Following the settlement of Hockin v RBS, the team provide an expert summary in 2-part blog series of the key points put forward in the opening submissions of each party at Trial. This first blog deals with the Claimant’s opening submissions.
Claimants’ Opening Submissions (David Reade QC acting)
Mr Reade began by providing a brief history of the case and specified how London & Westcountry Estates (“the Company”) came to be, how it prospered, RBS’ involvement and how the business was ultimately forced into administration as a consequence of the Swap RBS had sold.
Mr Reade systematically took the Court through the 7 main limbs of the Hockins’ pleaded case, summarised as follows:
- The Mutual Credit Break
- The Company made it clear to the Bank that any Interest Rate Hedging Product would have to be cancellable after 3 years and at zero cost. It was on this premise the Company entered into a 10 year Interest Rate Swap (“the Swap”).
- In fact the Swap locked the Company into a 10 year term with no option or right to cancel the Swap without it paying substantial break costs if it needed to exit before the 10 year term. The Bank was fully aware of this.
- The Bank also represented that it was only on the Swap’s third anniversary (and at three year intervals thereafter) that the customer could exit the Swap, when in actual fact it could choose to break the Swap whenever it pleased – subject to paying the breakage fee.
- Upon receiving the long form Swap Agreement, the Company checked it for a reference to the mutual credit break point. There was no reference to it. The Company called the Bank and informed them. The Bank resent the Company a copy of the confirmation, but annotated it by hand, marking the reference to the mutual credit break with asterisks. It was the Company’s case that this was not sent by e-mail to conceal the Bank’s deceit.
- The Bank’s motive for this was profit. There was damaging evidence found in the documents of the Bank that noted derivative sellers discussing profits made from one deal to another.
- Duty to advise; duty to inform
- Information provided by the Bank to the Company was relied upon by the Company. The Company pleaded that this gave rise to an agreement to advise, an assumption of responsibility to advise and also a duty to inform.
- The Bank’s Contractual Defence
- It was the Claimants’ case that the Bank could not rely upon the standard contract and non-reliance terms contained within its documentation due to the following:
- In the previous similar case of PAG v RBS it was established that non-reliance conditions do not cover deceit and duty to inform claims.
- The Bank would advise and provide information to the Company to enable it to make an informed decision about whether or not it should enter into the Swap.
- The Company was never sent and never signed any terms of business prior to entering into the Swap. Therefore, the precedent (that if the terms of business were signed then the non-reliance terms became basis clauses of the contract, rather than exclusion clauses) set in the earlier case of Crestsign v RBS cannot be relied on.
- The only document the Company signed that contained the entire terms of the Swap agreement was an ISDA Master Agreement signed in 2004. At the time the Bank reassured the Company stating the document was a “generic document with standard terms.”
- The Company did sign trade confirmation documents in relation to the Swap, but only after the trade had been agreed.
- There was asymmetry in expertise and bargaining power between the parties and the fact that the Bank advised and provided information to the Company about the Swap made it very difficult for the Bank to prove that the non-reliance terms are reasonable and can be relied upon in this way.
- The Company personnel were wholly unsophisticated in respect of their knowledge of financial derivative products.
- Selection as advice
- The Bank selected specific Swap products to present to the Hockins but offered no real alternative products. The Bank as trusted advisors of the Company made representations that the Swap was the best option for it.
- Transfer to GRG
- As a result of the mis-sale of the Swap the Bank had grown increasingly concerned about the Company’s financial position, which was of course caused by the Bank. Consequently the Bank announced that they required a debenture to provide additional security. The Bank then intended to transfer the Company to its turnaround unit for ‘distressed’ business – GRG.
- The Bank succeeded in this conspiracy and deception, and in June 2009 obtained a debenture from the Company and a deed of priority from Mrs Hockin (so that the Bank’s Debenture ranked above a separate Debenture that Mrs Hockin held over the Company).
- The Bank in its own internal document which served as a preamble for the move to GRG confirmed that “the Swap and particularly its tenor has ultimately proved the undoing of this structure (the Hockins’ Company), preventing any benefit from current low rates. Whilst not unprecedented, it is unusual for Swap tenors to outstrip debt terms to this extent”
- Transfer to Isobel Assetco Limited (“Isobel”)
- The Company pleaded that the Bank arbitrarily, capriciously or in bad faith assigned the Company’s indebtedness, at a discount, to a separate entity 75% – owned by the Bank (Isobel).
- The sale breached a duty of good faith implied into the Bank’s power of assignment, and ultimately caused the Company to enter administration rather than refinance its debt. The Company relied on the case of Socimer v Standard Bank to establish the existence duty of good faith on a party when it exercises a contractual discretionary right.
- Despite the Company making offers to refinance its debt, the Bank failed to properly consider those offers and sold the Company’s loan to Isobel who appointed an administrator to take control of the Company and its properties.
- The Company had always borrowed against Base Rate with the Bank. The Bank informed the Company in 2008 that it had to switch its borrowing so that it was centred on LIBOR interest because the Banks were lending to each other at LIBOR interest rates and it was no longer profitable to lend to customers at base rate.
- The Company strongly resisted but the Bank continuously badgered them and suggested the move would not cost the Company any more money. The Bank also presented a pre-determined refinance package which it alleged would result in the Company continuing to pay Base Rate.
- The Bank also put pressure on the Company to deal expeditiously because of rising interest rates (it has subsequently transpired that the Bank did not believe was a real risk). At the same time that the Bank was making representations about LIBOR to the Company, the Bank was itself engaged in systematically and dishonestly manipulating LIBOR. It was the Company’s case that the Senior Bank personnel who pressured customer relationship managers to force their customers to move their borrowing from base rate to LIBOR were aware that the LIBOR traders were engaged in rigging the rate.
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