Crestsign Ltd: v (1) National Westminster Bank plc (2) Royal Bank of Scotland plc (2014) (Internal material - CMS only)

10/10/2014

The claimant company (C), through its directors (P), brought a negligence claim against the defendant bank (N) in respect of economic loss allegedly suffered as a result of advice given by N.

C was a small company which invested in commercial properties for letting. In 2008, P entered into negotiations with N, through its representative (G), with a view to refinancing secured loans on the three properties owned by C. P's plan was to sell the properties after 10 years to discharge the loans and fund their retirement. G set out proposals for four alternative finance structures, attaching a risk management paper and N's terms of business, which defined the relationship as one in which advice was not being given. The transaction was carried out by way of a swap agreement whereby the loan was to be for only five years, with a separate interest rate management contract for 10 years. In 2011, due to interest rate changes, the swap transaction became substantially more expensive for C than had been foreseen. P complained that the swap agreement had been mis-sold to them and was unsuitable because it placed nearly all the risk on C and exposed it to adverse interest rate conditions and high break costs in the event of exit. The issues were: (i) whether N owed a duty of care to use reasonable skill and care when giving advice to P or making recommendations about the suitability of the swap, and if so, whether N was in breach of that duty; and (ii) what duty N owed when giving information about the swap, and whether it had breached its duty when giving that information.

HELD: (1) G was aware that P were looking to it for expert assessment of the available products and had given advice in the form of a recommendation as to alternative structures that might be suitable for C's business. However, the giving of advice did not in itself mean that there was an assumption of responsibility and a duty of care in tort to give the advice carefully. The explanations G had given about the swap agreement had not been properly understood by P. In particular, they had not understood that the loan facility was guaranteed for only five years and might not be renewed after that time. The relationship between G and P satisfied the requirements for the existence of a duty of care, Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465 followed. The disparity in knowledge and expertise and the respective roles of P on the one hand and G on the other was such that it was reasonably to be expected that P would rely on G's skill and judgment. However, N had successfully disclaimed responsibility for G's advice by means of the documentation which had been drawn to P's attention before the transaction was completed. It followed that N did not owe a duty to C to use reasonable skill and care in the giving of advice about the swap (see paras 38, 40, 107-108, 110-111, 114, 122 of judgment). (2) (Obiter) If N had not succeeded in excluding its duty of care, it would have been in breach of duty to C in recommending the structures that it did recommend as suitable products for C's purposes. Viewed at the time, the alternatives proposed by G carried the unacceptable risk of high payments resulting from low interest rates, coupled with the risk of C being unable to borrow beyond the five-year term of the loan or switch providers because of the high break costs (paras 130, 132). (3) A bank which undertook to explain the nature and effect of a transaction owed a duty to take reasonable care to do so as fully and properly as the circumstances demanded, Cornish v Midland Bank Plc [1985] 3 All E.R. 513 followed. G was under a duty to explain fully and accurately the nature and effect of the products in respect of which he chose to put forward as alternatives to C, but he was not under a duty to explain fully other products that he did not wish to sell to it. An explanation of such other products would be in the territory of giving advice, which was excluded by the documents (paras 143, 153-154). (4) N had not acted in breach of its duty relating to the provision of information about the products G had offered to C. G's explanations of the alternative products were not misleading and were adequate to comply with N's duty (paras 159, 168).

Judgment for defendant

Counsel:

For the claimant: Richard Edwards

For the defendants: Andrew Mitchell QC, Laura John

Solicitors:

For the claimant: Slater & Gordon (UK) LLP

For the defendants: DLA Piper

Lawtel transcript of judgment here.