Grant Estates Ltd and Others v Royal Bank of Scotland Plc and Others
| Jurisdiction | Scotland |
| Judge | Lord Hodge |
| Neutral Citation | [2012] CSOH 133 |
| Year | 2012 |
| Docket Number | CA152/11 |
| Date | 21 August 2012 |
| Published date | 21 August 2012 |
| Court | Court of Session (Outer House) |
| OUTER HOUSE, COURT OF SESSION [2012] CSOH 133 | |
| CA152/11 | OPINION OF LORD HODGE in the cause GRANT ESTATES LIMITED (IN LIQUIDATION); RUARI STEPHEN; and JAMIE STEPHEN Pursuers; against (1) THE ROYAL BANK OF SCOTLAND PLC; and (2) THOMAS CAMPBELL MACLENNAN and KENNETH ROBERT CRAIG, JOINT ADMINISTRATORS OF GRANT ESTATES LIMITED Defenders: ________________ |
Pursuer: I G Mitchell QC, Wallace; Balfour & Manson LLP
Defender: A. Clark QC, MacGregor; Brodies LLP (First Defenders)
21 August 2012
Introduction
[1] The pursuer, Grant Estates Limited ("GEL") is a single venture company which in 2007 was developing properties at 1 School Wynd and 4 Bank Street, Elie, Fife with the assistance of loan finance from The Royal Bank of Scotland plc ("RBS"). In common with many property developers, GEL encountered financial difficulties in the economic downturn from about 2008. As a result of GEL's inability to meet its obligations under its finance agreements, RBS placed it into administration on 25 February 2011. GEL has attempted to challenge the appointment of the administrators in various processes but has eventually concentrated on this action as the vehicle for its challenge.
[2] The directors of GEL are two brothers, Mr Ruari Stephen and his brother Mr Jamie Stephen, who were sisted as additional pursuers on 11 April 2012 in order to be responsible for any adverse awards of expenses and thereby avoid an order for caution under section 726 of the Companies Act 1985.
[3] Mr MacLennan and Mr Craig, the second defenders, are the administrators of GEL but have taken no part in this action in which GEL and its directors seek among other remedies, the suspension of their appointment as joint administrators. To date the administrators have not been able to make progress in the administration as they have given undertakings not to dispose of the properties pending the outcome of the debate which I have heard. In that debate RBS has sought to have the action dismissed as fundamentally irrelevant.
[4] At the heart of GEL's claim against RBS is an allegation that the bank's employees mis‑sold to GEL an interest rate swap agreement ("IRSA"), which they represented was a device to protect GEL from a rise in interest rates. As a result of the financial crisis, the sharp fall in interest rates in 2008 and their low level thereafter, the IRSA, far from protecting GEL from rising interest rates, became a burden on the company, which would have benefitted from the lower rates which it would have paid on its borrowing. GEL in challenging the validity of the administration has from the outset asserted that, but for the obligations which it incurred under the IRSA, it would not have been in default of its obligations under its loan agreement with RBS and would not have gone into administration. RBS has challenged that assertion and pointed out that GEL had not the means to repay the loan.
[5] GEL alleges that the sale of the IRSA was (i) in breach of the requirements of both the Conduct of Business Sourcebook ("COBS ") issued by the Financial Services Authority ("FSA") and also the Markets in Financial Instruments Directive 2004/39/EC as implemented by Directive 2006/73/EC ("MiFID") and (ii) as a result of misrepresentation by RBS's employees which it characterises as fraudulent or at least negligent. It also asserts that RBS entered into a contract to give it advice on financial products and also that it was negligent in that advice. RBS challenges the relevancy of each of those cases.
[6] The summons claimed three principal remedies. First, it sought reduction of the loan agreement, the securities in support of the borrowing and the IRSA on the basis that they were all parts of a single unlawful scheme. In the debate Mr Iain Mitchell QC for GEL departed from the assertion that his challenge to the IRSA would invalidate the loan agreement and the securities. He sought reduction only of the IRSA. Secondly, GEL made claims for restitution based on the invalidity of those agreements and securities. Thirdly, it sought damages for loss resulting from (i) the breach of the COBS rules and MiFID, (ii) breach of contract, (iii) negligent advice and (iv) misrepresentation.
[7] In the wide‑ranging debate there were five principal issues. They were (i) whether the alleged breaches of the COBS rules could be made the subject of a claim in a civil action; (ii) whether RBS was in breach of contract; (iii) whether GEL had pleaded a relevant case of negligent misrepresentation; and (iv) whether there were relevant averments of fraudulent misrepresentation. The fifth issue was whether compliance with the COBS rules was a term of the contract or was subsumed within a delictual duty of care. Connected to the second issue, GEL also argued that section 17 of the Unfair Contract Terms Act 1977 applied so as to prevent RBS from relying on its contractual provisions that limited or excluded its contractual liability for the advice which its employees had given.
[8] During the debate Mr Mitchell intimated that for pragmatic reasons GEL was not insisting on its claim that RBS's employees acted fraudulently. That issue therefore does not affect the outcome of the debate. But as I am concerned that the allegations were made at all, I discuss the fraudulent misrepresentation case in paragraphs [85] - [93] below.
The averred factual background
[9] The relevant events began with an email from Mr Kevan Munro of the Global Banking and Marketing ("GBM") division of RBS to Mr Ruari Stephen on 3 July 2007 in which he referred to a prior telephone call and attached a copy an RBS booklet called "Interest rate hedging solutions". The booklet described in simple terms commonly used hedging products including base rate caps, base rate collars and base rate swaps. In the email he gave some guidance on the cost of an interest rate cap and said that he would telephone to discuss the matter further. The email contained certain standard statements that the bank was not giving advice, that the recipient should understand the potential risks that derivative products involved, and that RBS might have an interest in the financial instruments. GEL avers that the email was sent but denies that Mr Stephen received it. RBS therefore did not rely on it in the debate.
[10] On 6 and 11 July GEL and RBS entered into a loan agreement under which GEL borrowed £775,000 at an interest rate of 1.4% over base rate which on 6 July was 5.75%, and with a repayment date of five years after the loan was drawn. The loan agreement contained a precondition on the drawing of the loan that RBS was satisfied with the customer's interest rate hedging arrangements and GEL undertook to maintain those arrangements.
[11] GEL avers that on 19 July 2007 Mr Ruari Stephen met Mr Munro of RBS and that the former sought and the latter gave financial advice in relation to interest rate swap agreements. It avers:
"During the course of that discussion, Mr Munro indicated that although the base rate currently stood at 6.5% pa, those rates were likely to rise and that a fixed rate of 6.4% pa was reasonable."
Mr Stephen did not take out a hedging arrangement at that time.
[12] At that meeting Mr Munro gave Mr Ruari Stephen a letter containing a Notice of Regulatory Classification and as an attachment the bank's terms of business. I set out the relevant terms of business including the risk warning in paragraphs [29] and [30] below. The letter informed GEL that it was a "Private Customer" within the meaning and for the purposes of the FSA rules. It drew attention to the risk warning and informed GEL that by signing and returning the letter it acknowledged receipt of the risk warning and confirmed acceptance of its contents. It stated:
"Action to be taken
Please read our Terms of Business carefully. They contain important information about our respective rights and obligations, including about certain limitations on our liability to you. ... By signing and returning this letter, you will be deemed to have agreed and accepted our Terms of Business which will therefore become legally binding on you and, in the absence of any other agreement between us and you, will apply to all dealings which we may conduct with you or on your behalf. If you are in any doubt about the meaning or the legal or financial effect of these Terms of Business or any other documents we provide to you, you should obtain professional advice as necessary."
On 11 August 2007 Mr Ruari Stephen signed on behalf of GEL an acknowledgement of the letter, which stated that he had read and understood the notice of regulatory classification and the risk warnings and assented to their terms. He sent the acknowledgement to RBS.
[13] Notwithstanding the precondition in the loan agreement, RBS advanced the £775,000 loan to GEL on 17 October 2007 without putting in place any interest rate hedging arrangement.
[14] On 25 October 2007 Mr Ruari Stephen emailed Mr Munro to thank him for a telephone call on the previous day and stated that he would discuss interest rate options with his brother and take a decision. He said that he would telephone RBS.
[15] RBS avers that by letter dated 29 October 2007 it issued revised Terms of Business to GEL to take account of the requirements of MiFID which came into effect on 1 November 2007. But as GEL denies receipt of the letter or the terms of business, the letter and the new terms of business are not relevant to the debate.
[16] On 8 November 2007 Mr Munro emailed Mr Ruari Stephen to record that the Bank of England had kept the base rate at 5.75%, which he stated was a "little bit unexpected." He continued:
"However the problems in the stock markets have moved into the interest rate markets - which means that a 6 year swap/fix is now trading at 5.75%. e.g. you could fix your costs for debt at the same price as you are currently paying for the next 5 years. Really need the documents I sent you signed and back. Any...
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