FML Timeline: Crestsign Limited v National Westminster Bank Plc and Royal Bank of Scotland Plc

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This High Court decision establishes that:

• National Westminster Bank Plc and Royal Bank of Scotland Plc (the “Banks”) did not owe Crestsign Limited (Crestsign) any duty at common to use reasonable skill and care when giving advice to Crestsign because this duty had successfully been displaced by disclaimers made by the Banks, and
• although the Banks were under a duty to fully explain the nature and effect of the products that it wished to sell to Crestsign, it was not under a duty to explain the whole range of products that might be available to it.

Crestsign was a small private company that invested in commercial properties which were purchased using interest-only bank loans, secured by the properties. In early 2008, Crestsign sought to refinance its loans with the Banks. As a condition of the refinancing, the Banks required Crestsign to enter into interest rate management product. The Banks provided Crestsign with a number of options including a fixed rate loan, an interest rate collar and two fixed-rate swaps, which were structured slightly differently. These products were all explained in detail. The Banks also warned Crestsign that there would be “substantial” break costs in relation to the fixed-rate swaps. Shortly thereafter, Crestsign agreed to enter into a fixed-rate swap and the refinancing was completed.

In 2011, due to interest rate changes occasioned by the global financial crisis and pursuant to the terms of the swap, Crestsign had to commence pay substantially more under the swap than either it or the banks had foreseen. In addition, in order to terminate the swap, Crestsign would have to pay break costs in the order of £600,000. Crestsign then complained that the swap had been mis-sold to it and was unsuitable. Crestsign then commenced the process of obtaining redress through the relevant regulators. In addition, Crestsign brought proceedings alleging that:

• the Banks owed Crestsign a duty of care to use reasonable skill and care when give advice and/or making recommendations (the Advice Duty); and
• the Banks owed Crestsign a duty at common law when providing information to Crestsign to take reasonable care to ensure such information was accurate and fit for purpose and therefore allowing Crestsign to make an informed decision (the Information Duty).

Crestsign also alleged that the Banks had breached both of these duties.

Decision

In relation to the Advice Duty, the Court found that the Banks readily provided advice to Crestsign that a fixed-rate swap was suitable for its business. The Court also found that given the disparity in the knowledge and the expertise of the relevant representatives from the Banks and from Crestsign, it was reasonable for Crestsign to rely on the advice provided by the Banks. However, the Court found that ultimately, the Banks had done enough to ensure that the Advice Duty would not arise.

The court found that the Banks were able to rely on the terms of business and various other documents that warned Crestsign that the Banks were not providing it with advice. For example, in the “Terms of Business for Retail Clients” agreed by both Crestsign and RBS, it was stated that RBS was not acting as Crestsign’s advisors and that RBS: “will not except where we have specifically agreed to do so, provide you with advice on the merits of a particular transaction or the composition of any account, or provide you with personal recommendations… in relation to any transaction or account…” On this basis, it was found that no duty ever arose.

In relation to the Information Duty, the Banks accepted that they were under a duty not to make any negligent misstatement but denied that they owed Crestsign the Information Duty. The Court determined this issue narrowly, and based on the specific facts of this case. The Court found that the relevant regulatory instrument, the “Conduct of Business” rules were relevant but not determinative in determining the nature of the duty imposed on the Banks. What was relevant to whether the Information Duty arose was the relative position of the parties. The court found that Crestsign’s representative in the negotiations was in a “state of ignorance” concerning hedging products and that the Banks were aware of this. They were also aware there were significant time pressures on Crestsign to complete its refinancing.

Ultimately, the court determined that the Banks were under a limited version of the Information Duty. The court determined that the Banks were not under a duty “to explain the whole range of products that might be available and which could satisfy the condition of sanction requiring a hedging product, including an interest rate cap product”. Rather, the Court found that the Banks only had a duty to “explain fully on those products which [they] wished to sell Crestsign”. The court found that:

“An explanation of such other products, for the purpose of presenting a balanced picture, would be the territory of an advice-giving duty, which was excluded on the documents as I have already found.”

Furthermore, the court found that the Banks were under no obligation to educate Crestsign on each aspect of each product and the risks associated with them. The court only qualified its findings on the basis that the Banks did have a duty to correct any obvious misunderstandings on the part of Crestsign, and to answer any questions its reasonably put to them.

To the extent that the court found that the Information Duty existed, the court found that it had not been breached because the information provided by the Banks to Crestsign was accurate.

The court concluded by expressing sympathy for Crestsign but noted that it was not its role to act as a regulator. Earlier this year, Crestsign was given permission to appeal the decision.

Noteworthy/ Novel points

This decision establishes that carefully worded disclaimers in contractual documentation that are readily apparent to borrowers could allow lenders to disclaim responsibility for any advice given in the course of the relationship.

This decision also establishes that the duties of lenders may go beyond a duty not to make any negligent misstatements in circumstances where there is a disparity of knowledge and expertise between the lender and the borrower. In this case the Banks were under a duty to fully and accurately explain the financial products that it wished to sell to Crestsign but it was not under a duty to “educate” Crestsign or to ensure that it correctly understood all the information provided by the Banks. The Banks were under no duty to provide information about other products that might have been available to Crestsign.