability in misrepresentation of the remedy of rescission, meaning that, if a claim is made out, the swaps will be unwound (or a damages payment made in lieu of rescission, with the same economic effect). The remedy for breach of an implied contractual term is damages on the contractual measure, which requires a comparison of the actual payments under the swaps with those that would have been made had the implied terms been performed, that is, if LIBOR had not been manipulated (specifically, downwards, in an attempt to give the impression of creditworthiness, described in the judgment as "lowballing").
In PAG, the experts undertook the complex exercise of seeking to generate a hypothetical alternative LIBOR rate based by comparing RBS' actual LIBOR submissions with their cost of funding, the latter calculated from actual trade data. PAG's own expert accepted (as recorded at ) that it was "almost impossible to determine the extent of such an effect [that is, any lowballing] precisely" and "that no one can say what the rate should have been where all the banks behaved properly". However, the court noted (at ) that, "given the inherently difficult nature of the task, it would not have been right to put too great an emphasis on [the expert's] diffidence in relation to his assumptions although it would have led to a cautious approach when determining loss towards the bottom end of [the expert's] scale".
As a final point, it is also relevant to note that PAG's expert's quantification of PAG's loss on this measure was in the range of £390,000 to £930,000. As well as being very wide (given the uncertainty in the exercise) this is also a low figure relative to the total payments under the swaps of around £13 million.
In the light of the PAG decision, claims for misrepresentation still appear strongly preferable to those for breach of contract. However, it does suggest that the court may be prepared to take a realistic approach to the quantification of damages for breach of contract, given the complexity of the exercise, and that it will necessarily be based on a number of assumptions.
Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.