Property Alliance Group (‘PAG‘) is a property investment and development company with a large portfolio of property. Fifteen years ago, in 2003, the Royal Bank of Scotland (‘RBS‘), began to provide funding facilities to PAG and over the next five years PAG entered into four interest rate hedging instruments (‘Swaps‘) which were governed by an ISDA Master Agreement. Other investment facilities provided were referenced to a margin over LIBOR. The Swaps included significant break costs for early termination in the event of interest rates declining.
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Interest rates fell from 2008 during the financial crisis, leaving PAG with high fixed rates and prohibitive break costs. In spring 2010, PAG was transferred into the Global Restructuring Group (‘GRG‘) within RBS. A year later in summer 2011 PAG terminated the swap agreements incurring break costs of some £8.26 million. They agreed refinancing terms with RBS at the same time and entered into a composite facility.
GRG demanded valuations of the part of PAG’s property portfolio (at PAG’s expense) over which RBS held security in 2013. PAG commenced court proceedings against RBS in autumn 2013.
Their claim was under three heads :-
- That RBS had been negligent in breaching a duty of care they owed PAG, by failing to draw to their attention at the outset, various illustrations of potential break costs and a “worst case scenario” should interest rates fall sharply;
- That RBS had used the term ‘hedge’, thereby misrepresenting the Swaps as products which would 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 had impliedly represented that it would not manipulate LIBOR and then did so.
In December 2016 the Judge held in the High court that all of PAG’s claims would be dismissed in their entirety. PAG decided to pursue only certain points on appeal and the decision of the Court of Appeal was handed down on March 2nd 2018.
The Court of Appeal held that the High court was correct to reject the allegations of negligent misstatement (under the doctrine established in Hedley Byrne v Heller 1964) and any idea that there was a wider duty to provide information (eg on future break costs and worst case scenario). It considered that the doctrine of a “mezzanine duty” was best avoided and that ‘concentration should be on the responsibility assumed in the particular factual context as regards the particular transaction or relationship in question’. There had been no error in the way in which RBS explained the terms of the Swaps and the information provided was neither misleading or inaccurate. Further, RBS had assumed no further responsibility and did not owe PAG a specific duty to explain the nature or effect of the transaction.
With regard to the alleged misrepresentation the Appeal Court held that the High court judge had been correct to hold that the term “hedge” did not represent the swap as a product which would reduce PAG’s interest rate risk. PAG did not enter into the swap agreement in reliance on RBS’ use of particular terminology. However, there was an implied representation by RBS that it was not manipulating, nor intending to manipulate, LIBOR when it sold the 4 Swaps to PAG. There was no factual finding that RBS did manipulate LIBOR so PAG’s case failed but the way looks open for claims of misrepresentation to be brought by a party to a LIBOR – linked derivative, entered with a LIBOR panel bank which engaged in the manipulation (or attempted manipulation) of LIBOR. This will be particularly so where there have been regulatory or other findings against that bank of LIBOR manipulation. So the Court of Appeal left open important questions of law as to the requirements for fraud and reliance in the context of implied representations founded on a party’s assumptions.
The third group of claims was under the provisions of one of PAG’s facility agreements whereby RBS had the right to require a valuation of each of the properties over which it held security. PAG alleged that this power was subject to an implied term to act in good faith, in a commercially acceptable way and for a proper purpose – i.e. not capriciously, arbitrarily or unreasonably. PAG argued that RBS were in breach of that term when they carried out a valuation in 2013, and had no intention to re-finance with PAG.
The Court of Appeal found that, although there was no question of RBS owing fiduciary duties, RBS’s right to require a valuation was not completely unfettered – it could be assumed that the power was to be exercised in pursuit of legitimate aims rather than vexatious ones. This finding is in contrast with that of the High court judge and, although on the facts, the Appeal court did not alter the original decision, it left 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 point to the Supreme Court for consideration at the highest level.
Link: Property Alliance Group v Royal Bank of Scotland plc [2018] EWCA Civ 355
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