If at first you don’t succeed, Try, try, try again.” - Thomas H. Palmer
Property Alliance Group (‘PAG‘) is a propertyinvestment and development company with a largeportfolio of property. Fifteen years ago, in 2003, theRoyal Bank of Scotland (‘RBS‘), began to providefunding facilities to PAG and over the next five yearsPAG entered into four interest rate hedging instruments (‘Swaps‘) which were governed by an ISDAMaster Agreement. Other investment facilitiesprovided were referenced to a margin over LIBOR.The Swaps included significant break costs for earlytermination in the event of interest rates declining.
Interest rates fell from 2008 during the financialcrisis, leaving PAG with high fixed rates and prohibitive break costs. In spring 2010, PAG was transferredinto the Global Restructuring Group (‘GRG‘) withinRBS. A year later in summer 2011 PAG terminatedthe swap agreements incurring break costs of some£8.26 million. They agreed refinancing terms withRBS at the same time and entered into a compositefacility.
GRG demanded valuations of the part of PAG’sproperty portfolio (at PAG’s expense) over whichRBS held security in 2013. PAG commenced courtproceedings against RBS in autumn 2013.
Their claim was under three heads :-
• That RBS had been negligent in breaching a dutyof care they owed PAG, by failing to draw to theirattention at the outset, various illustrations of potential break costs and a “worst case scenario” shouldinterest rates fall sharply;
• That RBS had used the term ‘hedge’, therebymisrepresenting the Swaps as products whichwould reduce PAG’s interest rate risk;
• That RBS had sold the Swaps in breach of an implied term that they were suitable, that RBS information about the Swaps. Also, that RBS hadimpliedly represented that it would not manipulateLIBOR and then did so.
In December 2016 the Judge held in the High courtthat all of PAG’s claims would be dismissed in theirentirety. PAG decided to pursue only certain pointson appeal and the decision of the Court of Appealwas handed down on March 2nd 2018.
The Court of Appeal held that the High court wascorrect to reject the allegations of negligent misstatement (under the doctrine established in HedleyByrne v Heller 1964) and any idea that there was awider duty to provide information (eg on futurebreak costs and worst case scenario). It consideredthat the doctrine of a “mezzanine duty” was best avoided and that ‘concentration should be on the responsibility assumed in the particular factual contextas regards the particular transaction or relationship inquestion’. There had been no error in the way inwhich RBS explained the terms of the Swaps and theinformation provided was neither misleading or inaccurate. Further, RBS had assumed no further responsibility and did not owe PAG a specific duty toexplain the nature or effect of the transaction.
With regard to the alleged misrepresentation the Appeal Court held that the High court judge had beencorrect to hold that the term “hedge” did not represent the swap as a product which would reduce PAG’sinterest rate risk. PAG did not enter into the swapagreement in reliance on RBS’ use of particular terminology. However, there was an implied representation by RBS that it was not manipulating, norintending to manipulate, LIBOR when it sold the 4Swaps to PAG. There was no factual finding that RBSdid manipulate LIBOR so PAG’s case failed but theway looks open for claims of misrepresentation to bebrought by a party to a LIBOR – linked derivative,entered with a LIBOR panel bank which engaged inthe manipulation (or attempted manipulation) ofLIBOR. This will be particularly so where there havebeen regulatory or other findings against that bank ofLIBOR manipulation. So the Court of Appeal leftopen important questions of law as to the requirements for fraud and reliance in the context of impliedrepresentations founded on a party’s assumptions.
The third group of claims was under the provisionsof one of PAG’s facility agreements whereby RBS hadthe right to require a valuation of each of the properties over which it held security. PAG alleged thatthis power was subject to an implied term to act ingood faith, in a commercially acceptable way and fora proper purpose – i.e. not capriciously, arbitrarily orunreasonably. PAG argued that RBS were in breachof that term when they carried out a valuation in2013, and had no intention to re-finance with PAG.
The Court of Appeal found that, although there wasno question of RBS owing fiduciary duties, RBS’sright to require a valuation was not completely unfettered – it could be assumed that the power was tobe exercised in pursuit of legitimate aims rather thanvexatious ones. This finding is in contrast with thatof the High court judge and, although on the facts,the Appeal court did not alter the original decision, itleft open important questions of law as to the requirements for fraud and reliance on implied representations based on a party’s assumptions. PAG are currently being advised on whether to take this pointto the Supreme Court for consideration at the highest level.
Link: Property Alliance Group v Royal Bank of Scotland plc  EWCA Civ 355
Article by kind permission of Thomas Walford, andExpert Evidence
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