PAG appeal landmark mis-selling case and RBS ordered to disclose its policy on the hidden cost of Swaps

6 July 2017

Shortly before Christmas, the High Court handed down a comprehensive 187 page judgment in Property Alliance Group Ltd v The Royal Bank of Scotland PLC.  

The court found in favour of RBS on all three claims brought by Property Alliance Group Ltd (PAG). In January this year, Mrs Justice Asplin dismissed PAG’s application to appeal stating that although the case involved some questions of law in a developing field, the decision on each head of claim turned on the facts pertaining to the reliance on representations.

The property group subsequently sought permission to appeal from the Court of Appeal and on 22 May 2017 the application was allowed on paper. Unfortunately no further information is provided by the court in relation to the appeal but it’s clear that PAG will now continue to challenge the landmark decision against them.

The history of this litigation is extensive and the complex trial took place over 10 weeks in the High Court last summer. The Court of Appeal decision will have implications for other potential claimants and is therefore seen as an important test case.

A further interesting development for potential claimants is the recent High Court decision in London Executive Aviation Limited v RBS.

The court held that the claimant, which had brought a mis-selling claim against RBS in respect of interest rate hedging products, was entitled to specific disclosure in relation to an alleged policy of the bank not to divulge to customers the potential worst-case break costs. London Executive alleged that the Swaps were mis-sold pleading claims in both deceit and the tort of negligence, alleging that RBS failed to properly advise it and deceived it as to the risks associated with the Swaps.

The court referred to the bank’s evidence in PAG v RBS, which suggested that the bank had a policy of withholding the potential worst-case break costs from customers to which it sold interest rate hedging products.

Background of PAG claim

PAG is a property investment and development business operating mainly in the North West of England. The proceedings arose primarily out of four interest rate derivative products (Swaps) entered into with the bank between 2003 and 2008, using the GBP London Interbank Offered Rate (LIBOR) as a reference rate. In June 2011, PAG terminated the Swaps incurring mark-to-market (MTM) break costs of over £8 million and restructured their finances entering into a new hedging transaction. 

RBS had provided PAG with all its commercial banking services until 2015, when the parties’ relationship broke down and PAG refinanced its entire lending with another bank. At the outset, PAG dealt with the management team of the Manchester division of RBS but in the spring of 2010 its customer relationship was transferred from the personnel in Manchester to the bank’s internal Global Restructuring Group (GRG) in London.

The multi-million pound claim followed revelations that RBS traders had manipulated the LIBOR rates and it was investigated by a number of regulators including the Financial Services Authority (now the Financial Conduct Authority).

The claims

PAG’s claims fell into three categories:

1.         The Swaps claims

PAG alleged that the Swaps were mis-sold to it by RBS because they did not provide a solution to, or protect PAG from interest rate risk. It entered into the Swaps to hedge against interest rate fluctuations but it was ultimately left in a worse financial position than if it had not entered the Swaps. It averred that the Swaps could not therefore be hedging instruments and claimed for rescission or damages arising out of RBS’ representations and/or breaches of contract in connection with the sale of the Swaps. PAG’s claims in relation to the sale of the Swaps were characterised under three main headings: (i) the Swaps Misstatement claims, (ii) the Swaps Misrepresentation claims and (iii) the Swaps contract claims.

2.         The GRG claims

PAG claimed damages for breach of contract arising out of its transfer from the RBS management team in Manchester to a different RBS division in London, known as the GRG, and its subsequent management within GRG.

3.         The LIBOR claims

PAG claimed for rescission of the Swaps, damages for misrepresentation (including fraudulent misrepresentation) and/or breach of contract arising out of RBS’ alleged participation in and knowledge of the manipulation of the LIBOR rates by both RBS and other LIBOR panel banks.

The High Court judgment

1.         The Swaps Claims

            1.1       The Swaps Misstatement claims

PAG alleged that having proffered an explanation of the products which it wished to sell, RBS was under a duty to provide a full, accurate and proper explanation which it failed to do. In particular, the failure to inform of the MTM figure at the outset in relation to each of the Swaps, to provide indications of break costs or provide any worked example of the effect of each of the Swaps dependent upon possible interest rate movement.  

The Swaps Misstatement claims failed. Taking into account foreseeability, proximity and fairness, justice and reasonableness in the context of the PAG/RBS relationship and the type of loss which PAG sought to recover, the court held that there was no duty of care of the kind contended for.

Asplin J noted that the potential duty of care pleaded by PAG was wider than a duty not to misstate facts, was fact dependent and fell on the advisory spectrum. She said that if the decision in Crestsign Ltd v National Westminster Bank & Royal Bank of Scotland (2015) suggests that once information is provided by a bank, a salesman is always under a duty to explain fully the products he wishes to sell without a broader advisory relationship having arisen, she declined to follow the Crestsign decision. She confirmed that “to take such an approach is to blur the line between a salesman and an advisor.”

In considering whether a broader duty of care existed, the court considered the following relevant circumstances in the case:

  • PAG was a substantial property company, a professional and not a retail client of the bank. Its officers and professional staff were not unsophisticated. They had entered into numerous derivative products with other banks and had contemplated entering into complex foreign currency structures.
  • PAG had a series of banking advisers who may not have been derivative specialists but were (i) aware of the potential for high break costs, (ii) able to consider the potential consequences of the terms proposed and (iii) could point PAG in the direction of those able to calculate MTM/break costs.
  • PAG never sought information about the amount of MTM on entry into the Swaps or thereafter.
  • Unlike the claimant in Crestsign, PAG was under no time pressure.
  • At the time, it was not general market practice to give information about potential break costs and the MTM at the outset.
  • Any duty to advise had been expressly excluded by the terms of the parties’ contractual arrangements.

In any event, PAG was aware of the potential for break costs which would vary according to market conditions. There was no duty on RBS to reveal the extent of the break costs or the MTM but in any event, PAG did not enter into the Swaps as a result of the information being withheld.

1.2       The Swaps Misrepresentation claims

PAG alleged that numerous representations were made fraudulently by RBS and relied on by PAG when entering into the Swaps with the result that each of the Swaps should be rescinded. In essence, the representations were that the Swaps were ‘hedges’, would ‘protect’ and ‘de-risk’, that they were ‘suitable’, would complement PAG’s borrowing, that the parties’ interests were aligned and that RBS’s termination rights were ‘not an issue’.

The court considered the representations in their factual context and in the light of the contractual relationship between the parties.

Asplin J concluded that a reasonable representee would have considered the references to the term ‘hedge’ to be generic and would not have understood the phrase as a representation as to the quality of the transaction upon which they could rely. This was more so because of the contractual terms agreed between the parties.

The contractual terms set out under the heading ‘Non-Reliance’ made clear that PAG was “making its own independent decisions to enter into” each Swap including whether it was “appropriate” or “proper”, was not “relying on a communication written or oral as investment advice or as a recommendation” and that “information and explanations” were not investment advice. Asplin J held that these are clear words which should be construed to mean that explanations of the terms of the Swaps and oral statements about them, could not be relied upon as investment advice or recommendations.

            1.3       The Swaps Contractual claims

PAG contended that a term should be implied into the various contracts between the parties that the Swaps would be suitable for the contractual purpose of hedging PAG’s interest rate risk. Asplin J did not consider that the facility agreements required the implication of such a term in order to provide business efficacy or coherence.

PAG also alleged an implied term that RBS would act in good faith and in accordance with commercial fair dealing. Considering the principles in the case of Marks and Spencer v BNP Paribas Securities Services Trust Co (2015), Asplin J found that such a term cannot be implied and would be contrary to the express terms of the facility agreements excluding equitable or fiduciary duties. Further, following the decision in Greenclose v National Westminster Bank (2014) such a term was unlikely to be implied in a contract between two sophisticated commercial parties negotiating at arms’ length.

Finally, PAG alleged that it should be implied into the facility agreements that RBS would not withhold from PAG important information about the hedging undertaken under the hedging requirement. Asplin J found that PAG was “seeking to achieve by the back door what cannot be achieved by the front” and that it would run contrary to express terms.

All the Swaps contractual and misrepresentation claims therefore failed.

2.         The GRG claims

PAG claimed that RBS breached the implied term of its customer agreement that RBS would not act in bad faith or in a commercially unacceptable manner, capriciously, arbitrarily, for an improper purpose or in a way that no reasonable lender would act. The implied terms were described as Socimer terms following the decision in Socimer International Bank Ltd v Standard Bank London Ltd (2008).

PAG alleged that the transfer to GRG and management and retention of its customer relationship by that division was in breach of these implied terms. The main breaches pleaded by PAG included RBS improperly calling for valuations of PAG’s portfolio, undervaluing the portfolio and demanding an onerous and unnecessary security review.

The court reviewed the decisions in Socimer, Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (2013) and Yam Seng Pte Ltd v International Trade Corporation Ltd (2013) considering whether RBS had a “contractual power or discretion” or a “bare contractual right”.

The court concluded that there is no general duty of good faith in English contract law, although it may be implied in certain categories of contract such as contracts of employment.  Asplin J held that there was no implied term that RBS would perform its obligations under the facility agreements in good faith (which were contracts between sophisticated parties negotiated at arms’ length) and not in a commercially unacceptable or unconscionable way.

Even if there had been such a term, RBS did not breach it in relation to PAG’s transfer and management by GRG. There was no contractual right as to the identity of the personnel who would provide banking services to PAG or their location. RBS also had an absolute right, rather than a discretion, to call for valuations of PAG’s property portfolio under the loan agreement.

3.         The LIBOR claims

PAG claimed that the bank had made misrepresentations to induce it to enter into the interest Swaps in that the bank’s proposal to use GBP LIBOR as a reference rate, was an implied representation that it would not manipulate the rates for its own ends.

The court decided that RBS did not make any representation about LIBOR merely by proffering to enter into Swaps products based on LIBOR. Asplin J accepted that there may be an implied term in the Swaps contracts that the relevant LIBOR rate would be calculated in accordance with the British Bankers’ Association (BBA) definition of LIBOR. However, this could only be implied to the extent of RBS’ conduct and not the conduct of other panel banks. In any event, the factual evidence did not support PAG’s claim that it had entered into the Swaps in reliance on the LIBOR representations.

The court rejected PAG’s claim that RBS had been involved in manipulation of GBP LIBOR and consequently found that the implied term in the Swaps relating to LIBOR had not been breached.


The fact that the Court of Appeal has given PAG the green light to proceed with its £30m claim will be welcomed by other potential claimants. A date has not yet been set for the appeal hearing but we understand that it will be heard by no later than 23 May 2018.

The case is seen as a test case in mis-selling claims but the reasons provided by Mrs Justice Asplin in dismissing the initial appeal application should be noted; the decision on each of the three heads of claim turned on the facts pertaining to PAG’s reliance on the representations. The communications between and intentions of the two commercial parties involved are fact specific. The High Court was critical of PAG’s main witnesses and therefore treated their evidence with some caution and this will no doubt have had a bearing on the outcome.

It is also worth noting that this case involves complex derivative products and sophisticated clients. PAG is a substantial property company and its professional staff had previously entered into numerous derivative products. The express contractual terms agreed between the parties were upheld by the court effectively excluding any advisory or fiduciary duties.

It will be interesting to see whether the documents ordered in London Executive Aviation Limited v RBS do in fact evidence a policy of withholding the potential worst-case break costs from customers. It is anticipated that the trial in this matter will be re-listed by the end of this year and therefore prior to the PAG Court of Appeal hearing.

The dismissal of PAG’s GRG claim potentially makes it more difficult for other claimants to succeed in GRG claims, particularly as the ISDA master agreement is a widely used standard form agreement.

The FCA‘s review of RBS’s treatment of SME customers is on-going. In November 2016, RBS announced that it had launched a new complaints process and an automatic refund for complex fees charged to SME customers in its GRG between 2008 and 2013. The FCA welcomed the involvement of an independent third party, Sir William Blackburne, a retired High Court Judge, to provide oversight of the complaints review process.  Since the announcement in November, the RBS have received over 650 complaints from eligible customers. Sir William’s first quarterly report is on the RBS website.

We shall follow developments in both the PAG and London Executive Aviation Limited matters with interest. 

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