Recent Judgment Handed Down In Swaps Litigation

Crestsign Limited V. (1) National Westminster Bank Plc; And (2) The Royal Bank Of Scotland Plc [2014] EWHC 3043 (Ch)

In the continuing march of swaps litigation, each new judgment handed down represents a fresh carcass over whose bones those involved in such litigation inevitably pick for insights as to how future cases are likely to be decided. The recent judgment in the Crestsign litigation may well prompt the same response, although the judge was at pains to emphasise at times that each case is highly fact-specific.

The judgment is ultimately a victory for the Bank, particularly as regards the effect of its contractual (and non-contractual) documentation, but that victory was not unequivocal and there are points in the judgment which claimants may find encouraging.

The judgment considers the odd combination of a finding of fact that advice was given, and the effect of documents asserting a non-advisory relationship. The key findings in the judgment are summarised in the Conclusions section below.

Relevant facts

It is unnecessary to recite the factual background to the dispute in full, save for a few key aspects. Crestsign is a family owned and run property investment company, letting out commercial premises. Its borrowing at the relevant time was approximately £3.3 million and the judge accepted that the intention of its owners was to retain the properties they owned for approximately 10 years, following which they would be sold and the proceeds used to repay Crestsign's borrowing (which the owners wished to remain interest-only) and provide some surplus for the family.

In June 2008, Crestsign refinanced its borrowing with the Bank for a period of five years, and entered into an interest rate swap with a term of 10 years (subject to an option for the Bank to terminate at intervals before that time), incorporating a discounted rate for two years followed by a fixed rate of 5.65% thereafter (the Swap).

The Swap was agreed following a series of meetings and calls, and exchange of e-mails, between Crestsign and a representative of the Bank authorised to sell such products. There was some disagreement as to what was said in the meetings and conversations which took place, and in general terms the judge preferred Crestsign's evidence on those matters. He found, among other things, that:

the Bank's representative said that interest rates were likely to rise (with which prediction Crestsign's owners expressly disagreed) despite the fact that the Bank's own internal forecast was that they would fall; Crestsign had not understood the explanations given; a more limited oral presentation of possible interest rate hedging products had been provided than the Bank's witnesses suggested; break costs were mentioned, but there was no attempt to explain or quantify them; and Crestsign did not fully grasp the implications of the loan and swap contracts being separate, and for disparate terms. The Bank's documents

The judge considered various documents produced by the Bank (the Documents), in particular:

A Risk Management Paper provided to Crestsign after its initial...