Side view of corridor and docks.

Don't gamble on a wager

13 April 2016. Published by Alan Williams, Partner and Simon Hart, Partner, Head of Banking & Financial Markets Disputes

In WW Property Investments v Natwest one of many interest rate swaps claims that have been made since the global financial crisis, the High Court confirmed, in line with previous decisions, that interest rate hedging agreements are not wagers in law where at least one party entered into the contract for a genuine commercial purpose and not to speculate.

Interestingly the High Court also struck out a claim that the bank had breached an implied term of the swap agreement that it would not manipulate LIBOR.

The Facts and Proceedings to Date

Between 2004 and 2010 the claimant borrowed money from the defendant (the bank). Over the same period the claimant entered into three interest rate hedging agreements (the collars) with the bank, before closing these out and entering into a further interest rate agreement in 2010 (the swap).

In 2014 the agreements were reviewed (along with similar contracts entered into with borrowers with a number of banks) as part of a review of such agreements pursuant to an agreement the major banks had reached with the FSA (now the FCA) (the FCA Review). Following this review, in August 2014 the claimant accepted an offer of redress from the bank in relation to the collars. The claimant signed a compromise agreement which was stated to be in "full and final settlement" of claims connected with the sale of the collars but reserved its rights to claim for additional losses under the review. A claim in the FCA Review for such additional consequential loss was subsequently made by the claimant but was rejected by the bank. Similarly a claim in the FCA Review for redress in relation to the swap was also rejected.

The claimant subsequently launched legal proceedings against the bank and in July 2015 served particulars of claim. No defence was filed but instead the bank made an application to strike out the claim. The claimant subsequently applied to amend its particulars.

The issues in Dispute

 In summary the claims being advanced were: 

  1. That the collars and swap amounted to contracts for differences and were thus wagers at law. The claimant argued that all interest rate hedging agreements amount to contracts for differences and all such contracts are wagers at common law. As such, the contracts are subject to implied terms that the chances are equal and that the parties possess equal ignorance and/or equal knowledge about the odds. The claimant argued that these implied terms had been breached as the bank had not disclosed to the claimant that the market value on day 1 was in the bank's favour, and because there was not equal uncertainty to both sides, with the result the contracts were voidable and damages payable by the bank.

  2. That the bank either represented or was subject to an implied term in the swap that it would not manipulate LIBOR. (The collars did not reference LIBOR.) The claimant argued that the bank had in breach of the implied representation and implied term manipulated LIBOR to its own advantage causing the claimant loss. The bank argued that this aspect of the case was "incoherent".

  3. That the bank owed the claimant a tortious duty of care in connection with the manner in which it had conducted its review of the collars and swap, which it had breached causing the claimant loss. The bank argued it did not owe the claimant a duty of care in respect of the review.

  4. For rescission of a Property Participation Agreement entered into between the claimant and a subsidiary of the defendant, West Register (Investments) Ltd and also of guarantees given by the claimant's directors and shareholders.

In its defence to each of the claims regarding the collars, the bank relied on the terms of the compromise agreement. The claimant argued in response that the settlement did not exclude the possibility of additional losses being claimed for but the bank argued that additional losses in relation to the collars could only be claimed within the FCA Review and that such claims had already been rejected.


 The Judge ruled that the claims in respect of the collars had been settled under the compromise agreement entered into by the claimant with the bank. 

In respect of the remaining claims in relation to the swap:


  • The judge noted that the High Court and Court of Appeal had previously rejected the argument (made in different claims but by the same counsel) that interest rate hedging agreements were wagers and had struck out such claims. The judge noted that although this case involved different parties and a different contract he regarded it as a further attempt to raise substantially the same arguments as on previous occasions and therefore pointless. He noted that Morgan Grenfell v Welwyn Council [1995] 1 AER 1 set out the modern test in relation to such matters, namely that an interest rate swap agreement is not a wager where at least one party entered into the contract for a genuine commercial purpose and not to speculate. Although previous decisions were not binding they were highly persuasive. Accordingly the judge held that this claim had no real prospect of success. 
  • The judge was critical of the LIBOR claim as pleaded He found that the allegations were repetitive, vague, couched in highly generalised terms and unclear, opaque or difficult to comprehend. In his view the implied representation aspect of the claim was not fully or properly pleaded. The judge also held that the case for implying such a wide term as alleged was not made out on the pleaded case. Nor, in the judge's view, was any relevant breach unequivocally and clearly alleged. The judge therefore found that this claim had no real prospect of success.  
  • The judge noted that the tort claim as initially advanced was vague and incoherent. However, the claimant advanced in oral argument a case that the bank had not complied with the FCA's requirements for the FCA Review. The bank's counsel objected as this was not the case he had come to meet and counsel for the claimant accepted that the case on this point would need further thought and amendment. The bank conceded (generously in the judge's view) that there was nothing in principle stopping the claimant attempting by fresh proceedings to bring a separate independent claim based on alleged deficiencies in the way the FCA Review had operated but it would argue that no duty of care was owed. The judge ruled that the case had no prospect of success as currently formulated. 
  • The judge also found that there was no legal basis or cause of action pleaded in support of the claim for rescission of the Property Participation Agreement and the shareholder and director guarantees. 

Accordingly the judge refused permission to amend and struck out the claimant's claim in its entirety.


 The court has now made it very clear that it will not entertain swap claims based on the proposition that that interest rate hedging agreements should be treated as wagers at law, as long as at least one party had entered into the relevant agreement for a genuine commercial purpose (such as hedging the risk of a change in the interest rate on an underlying loan) and not to speculate.

The court in this instance also took a dim view of the claims based on breach of an implied term not to manipulate LIBOR and for breach of a duty of care owed in respect of the conduct of the review of interest rate hedging agreements, as pleaded. However, the court's decision to strike out these claims was based on the way these claims had been pleaded and only gives a limited insight into the approach the court may take to such claims more generally. It will therefore continue to be interesting to see what approach the court takes to such claims in other cases, in what continues to be a developing area of caselaw.

As regards the conduct of the FCA Review, and duties allegedly owed to claimants pursuant to it, the approach taken by the court in this case can be contrasted to those taken by the court in Suremime Limited v Barclays Bank plc [2015] EWHC 2277 (QB) when the court allowed the amendment of a claim to include a new claim that in agreeing to provide redress in accordance with the specification for the conduct of FCA Review, the bank in that case owed the claimant a duty of care in tort, which it breached, holding it was arguable; and in CGL Group Ltd v Royal Bank of Scotland plc and National Westminster Bank plc [2016] EWHC 281 (QB), when it did not (see our previous article on this case). 

 The claim can also be contrasted with Holmcroft Properties Limited v KPMG LLP [2016] EWHC 323 (Admin) in which the claimant had taken the different approach of arguing that as it was acting pursuant to the FCA Review, the conduct of the independent reviewer, in this case KPMG, was susceptible to judicial review. However, the Administrative Court dismissed the claimant's application for judicial review brought against KPMG on the basis there was no direct public element to KPMG's role and that in any event there was no particular error in the handling by KPMG of the claimant's case that could support a finding that any of the alleged public law duties had been breached.

As regards swap claims arising from the manipulation of LIBOR, a key case of particular interest is Property Alliance Group Limited's long-running claim against the Royal Bank of Scotland in which one of the claims is based on alleged representations made by the bank concerning LIBOR in relation to interest rate hedging agreements entered into by the claimant, breaches of implied warranties that these representations about LIBOR were true, and breach of various implied terms of the relevant customer agreement in relation to LIBOR. As avid followers of these proceedings will be aware the bank won the latest skirmish in January 2016 when, on its application (opposed by the claimant), the case was transferred to the new Financial List of the Commercial Court. The trial in this case is due to commence on 23 May 2016.

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