London Executive Aviation Ltd v The Royal Bank of Scotland Plc

JurisdictionEngland & Wales
JudgeMrs Justice Rose
Judgment Date22 January 2018
Neutral Citation[2018] EWHC 74 (Ch)
Docket NumberCase No: HC-2014-002117
CourtChancery Division
Date22 January 2018

[2018] EWHC 74 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS & PROPERTY COURTS OF ENGLAND AND WALES

BUSINESS LIST (CH)

Rolls Building

Fetter Lane, London, EC4A 1NL

Before:

Mrs Justice Rose

Case No: HC-2014-002117

Between:
London Executive Aviation Ltd
Claimant
and
The Royal Bank of Scotland Plc
Defendant

Mr Richard Edwards QC and Ms Olivia Chaffin-Laird (instructed by FPG Solicitors) for the Claimant

Mr Paul Sinclair and Mr Daniel Khoo (instructed by Dentons UKMEA LLP) for the Defendant

Hearing dates: 1 – 3, 6 – 10, 15 – 17 November 2017

Judgment Approved

I. INTRODUCTION

1

II. THE PARTIES AND WITNESSES

10

III. THE FACTS

23

(a) The Lombard Loans

23

(b) Early contacts between the parties and the 2006 Terms of Business

27

(c) The July 2007 meeting and the September 2007 Meeting

38

(d) The new Terms of Business

59

(e) After the September 2007 meeting until 12 November 2007

65

(f) From mid November 2007 until the conclusion of the contracts

120

(g) Events after the contracts were concluded

151

(h) The regulatory background

156

IV. THE ADVICE CLAIM

159

(a) The court's approach to negligent mis-selling claims

159

(b) Did Mr Brindley give advice to LEA for which the Bank must take responsibility?

173

(i) Statements alleged in the Particulars of Claim to amount to advice

173

(ii) Advice about interest rates

186

(c) Was there a duty to advise?

204

(i) The sophistication of LEA

207

(ii) Absence of a written advisory agreement

212

(iii) Availability of advice from other sources

213

(iv) Indicia of an advisory relationship

216

(d) LEA's complaints about various features of the hedging products

218

(i) The inconsistency between the hedging products and the Lombard Loans

219

(ii) The divergence between the notional amount of the hedging products and the principal of the Lombard Loans

221

(iii) The callability of the hedging products

226

(iv) The inflexibility of the hedging products

231

(v) The breakage costs

232

(e) Conclusion on the Advice Claim

233

V. THE MEZZANINE CLAIM

235

(i) Failure to explain what would happen if interest rates fall

239

(ii) Failure to explain the full terms of the ISDA agreement

242

(iii) Failure to disclose the CLU or otherwise explain potential breakage costs and other risks

244

VI. THE DECEIT AND MISREPRESENTATION CLAIMS

255

VII. HAS LEA SUED THE WRONG PARTY?

275

(a) The test to be applied in identifying the counterparty to the contract

279

(b) The factual indicators

280

VIII. CONCLUSION

296

Mrs Justice Rose

I. INTRODUCTION

1

The Claimant company (‘LEA’) operates a business chartering private aircraft. In 2007 the business was thriving and its owners, Patrick Margetson-Rushmore and George Galanopoulos decided to buy more private jets to increase LEA's fleet of modern aircraft so that the company could widen its client base. They started to negotiate substantial new loan facilities with their existing lender, Lombard North Central plc (‘Lombard’), to finance these purchases. Lombard is part of the RBS group of companies. LEA had had its bank account for a number of years with National Westminster Bank plc (‘NatWest’) also part of the RBS group. LEA's relationship manager at NatWest was Mr Adrian Wood.

2

The terms of the loan facilities that LEA was negotiating with Lombard in Autumn 2007 obliged LEA to pay interest set at a variable rate based on NatWest's base rate plus a small percentage. At the time of these discussions the NatWest base rate was about 5.75%. In about July 2007 Mr Wood suggested to LEA that they discuss with a colleague of his, Dominic Brindley, the possibility of entering into a hedging product to protect the company against the possibility of interest rates rising over the period of the loans. Mr Brindley held meetings and phone conversations with the directors of LEA and also with Isabel Margetson-Rushmore who is Mr Margetson-Rushmore's wife but who was neither a director nor shareholder of LEA. She was brought into the discussions because of her previous banking experience.

3

In November 2007 LEA decided not to enter into any hedging product, at least for the time being. However, in January 2008 discussions were restarted following the delivery of LEA's first new Mustang jet. By this time LEA had entered into two loans with Lombard. An important feature of the loans was that although interest was calculated at a variable rate (subject to a minimum base), the monthly payments made by LEA to Lombard were fixed throughout the life of the loan. Depending on what happened to interest rates, the monthly fixed instalments would pay off the interest accrued and a portion of the principal owed. At the maturity of the loans, LEA would be obliged to make a single lump sum payment, referred to at the trial as the balloon payment, to pay off what was still owed. Thus, if interest rates had been high over the life of the loan, the balloon payment would be larger because the monthly payments would not have eroded much of the principal. If interest rates had been low over the life of the loan, the balloon payment would be small because the monthly payments would have paid off much of the principal as well as the accruing interest.

4

In the course of a meeting on 8 February 2008, LEA agreed to enter into two hedging products with the Bank. The contracts for the two products were concluded during a phone call on 12 February 2008. One of the issues between the parties is which entity within the RBS group was actually the counterparty to these hedging products so I shall refer to that counterparty in a neutral way as “the Bank”. Broadly the terms of the hedging products were as follows:

a. A dual rate swap: under the dual rate swap, the Bank commits to paying LEA each quarter the sum arrived at by applying the variable base rate during that quarter to the notional amount of capital which was £4 million for the first five years and £6 million for the second five years. In return LEA agrees to pay the Bank one of two interest rates applied to the same notional amount. If the variable interest rate stayed between the range of a floor of 4% and a ceiling of 6.25%, LEA would pay the Bank interest at a rate of 4.69% on the notional amount. If the variable interest rate was either lower than the floor or higher than the ceiling, then LEA would pay the Bank an interest rate of 5.35% on the notional. The sums due from the Bank and from LEA would be netted off so that each quarter there would be a payment in one direction or the other, unless base rate happened to be 4.69%. The dual rate swap was cancellable by the Bank on 12 February 2013 and every quarter date thereafter.

b. A value collar. Again, this product was to last for ten years and was based on a notional amount of £4 million for the first five years and £6 million for the second five years. This product was different in that there was only a payment due if interest rates fell outside a range, set as between a floor of 3.75% and a ceiling of 5.75%. If the variable base rate stayed within that range, then neither the Bank nor LEA had to make a payment. If base rate was 3.75% or lower during any quarter, LEA had to pay the Bank the difference between that base rate and 5.49% applied to the notional amount. If base rate went above 5.75% in any quarter, the Bank had to pay LEA the difference between the base rate and 5.75%. The Value Collar was cancellable by the Bank on one date only, on 12 February 2013.

5

During the second half of 2008 interest rates fell dramatically and have remained at very low levels since then. The effect of this has been that although LEA has been able to pay off its loans to Lombard more speedily than expected, the company has remained saddled with the obligation to make substantial payments to the Bank under the two hedging products.

6

LEA bring this action against the Defendant alleging that they were mis-sold these products. They alleged that Mr Brindley advised them to enter into the hedging products and that that advice was negligent. They allege that the hedging products are liable to be rescinded for misrepresentation or that they are entitled to damages in lieu of rescission in the sum of £3,844,574.

7

The Defendant contests the claim on a number of grounds. First they say that LEA has sued the wrong party because the relevant contracts were entered into between LEA and NatWest not between LEA and the Defendant and that any advice which Mr Brindley gave must have been given on behalf of NatWest as well. They also deny that Mr Brindley gave any advice to LEA about the wisdom of entering into the hedging products; they deny that the Bank accepted any legal responsibility for anything Mr Brindley may have said that could be construed as advice and in any event they deny that the advice was negligent. They say there was nothing wrong with the hedging products sold to LEA. No one foresaw what has happened to interest rates; LEA made what turned out to be a bad bargain but that is no reason not to hold them to it.

8

The trial of this claim began in June 2017. Unfortunately, after five days the illness of LEA's leading counsel meant that the trial had to be halted. After the case was adjourned, amendments were made to the Particulars of Claim with the permission of Barling J. These amendments introduced an allegation that Mr Brindley fraudulently misrepresented the risks to which LEA was subject under the products. He did this by giving them a figure, £1.5 million, as the maximum amount that LEA might be liable to pay as the balloon payment over and above what they expected to pay if interest rates followed the then current forward rate....

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    ...Bus LR 168 later approved by the Court of Appeal. See also paras. 235–236 of the judgment of Rose J in London Executive Aviation v RBS [2018] EWHC 74 (Ch) which was a swaps mis-selling case. Rose J there referred to the earlier decision of Asplin J (as she then was) in PAG v RBS [2016] EWHC......
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