Property Alliance Group Ltd v The Royal Bank of Scotland Plc

JurisdictionEngland & Wales
JudgeSir Terence Etherton MR,Lord Justice Newey,Lord Justice Longmore
Judgment Date02 March 2018
Neutral Citation[2018] EWCA Civ 355
CourtCourt of Appeal (Civil Division)
Docket NumberCase No: A3/2017/0482
Date02 March 2018
Property Alliance Group Limited
The Royal Bank of Scotland Plc

[2018] EWCA Civ 355



Lord Justice Longmore


Lord Justice Newey

Case No: A3/2017/0482




Asplin J

[2016] EWHC 3342 (Ch)

Royal Courts of Justice

Strand, London, WC2A 2LL

Tim Lord QC, Adam Cloherty and Ben Woolgar (instructed by Bird & Bird LLP) for the Appellant

Richard Handyside QC, Adam Sher and Laurie Brock (instructed by Dentons UKMEA LLP) for the Respondent

Hearing dates: 29–31 January and 1, 5, 7 & 8 February 2018

Judgment Approved

Lord Justice Newey

Sir Terence Etherton MR, Lord Justice Longmoreand


This litigation arises out of interest rate swaps that the claimant, Property Alliance Group Limited (“PAG”), and the defendant, The Royal Bank of Scotland plc (“RBS”), entered into. It is PAG's case that it is entitled to rescission of the swaps and/or damages, but in a judgment dated 21 December 2016 Asplin J (as she then was) dismissed the claims. PAG now appeals.



PAG is a property investment and development business. It operates mainly in the north-west of England and has a portfolio of industrial sites, offices and retail and leisure properties. At the relevant times, PAG's managing director and majority shareholder was Mr David Russell, whom the Judge observed made all major decisions in relation to the company. Mr Ewan Wyse was the finance director.


RBS had become PAG's principal source of commercial banking facilities by May 2003. It continued to supply such facilities until 2014, when, following the breakdown in the parties' relationship, PAG refinanced with HSBC. The facilities which RBS provided to PAG were revolving and had two elements: “development facilities”, which involved relatively short-term borrowing to develop properties and were usually referenced to a margin over the Bank of England base rate, and “investment facilities”, which were used to finance income-producing property investment assets and were usually referenced to a margin over the London Inter-bank Offered Rate (or “LIBOR”).


During the relevant period, LIBOR was published on behalf of the British Bankers Association (“the BBA”) by Reuters after receiving submissions from panels of banks. The submissions were intended to represent the banks' opinion as to:

“The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking for and accepting inter-bank offers in reasonable market size, just prior to 11:00 [am] London time”.

The particular species of LIBOR to which the contractual arrangements at issue in this case were referenced was 3 month GBP (i.e. sterling) LIBOR.


We were taken to two agreements, dated respectively 27 April 2004 and 19 December 2006, to illustrate the basis on which RBS made funding available to PAG. Under one of them, interest was payable at 1.25% above LIBOR; the other provided for interest of 1% above LIBOR. In each case, clause 10.14 provided as follows:

“The Borrower shall ensure that an interest rate hedging instrument(s) acceptable to the Bank and at a level, for a period and for a notional amount acceptable to the Bank is entered into and maintained.”

Both agreements also contained (as clause 10.9 in one instance and as clause 10.10 in the other) a provision in these terms:

“The Borrower authorises the Bank from time to time to obtain an up to date Bank instructed and addressed professional valuation of all or any of the Charged Properties from a valuer/surveyor acceptable to the Bank and the Borrower shall meet the cost of any valuations obtained by the Bank provided that the Borrower shall not be liable for the cost of more than one valuation for each of the Charged Properties in any one calendar year other than a valuation obtained following the occurrence of an Event of Default.”


PAG and other companies associated with Mr Russell entered into some 11 transactions in derivatives between 2003 and 2014. The present proceedings arise out of four swaps (“the Swaps”) that RBS sold to PAG between 2004 and the spring of 2008.


The people with whom PAG dealt at RBS included Mr Anthony Goldrick and Mr Matthew Jones, who were successively the relationship manager, and Mr Anthony Bescoby, the individual who sold PAG the Swaps. Mr Jones took over from Mr Goldrick as relationship manager in January 2004.


PAG itself had a number of people to advise it on banking matters over the relevant years. The first of these was Ms Anne Taylor, who was taken on as a part-time consultant in October 2002 and described by Mr Russell in an email as a “banking consultant/specialist”. PAG dispensed with her services in May 2005, but in July 2007 Mr Richard Malin was engaged to work on a consultancy basis; Mr Wyse told Mr Jones in an email that Mr Malin would, among other things, “advise on new and future strategies including interest rate hedging”. Mr Malin was succeeded by Mr Jonathan Morton-Smith in early 2008, and Mr Morton-Smith was himself replaced by Mr Robin Priest in September 2009.


At times, PAG also had advice from JC Rathbone Associates Limited (“Rathbones”), a leading derivatives advisory firm. Rathbones were consulted in 2002 and were asked for their views periodically until late November 2004 when, after Rathbones had voiced concerns about the first RBS swap, Mr Wyse told them in a letter, “although we may seek to work with you in the future, we did not find it necessary to use your company to assist us”. PAG sought advice from Rathbones again from 2009.


The earliest of the Swaps (“the First Swap”) had a trade date of 6 October 2004 and a notional amount of £10 million. RBS was to have “the right to cancel the structure on 07-Oct-2009 or each quarter thereafter”, but the maturity was otherwise to be 7 October 2014. The transaction involved a “Multi Callable Libor Value Collar” summarised in these terms:

“Company [i.e. PAG] buys a 6.25%-5.25% Dual Strike Cap (Company protected at 5.25% until/unless 3 month LIBOR fixes at or above 6.25%, then company is protected at 6.25%) and sells a 5.25% Floor which is activated if 3 month LIBOR fixes at or below 3.30%”.


This meant that PAG would pay interest at no more than 6.25% however high the 3 month LIBOR rate went up and only 5.25% if the rate were between 5.25% and 6.25%. If and for so long as the 3 month LIBOR rate were between 3.30% and 5.25%, PAG would pay that rate. If, on the other hand, the 3 month LIBOR rate were to fall below 3.30%, PAG would find itself paying interest at 5.25%.


The transaction was documented in a post-transaction acknowledgment (or “PTA”) dated 7 October 2004 and a fuller confirmation dated 25 October. The PTA stated that there would be a “confirmation detailing the entire terms of our agreement relating to the transaction”, but itself contained notes that were stated to be “important”. One of these explained what PAG would pay overall if the notional amount of the swap (i.e. £10 million) were looked at together with borrowing of a corresponding sum. The note said:

“The cost to you of the overall structure is the sum of the cost of the borrowing and the net cost to you of the interest rate contract, whether this is a swap, cap, collar or any other interest rate hedging structure. This is illustrated below

You may have an interest rate swap under which you receive base rate and pay fixed. This is being used to protect interest rate risk on which you are paying base rate plus margin.

Your net pay/(receive) position under the swap is

Interest Rate





(Base rate)



Base rate + Margin

Net Pay

Fixed + Margin”

In other words, the net effect of the First Swap and a loan of £10 million at a margin above LIBOR would be that PAG would pay the interest rate given in the swap ( say, 5.25% if the 3 month LIBOR rate were 6%) plus the margin over LIBOR ( say, 1%). On the assumed facts, PAG would thus, in all, pay 6.25%.


The notes in the PTA pointed out that PAG would be exposed to interest rate risk if there were a mismatch between “the start dates of the underlying borrowing and any protection” and if there were “a difference between the value of the borrowing that is to be protected and the notional principal of your interest rate contract with us”. The notes also said:

“You [i.e. PAG] are acting for your own account, and will make an independent evaluation of the transactions described and their associated risks and seek independent financial advice if unclear about any aspect of the transaction or risks associated with it and you place no reliance on us [i.e. RBS] for advice or recommendations of any sort.”


The notes dealt, too, with what the position would be if PAG chose to bring the swap to an end before maturity. As to that, it was stated:

“If interest rate derivative contracts are closed before their maturity, breakage costs or benefits may be payable. The value of any break cost or benefit is the replacement cost of the contract and depends on factors on closeout that include the time left to maturity and current market conditions such as current and expected future interest rates. This is illustrated below.

There will be a break cost to you if the interest rates prevailing on closeout are lower than the fixed rate of the swap (that you are paying) or below the floor rate of the collar. There will be a benefit to you if prevailing interest rates are higher than the fixed rate of the swap (that you are paying) or above the cap rate of the collar.”

In the broadest terms, therefore, PAG would be liable to pay a break cost if interest rates declined but could stand to receive money if interest rates went up.


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