Standish v RBS - 30 July 2018 – Chief Master Marsh
The High Court in England has considered a claim that a lender breached an equitable duty to act in good faith by taking a significant shareholding in a borrower in a debt restructuring.
Receivers and mortgagees in England owe equitable duties (for example, to act in good faith) to a mortgagor when selling a mortgaged property. In Medforth v Blake  Ch 86 it was stated that the "duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor".
The claimants in this recent case argued that as the duties arise even when a mortgagee is not in possession, a lender holding a real property mortgage has a general implied duty to act in good faith and to act fairly, even when not exercising powers under its security. Rejecting this argument, Chief Master Marsh noted that the Medforth case concerned whether a receiver owed similar duties when managing the mortgagor's business to when selling a mortgaged property. It was impossible to extrapolate from this a wide-ranging duty of good faith, applying to all the lender's dealings with the mortgagor, even when it has not enforced (or threatened to enforce) its security, merely because it holds a real estate mortgage.
The claimants' other arguments that there had been a breach of an implied contractual duty of good faith and a breach of the lender's fiduciary duties as a shadow director were also rejected. The claim was struck out as the particulars of claim showed no reasonable grounds for bringing the claim.
Lenders will be relieved that the attempt to extend a mortgagee's equitable duty to act in good faith in relation to enforcing security to a restructuring situation was given short shrift. Extension of this duty would open an avenue for challenging additional lender protections, enhanced pricing, or the grant of an equity stake agreed with a secured lender during a debt restructuring.
The Financial Conduct Authority has announced that no action will be taken against RBS and its senior managers over the activities of its Global Restructuring Group (GRG). The GRG is accused of deliberately destroying small firms so it could seize their assets in the aftermath of the financial crisis. The FCA said its powers were "very limited" and that there were no "reasonable prospects of success" when it came to action against senior managers. RBS chairman Sir Howard Davies welcomed the FCA's conclusion that it would take no further action. He said the bank would await the publication of the FCA's full account and would "reflect carefully on its findings to learn any further lessons from what was a hugely challenging time for the bank, its customers and the wider economy". Nicky Morgan, chairman of the Treasury select committee, said it was "bewildering" that the watchdog could not act. "This demonstrates the need for a change in how lending for SMEs is regulated," she added.
The High Court has recently handed down the judgment in Parmar and another v Barclays Bank plc  EWHC 1027 (Ch).
In a comprehensive judgment, Mr Hochhauser QC, sitting as a Deputy Judge of the Chancery Division dismissed claims for alleged breaches of statutory duty relating to two interest rate hedging products (IRHPs) entered into by the claimants in April 2009.
This is the latest in a long line of authorities in the swap mis-selling arena that have been decided in favour of the banks. The judgment is of particular interest as it is the first IRHP claim to reach a full trial involving a claim by a private person for alleged breaches of the FCA's Conduct of Business sourcebook (COBS) rules under section 138D of the Financial Services and Markets Act 2000 (FSMA).
The judge found entirely for the defendant (Barclays), save for some minor technical breaches of COBS (in relation to which no loss flowed). In particular, the judge held that the sale was not advised (but that, even if it was, the IRHPs were suitable), that the IRHPs were appropriate and that, on the facts of the case, there was no obligation to disclose the existence of the CEE limit to the claimants. The judge also rejected Barclays' reliance on previous authorities in terms of its ability to rely on its basis clauses.
The claim also raised allegations regarding an alleged failure by Barclays to disclose its internal calculation of the maximum credit risk that it faced in the event of a default by the claimants on the IRHP (referred to as CEE (credit equivalent exposure)). Similar allegations have been considered and dismissed by the Court of Appeal in Property Alliance Group Ltd v The Royal Bank of Scotland plc  EWCA Civ 355.
The Court of Appeal has recently published its judgment in Elite Property Holdings Ltd and another v Barclays Bank plc  EWCA Civ 1688 (17 July 2018). This case is of interest as it is the first time the Court of Appeal has considered whether a bank owes a contractual duty to its customers relating to its conduct of the IRHPs review.
Flaux LJ reached the conclusion that no contractual relationship arose between a bank and its customer when the customer accepted an offer of redress following the bank's review of its sale of interest rate hedging products. The bank had undertaken the review pursuant to its obligation to the Financial Conduct Authority and did not come under any contractual obligation to its customers in relation to its conduct of the review when it made an offer of redress in relation to the misselling of structured interest rate collars.
One of the big political stories of this summer was the agreement reached between the Conservative Party and the Democratic Unionist Party on 26 June 2017. The two political parties entered into a so-called “confidence and supply” agreement which meant the DUP agreed to support the Government on all motions of confidence, including the Queen’s Speech and the Budget. Furthermore, the DUP agreed to support the UK Government on legislation relating to Brexit. Further support on other matters would be agreed on a case by case basis.
The deal struck in June is now the subject of High Court judicial review proceedings in London. The Administrative Court will hear an application by Northern Irish Green activist Ciaran McClean seeking judicial review of the June “votes for money” agreement. The hearing on 26 October is a preliminary hearing for “permission”. If permission is granted, then a full hearing is likely to take place a few weeks later.
What is the basis for Mr McClean’s challenge? He claims the confidence and supply deal is in breach of the Good Friday Agreement under which the UK Government undertook to exercise its power in Northern Ireland “with rigorous impartiality on behalf of all the people in the diversity of their identities and traditions”. He firmly believes that the June deal puts the Good Friday Agreement and the “hard won peace” in severe danger.
In addition, Mr McClean is running an argument under the Bribery Act 2010, claiming that the deal is unlawful as a corrupt arrangement. The Bribery Act came into force in July 2011 in order to modernise the law in this area. According to the Government’s own published guidance, bribery “is defined as giving someone a financial or other advantage to encourage that person to perform their functions or activities improperly… So this could cover seeking to influence a decision-maker by giving some kind of extra benefit to that decision-maker rather than by what can legitimately be offered…” Mr McClean claims that the arrangement that has been put in place is “straight bribery – money for votes”.
The judicial review challenge is being crowdfunded and Mr McClean is close to reaching his £100,000 target.
This is not the only challenge the Government has faced relating to the DUP Agreement. Balfour+Manson has been acting for businesswoman Gina Miller – well-known for bringing the case which led to the Supreme Court ruling that the Brexit vote had to be ratified by UK parliament legislation – and a trade union, the Independent Workers Union of Great Britain, in connection with another judicial review challenge to the deal struck in June.
This is based upon a claim that the Conservative-DUP agreement was improper and discriminatory. The extra funding would be contrary to the Equality Act 2010 and the Human Rights Act 1998. This challenge is yet to progress beyond the “Pre Action Protocol” stage. The UK Government’s Legal Department wrote to Balfour+Manson on 29 August in response to their pre-action protocol letter. This response has been the subject of much discussion, especially in Northern Ireland, arising out of two particular matters. Firstly, the Government’s lawyers, in their response to Balfour+Manson, indicated that the £1 billion in extra funding for Northern Ireland will need to be approved by the Westminster Parliament.
Ms Miller told the press that this aspect of the deal had not been widely known. There was no mention of this seemingly crucial issue when the agreement was announced in June. This raises the issue as to whether some Conservatives, who may be unhappy with the DUP deal, may take “disruptive” action.
Secondly, the response received by Balfour+Manson from the Government Legal Department made it clear that “no timetable has been set for the making of such payments”. This statement appears to be at odds with the message conveyed by the DUP to its supporters that this badly needed extra money for health and education, roads and infrastructure in Northern Ireland would be available shortly. Indeed, Gina Miller has questioned whether there is any space in the Government’s legislative programme for a separate vote on the extra £1bn. There is doubt as to whether the payment could be included in the Budget in November.
For the moment, the decision of the Administrative Court on 26 October is keenly awaited. A successful judicial review challenge could render the confidence and supply agreement unlawful and prevent any of the extra funding reaching Northern Ireland. Such an outcome would undoubtedly heap further pressure on Theresa May’s minority Government.
Only the most battle-hardened litigation lawyers would not have been shocked by reports on the legal costs incurred by Royal Bank of Scotland in defending the recently-settled action brought by the RBS Shareholders Action Group.
Some reports suggested RBS had spent £100 million-plus before an 11th-hour settlement with the claimants. The 14-week trial would have cost RBS another £25m. Is this the best use of what is essentially taxpayers’ money? Could this long-running dispute have been resolved more cost-effectively via mediation?
Mediation is a flexible, voluntary, confidential form of alternative dispute resolution (ADR), in which a neutral third party assists parties to work towards a settlement. The parties retain control on whether or not to settle and on what terms. There are different styles of mediation but the most common is facilitative mediation in which (unlike a judge or arbitrator), the mediator will not decide the case on its merits, but work to facilitate agreement.
Almost all cases are suitable for mediation, with disputes involving customers, shareholders or investors against banks particularly susceptible to resolution. These cases are often complex and ‘fact-heavy’ and can be expensive. The costs on both sides in litigating can become disproportionate to the amounts in dispute.
The settlement offers accepted by the investors in the recent RBS litigation were substantial. However, the majority of customer claims against banks involve more modest amounts.
The mediation process allows for creative solutions. Generally speaking, a judge in a banking dispute can order the customer to repay money or order the bank to pay damages. I’ve been involved in settlements where the parties have resolved their differences by agreeing a restructuring of underlying debt. The customer can then seek refinancing with another lender. It can be a win-win solution.
Mediation allows parties to resolve differences in a non-public setting. Confidentiality is a cornerstone of mediation. This can ensure that negative or embarrassing precedents are avoided, as banks seek to avoid reputational damage.
So should courts be doing more to encourage parties involved in banking (and other) disputes to explore the possibility of resolving differences at an earlier stage?
The Commercial Court in Scotland has recently sought to do that. In March, it issued updated guidance about ADR, seeking to persuade parties to consider it at an early stage.
There are several key provisions, – firstly, before legal proceedings are issued, parties should consider whether ADR may be suitable. Prior to the early procedural hearing, the parties should also “consider and discuss whether resorting to [ADR] may be appropriate in respect of some or all of the issues”.
The Commercial Judge will ask what steps parties have taken to resolve matters via ADR and they have an express power to order parties to hold a joint meeting to seek to resolve the dispute. Any refusal to attend may result in costs sanctions.
This initiative is significant. It brings forward the point at which the parties are encouraged to consider ADR.RBS settled during the first week set down for trial. Preparatory costs had already been incurred. If a settlement can be reached earlier, substantial sums are saved on lawyers’ fees. This money could be better spent funding any settlement. Asignificant part of the £100 million spent by RBS could have increased the settlement pot.
But does this new guidance go far enough? Some litigation lawyers would like to see Scottish courts go further. They point to practice in England, where an unreasonable refusal to mediate can result in significant costs consequences. If the suggestion to mediate is rejected out of hand, cost sanctions are likely. If the suggestion to mediate is considered, but rejected, the rejecting party should provide a thorough explanation. The risk of cost sanctions remains if the refusal is considered unreasonable.
I hope, in its next update rules, the Commercial Court might build upon this guidance. A further tightening of the rules to deal with any unreasonable refusal to mediate should encourage parties to focus their efforts on reaching an early resolution.
The High Court has held that, when a commercial customer inquired about fixing the rate on loans the bank had made them, the bank owed them a duty of care to explain the financial implications of fixing the rate. The duty was owed only in response to the customer’s inquiries because the bank subscribed to the voluntary Business Banking Code. It was not a duty to volunteer information if not asked. What was required was an explanation in plain English of what fixing the rate entailed and the consequences.
The facts of the case (Thomas v Tridos Bank) were as follows. The customer had substantial loans from the bank at variable rates of interest. In 2008 they inquired about fixing the rate on their borrowing. After receiving certain information from the bank, both oral and written, they entered into fixed rate loan agreements. After the financial crisis and the general reduction of interest rates, the customer found it increasingly difficult to service the loans, and considered that the bank had misled them about the redemption penalty in particular. The relationship broke down and the customer brought proceedings. The High Court held that the bank had misrepresented the position, and had also breached its "information duty" to give a balanced picture of the consequences of fixing the rate.
There are conflicting first instance decisions as to the duties owed by banks when they are merely providing information about a product, rather than advice. This first instance decision indicates that banks sometimes owe an "intermediate duty" to explain the product, which is higher than their duty not to mislead or misstate.
Gordon Deane at Balfour+Manson has been advising a number of the firm’s clients regarding bank related claims, including those involving interest rate swaps. If you would like to discuss any such matter with Gordon, please contact him on 0131 200 1485 or at firstname.lastname@example.org.
The Royal Bank of Scotland (RBS) has won a battle over interest rate swaps mis-selling against Property Alliance Group.
In a High Court judgment released on 21 December, PAG lost its $30m claim against RBS.
Mrs Justice Asplin dismissed PAG’s claims. They had alleged that RBS had mis-sold four interest rate swaps and that the firm's global restructuring group (“GRG”) had acted in bad faith. They had also claimed that RBS had breached contract terms in relation to the bank’s alleged rigging of LIBOR.
Gordon Deane at Balfour+Manson has been advising a number of the firm’s clients regarding bank related claims. If you would like to discuss any such matter with Gordon, please contact him on 0131 200 1485 or at email@example.com.
The Times yesterday reported that hundreds of businesses are threatening the City Regulator with legal action because of delays to a long-awaited report into the activities of RBS’ Restructuring Unit.
Lawyers acting for more than 400 companies which claim they were mistreated by the Global Restructuring Group (“GRG”) have written to the Financial Conduct Authority saying that they plan to lodge a judicial review into the handling of the issue.
The Times reports that some businesses fear that their legal claims could expire unless the findings of the FCA report are made public soon. Hundreds of businesses have complained about the unreasonable delays to the publication of the GRG report, which was to be issued almost 2 years ago. The review was conducted by Promontory, a financial consultancy, and Mazars, the accountancy firm. It was handed to the FCA about 6 months ago and has been seen by RBS, but there is still no firm schedule for publication.
The Times reports that it is understood that one of the factors is whether the Regulator will recommend compensation for effected companies.
Gordon Deane at Balfour+Manson has been advising a number of the firm’s clients regarding bank related claims, including those involving the GRG. If you would like to discuss any such matter with Gordon, please contact him on 0131 200 1485 or at firstname.lastname@example.org