His Honour Judge Bird:
Introduction
- This is an application for summary judgment made by a bank in respect of proceedings brought by two companies ("the customer" or "the Claimants"). Mr David Head QC appears for the bank with Mr Ciaran Keller and Mr Humphries appears for the customer.
- The claim was issued on 31 March 2016. The customer seeks damages arising out of the mis-selling of various Interest Rate Hedging Products ("IRHPs") in 2002 and 2004. The application for summary judgment is based on the bank's assertion that the claims are statute barred. Whether the bank is right or not depends on an application of section 14A of the Limitation Act 1980 and in particular on understanding when the customer had "the knowledge required for bringing an action for damages in respect of the relevant damage" (see section 14A(5)).
- Some of the pleaded claims are accepted to be statute barred. The only remaining claim is one in negligence. The parties have agreed that the customer's claims will be statute barred if the customer had the requisite knowledge before 29 June 2012.
- Before dealing briefly with the pleaded claim and then the law I will briefly set out the chronology of events. Paragraphs 16 to 69 of the bank's skeleton set out certain "uncontested background facts". True to that description no issue was taken with the cited facts during argument. I need only summarise them here.
Chronology
- In late 2002 the bank agreed to lend Orchard (Huthwaite) Limited ("OHL") £2.8M on condition that an IRHP was entered into in respect of the loan. On 2 October 2002, there was a meeting between the bank and the customer and on 4 October 2002 a paper entitled "interest rate risk management solutions" was prepared for the customer. That was followed up by another paper with the same title on 14 November 2002. Minutes of the 2 October meeting produced by the bank refer to a paper presented at that meeting in which alternative methods of lending were set out including interest rate caps.
- Indicative terms for the loan were signed on 15 November 2002. An IRHP (a collar) was completed on 22 November 2002. The cap rate was 6.35%, the floor rate 3.85% and if base rate fell to or below the floor the default rate would be 5.4%. Base rate fell in February 2003 and the default rate then applied. Discussions about restructuring followed and on 8 August 2003 the customer was told that the break costs to exit the collar were £185,000. That was 6.6% of the loan value. On 11 August 2003, the customer expressed concern about the break costs. In an email of that date the customer wrote:
"we are most concerned you have now advised us that the exit cost from our current trade is £185k. where has this figure come from and how is it calculated? This is the first we have heard of it."
- In November 2003 Orchard (Developments) Holdings PLC ("ODH") approached the bank for funding in the sum of £3.2M. The bank was prepared to consider the loan but on condition that an IRHP was entered into. By that time, because of fluctuations in relevant rates the costs of exercising the break in respect of the IRHP already in place had fallen to £71,000. On 11 December 2003, a loan agreement for £3.2M was signed. By then the customer had received documentation from the bank which set out the following:
"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."
- On 3 March 2004 ODH executed an IRHP (a swap) with an effective date of 30 September 2004 and a termination date of 30 September 2014 (reflecting the 10-year loan facility), for a partially amortising notional amount of £3.2 million with a fixed rate of 4.75% gradually stepping up to 6.00%.
- On 24 November 2004, the £2.8M OHL debt was refinanced by a loan agreement between the bank and ODH in the sum of £2,649,545.21 over a period of 9 years and 7 months. It was again a condition of the loan that an IRHP should be entered into. To fulfil that condition, in October 2005, ODH in effect took over the OHL collar.
- From around 2008 the customer began to experience financial difficulties and in March 2009 was referred to the bank's global restructuring group, by reason of a failure to repay earlier indebtedness. In January 2010 following an inquiry, the customer was told that the break costs of exiting the IRHPs were £201,000 in respect of the swap and £347,000 in respect of the collar.
- On 30 November 2010 HMRC indicated an intention to present a winding-up petition against ODH in respect of a debt of £296,757.58. At a board meeting of the group it was noted that "the presence of hedging products" was contributing towards difficulties in securing re-finance. In December 2011, there was a meeting between the bank and the customer. Discussions took place about refinancing with Santander and (as appears from board minutes of 15 March 2012) the customer became aware for the first time, that the bank would take account of break costs when carrying out its loan to value calculations. At the meeting (as is made clear in an email sent by the customer on 13 March 2013) the customer also became aware of "the enormous extent of hedging break costs". In January 2012, the hedging break costs were £335,200 in respect of the swap and £193,500 in respect of the collar.
- On 3 April 2012, in the context of attempts to transfer the IRHPs to Santander, the directors of the customer noted in a board meeting that:
"despite the bank's statement that hedging arrangements were transportable, this was not the case"
- On 13 March 2013, the customer emailed Mr Ewan Mackie of the bank in the following terms:
"…we appreciate that you are new on the scene from our point of view and are clearly not fully appraised of what has been happening to us particularly over the period from December 2011. We mention 15 December 2011 because on that date we met with the bank in London…..and discovered much to our surprise the enormous extent of hedging break costs and that fact that you were now treating those break costs as a part of the facility for the very first time , even though that was never previously explained to us, was not mentioned in facility letters issued by the bank and not included in annual certifications….."
The Claim
- The Particulars of Claim plead breaches of duty at paragraphs 26, 27 and 29 in the following manner:
26. The Bank failed to provide a full, accurate and proper explanation of breakage costs under the Swaps sufficient to ensure that [the customer] understood the nature of the risks. Alternatively, the explanation given by the bank was not clear and misleading.
(1) Before [the collar was executed] the bank said that breakage costs may be payable should the customer wish to close out the swap before maturity, but did not explain the unascertainability or potentially very high sums that those costs might entail.
(2) Before [the swap was executed] the bank's explanations about breakage costs (including their calculation and extent) were unfairly contained in small print notes at the end rather than in the body of the bank's papers…
(3) a full accurate and proper explanation would have been that there was a risk that breakage costs of an unascertainable amount which could be very significant, would be included as a contingent liability in loan to value calculations which might cause [the customer] to be in immediate breach of their LTV covenants for which the bank would hold security and which would be realised in the event that the customer sought to transfer the swap to another bank.
27. The bank's description of the [collar and the swap] as "totally transportable" was incorrect and misleading.
(1) The bank would require security for any contingent liability to breakage costs to be secured against the property held by the bank as security for the loan; and/or any other property over which the bank held security. In practice the [collar and swap] were not totally transportable separate from the loans.
(2) the contingent liability for very significant breakage costs might well restrict the bank's ability or willingness to take on the [collar and swap] in circumstances where the customer was not wanting to close out its [collar and swap] but to continue them with another bank.
29. Further or alternatively the statement set out at paragraph 29 above did not amount to a full accurate and proper explanation of the transportable nature of the [collar and swap] for the reasons there given. A full explanation would have included reference to an interest rate cap, which allowed parties to limit exposure to upward interest rate movements, while providing the customer with the benefit of downward interest rate movements and involved no liability (whether contingent or otherwise) to breakage costs which might otherwise obstruct the transportability of the [collar and swap].
- The customers claim damages from the bank in the sum of approximately £48,300,000. Some of that claim relates to the loss of an opportunity.
The Law in respect of Limitation
- Insofar as is relevant, section 14A of the Limitation Act 1980 is as follows:
14A.— Special time limit for negligence actions where facts relevant to cause of action are not known at date of accrual.
…….
(3) An action to which this section applies shall not be brought after the expiration of the period applicable in accordance with subsection (4) below.
(4) That period is…..
(a) …..
(b) three years from the starting date as defined by subsection (5) below….
(5) For the purposes of this section, the starting date for reckoning the period of limitation under subsection (4)(b) above is the earliest date on which the plaintiff ……. first had…. the knowledge required for bringing an action for damages in respect of the relevant damage….
(6) In subsection (5) above "the knowledge required for bringing an action for damages in respect of the relevant damage" means knowledge both—
(a) of the material facts about the damage in respect of which damages are claimed; and
(b) of the other facts relevant to the current action mentioned in subsection (8) below.
(7) For the purposes of subsection (6)(a) above, the material facts about the damage are such facts about the damage as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment.
(8) The other facts referred to in subsection (6)(b) above are—
(a) that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence; …
(b) …….
(c) ……
(9) Knowledge that any acts or omissions did or did not, as a matter of law, involve negligence is irrelevant for the purposes of subsection (5) above.
(10) For the purposes of this section a person's knowledge includes knowledge which he might reasonably have been expected to acquire—
(a) from facts observable or ascertainable by him; or
(b) from facts ascertainable by him with the help of appropriate expert advice which it is reasonable for him to seek; but a person shall not be taken by virtue of this subsection to have knowledge of a fact ascertainable only with the help of expert advice so long as he has taken all reasonable steps to obtain (and, where appropriate, to act on) that advice.
- Thus, time starts to run from the date when the customer first had the knowledge required for bringing an action for damages in respect of the relevant damage. No issue about the right to bring the action arises. The requisite knowledge then, is knowledge:
a. Of material facts about the damage in respect of which damages are claimed (section 14A(6)(a)), and
b. That the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence (section 14A(8)(a)).
- In Haward v Fawcetts [2006] 1 WLR 682 the House of Lords provided guidance on the proper application of section 14A (in cases of actual as opposed to implied knowledge) and answered two important issues:
a. what degree of certainty does the Claimant need to have before the Claimant can be said to have the requisite knowledge? and
b. how much detail must the Claimant have before the requisite knowledge is present?
- In answer to the first issue, Lord Nicholls made it plain that for time to start running, the knowledge possessed by the claimant need not be absolute. In other words, the Claimant need not have absolute certainty about the requisite facts. Approving Halford v Brookes [1991] 1 WLR 428, he expressed the view that knowing with sufficient confidence to justify embarking on the preliminaries to the issue of a claim was sufficient to constitute knowledge for the purposes of the section. A reasonable belief would in normal course suffice, but a vague suspicion would not. If the customer knows enough for it to be reasonable for him to begin further investigations, he will be taken to have the requisite knowledge.
- Lord Nicholls approached the second issue (at least insofar as it relates to section 14A(8)(a)) by posing 2 supplemental questions: what detail does the Claimant need to have:
a. first in respect of the "act or omission" alleged to constitute the negligence complained of, and
b. secondly in respect of the connection (or "attributability") between the acts or omissions complained of and the damage suffered.
- Lord Nicholls explained the need for the 2-part approach by noting that knowledge of the acts or omissions alleged to constitute negligence would, without more, not start time running.
- As to the first question, the answer Lord Nicholls gave (approving Wilkinson v Ancliff [1986] 1 WLR 1352) is that the claimant need not have the kind of detail that one would see in a well-drafted Particulars of Claim, but need only have a "broad knowledge of the essence" of the relevant acts or omissions (approving Spargo v North Essex DHA [1997] PIQR 235).
- Lord Nicholls explained in respect of the second question (approving Nash v Eli Lilly [1993] 1 WLR 782) that time would not start to run until the Claimant knows (in the sense identified above), that there is a real possibility his damage was caused by (or per Lord Mance at paragraph 122, "capable of being attributed" to) the act or omission in question.
- In cases where, as here, the claim is for economic loss suffered as a result of receiving bad or incomplete (in other words, "flawed") advice, it is axiomatic that the Claimant must plead reliance on the flawed advice. In the absence of reliance there is no causal link between the flawed advice and the damage suffered. In those circumstances, once the Claimant knows the advice is flawed (either because it was wrong or incomplete), the Claimant would necessarily know that there was a real possibility that his damage was capable of being attributed to the flaws in the advice the Claimant had relied upon. Thus, the plea of reliance in effect means that the court will, in flawed advice cases, easily be persuaded that the requirements of the second question are met. This point arises from the opinion of Lord Nicholls at paragraphs 16 and 17.
- In practice, when dealing with the first question (how much does the Claimant need to know about the acts or omissions?) the court should (see Lord Nicholls approval of the approach of Hoffmann LJ in Broadley v Chapman [1994] 4 All ER 439) look at the way the claimant has pleaded his case, distil from that what he is complaining about and then ask whether, in broad terms, he had knowledge of the facts on which the complaint is based.
- Lord Nicholls points out at paragraph 12 that section 14A(9) does not require that the Claimant know that the relevant acts or omissions constitute negligence. Knowledge of the facts is required before time can run, knowledge of the legal consequences of those facts is irrelevant. Approving the view of Sir Thomas Bingham MR in Dobbie v Medway [1994] 1 WLR 1234, Lord Nicholls notes that for time to begin running, a Claimant need not know he has a worthwhile cause of action.
The law in respect of summary judgment
- I was referred to Easyair v Opal [2009] EWHC 339 (Ch) a decision of Lewison J (as he then was). There is no dispute between the parties about the proper approach to be taken to an application for summary judgment in this context.
- In summary to succeed in its application for summary judgment, the bank must persuade me that the customer has no realistic (as opposed to fanciful) prospect of persuading the court at trial that its claims are not statute barred.
The arguments
- Mr Head QC submits that the question which arises under section 14A(6)(a) is one that I need not spend much time on. He relies on the opinion of Lord Mance in Haward at paragraph 106. Subsection (6)(a) is concerned with the seriousness of the damage suffered and will be relevant in circumstances where the loss suffered may appear, for a time, to be so minor that proceedings would not be justified. The schedule of loss provided by the Claimant expressly pleads a loss of £3.4M arising from the sale of a property in July 2011. There is no suggestion that losses were ever thought to be so trifling that the issue of proceedings would not have been justified.
- Mr Head submits that the customer had "broad knowledge of the essence" of the facts their complaints were based upon and knew that there was a real possibility that their damage was capable of being attributed to those facts well before 29 June 2012.
- He submits that a fair summary of the Claimants' case is (see his skeleton at paragraph 89):
"The bank did not give a sufficient explanation of the Collar and Swap when they were sold, in particular that there was a risk of break costs in an amount which might be very significant. (It is not accepted that the complaints that the break costs (i) would be added as a contingent liability on LTV calculations, or (ii) might restrict the portability of the IRHPs is part of the essence of the claim, but on the facts it does not matter if it is); and the Bank did not give a sufficient explanation of alternative interest rate hedging products that were available. (It is not accepted that the complaint that a full explanation would have required reference to an interest rate cap is of the essence of the claim, but, again, on the facts it does not matter if it is)."
- Mr Head goes on to submit (see paragraphs 90 to 118), by reference to the evidence before me and the chronology set out above that – even on his wider statement of the essence of the claim – the Claimants had a "broad knowledge of the essence" of facts which form the foundation of their complaints and knew there was a real possibility that their damage was caused by the acts or omissions in question. He relies on actual knowledge, but is entitled to rely as a fall-back position (see paragraphs 74 and 121 of his skeleton) on the knowledge that the Claimants could reasonably have been expected to acquire.
- In particular:
a. The Claimants had a proper explanation of the swap and collar and of break costs considerably before June 2012.
b. The Claimants became expressly aware of the "enormous extent of hedging break costs" at the latest on 15 December 2011 as they explain in their email to the bank dated 13 March 2013. The date is repeated in solicitors' correspondence sent on behalf of the Claimants (see the bank's skeleton at paragraph 94). In fact, Mr Head submits that the Claimants knew of the enormity of the break costs much earlier and refers to the Claimant's request for an explanation of how break costs of £185,000 were calculated and the bank's response to that request, as early as August 2003.
c. The bank's intention to include break costs within the LTV calculation also came to the attention of the customer in December 2011. So much is recorded in board minutes of a meeting of 15 March 2012 and in the email of 13 March 2013.
d. The Claimants were aware that the collar and swap were not "portable" by 3 April 2012 at the latest as appears from the board meeting minutes of that date.
e. The evidence is that the bank explained alternative products to the customer, including an interest rate cap at a very early stage. There is mention of interest rate caps in a document dated 1 October 2002 which is referred to in notes of the meeting of 2 October 2002. The note of the 2 October meeting records the customer's decision to pursue a collar structure as it required no up-front costs to be paid.
- Mr Humphries accepts that, save for "concerns" about the minutes produced by the bank of the meeting on 2 October 2002, no issue is taken with the documents. I will come back to Mr Humphries' concerns shortly. His primary submission (and in truth his only real answer to the application) is that whilst it may be that certain key facts were known to the customer before 29 June 2012 the customer did not know until July 2012 that any advice they had received was "flawed or wrong" in the sense that it gave rise to a right of action. Mr Humphries submits, on the basis that the bank pursues its application relying on the customer's actual knowledge, that (see paragraph 11 of his skeleton where this point is described as "key") the customer had no reason to believe that the IRHPs had been mis-sold until July 2012. Mr Humphries relies on the fact that the first public announcement by the FCA that it would provide appropriate redress to victims of mis-selling was not made (coincidentally) until 29 June 2012.
- Mr Humphries also argues that in order to succeed in its application under section 14A the bank needs to establish (see paragraph 14 of his skeleton argument) that the customer knew about "the size and unquantifiability" of the breakage costs. At paragraph 25 of the witness statement prepared in opposition to the application Mr Humphries says this, in effect by way of submission:
"whilst only peripherally relevant to the issue the subject of the application, it is perhaps not wholly inappropriate to have in mind that the losses suffered by [the customer] are said to be very substantial,……if the claims were struck out as time-barred, it would surely be one of the largest claims ever to have suffered that fate by reason of someone, who had very much in mind the need to protect the limitation position, having waited just a little too long before putting a standstill agreement in place"
- As to the issue of "attributability" Mr Head in effect submits that the causal connection between the advice given and the damage suffered was patent and obvious. As in Haward the Claimants accept that they relied on the flawed advice. As soon as they knew the advice had fallen short, either because there was a failure to explain or because the advice given was inadequate they must have had the requisite knowledge of "attributability".
- Mr Humphries submits that there is a real possibility that the claimants will succeed at trial in arguing that that claim is not statute barred. He asserts that the evidence shows that they only realised that they might have a claim against the bank after 29 June 2012 and that that, in essence, amounts to a good reason why the matter should proceed to trial.
- Mr Humphries relies on paragraph 59 of the opinion of Lord Walker in Haward:
"…..considering the matter for the present simply by reference to the statutory text, I think that it is clear that although section 14A(9) has the effect just mentioned, it cannot go so far as to free the section entirely of any hint of legal technicality. There are three pointers to this, all of which I have already mentioned: the word "damage" (which must in this context mean actionable damage, or at any rate what the claimant believes to be actionable damage, the cause of action being negligence); the words "attributable to" which are concerned in some way with causation, in the context of what becomes (once proceedings have been commenced and the claim pleaded) an allegation of negligence; and the words "acts or omissions alleged to constitute negligence". So although the claimant need not, at the starting date, know anything about the tort of negligence (not even its name) his or her state of knowledge cannot be assessed, with hindsight, without some reference to legal concepts, including what is causally relevant in the context of a negligence action".
Discussion and conclusion
- I am satisfied, and there was no real argument to the contrary, that the Claimants had the requisite knowledge of the material facts about the damage in respect of which damages are claimed before 29 June 2012. I am satisfied that such knowledge arose at the latest in July 2011 when a loss of in excess of £3M is said to have been suffered on the sale of a property. It follows that the requirements of section 14A(6)(a) were met before 29 June 2012.
- Taking the 2-stage approach to section 14A(8)(a) I am satisfied, for the reasons given by Mr Head QC, that the Claimants knew of the acts or omissions which are now said to constitute negligence before 29 June 2012. I am satisfied that Mr Head QC is right when he submits that the true essence of the claim pleaded against the bank (and so the acts and omissions relied upon) is that the bank gave flawed advice about how break costs would be calculated and about the availability of other products.
- It is abundantly clear that the Claimants were aware that the advice was flawed well before 29 June 2012. The precise summary of the claim (and so of the "acts and omissions" relied upon) was not a matter of dispute between the parties and in any event its precise formulation is not of central relevance; even on Mr Head's wider distillation of the claim (including what in my view are in truth the detailed particulars that one finds in a well-pleaded particulars of claim) the relevant acts and omissions were known before 29 June 2012.
- As to attributability I am again satisfied that the Claimants were sufficiently aware that their damage was attributable in whole or in part to the acts and omissions they knew about before 29 June 2012. On the Claimants' own case they relied on the advice given when entering into the IRHPS. When they knew the advice was flawed (and indeed seriously flawed) it would in my judgment have been obvious to them that the damage they were suffering was attributable in whole or in part to the flaws in the advice.
- I cannot accept Mr Humphries' submission that the Claimant needed to know that they had a claim in negligence against the bank before time could run. I accept for the purposes of this judgment that there is a real prospect (because it is a matter of fact best determined at trial on the evidence) of the Claimants establishing at trial that they did not actually know that they had a claim in negligence until after 29 June 2012. However, in my judgment that state of knowledge is irrelevant to the proper application of section 14A.
- I do not consider that paragraph 59 of the opinion of Lord Walker supports Mr Humphries' argument. Lord Walker points out that a proper analysis of attributability and the proper identification of relevant acts and omissions cannot take place without some reference to legal concepts. He expressly notes that the Claimant "need not, at the starting date, know anything about the tort of negligence (not even its name)". The point is echoed by Lord Nicholls at paragraph 12 in the words: "…knowledge of fault or negligence is not necessary to set time running. A Claimant need not know he has a worthwhile cause of action".
- It seems to me on the evidence that it is plain that the Claimants had actual knowledge of the requisite matters before 29 June 2012. If I am wrong in respect of that, then I accept Mr Head's submission that the Claimants might reasonably have been expected to acquire the relevant knowledge from facts observable or ascertainable by then with or without appropriate reasonable advice.
- Mr Humphries' point that the notes of the 2 October meeting are not agreed does not in my view make any material difference to the outcome of the application.
- Mr Humphries' plea to fairness (see paragraph 35 above), is in my judgment of no relevance. The balance between the rights of the parties has been struck by Parliament in section 14A of the 1980 Act. The mechanics of striking the balance by the proper application of section 14A have been explained by the House of Lords in Haward. On a proper application of the section the claim is either statute barred or it is not. Parliament has given the courts no discretion in the application of section 14A (see paragraph 7 of Haward).
- I am satisfied that the Claimants, by 29 June 2012, knew with sufficient confidence to justify embarking on the preliminaries to the issue of a claim, that the damage they were suffering was attributable (in whole or in part) to the acts or omissions which they allege constitute negligence. I am not persuaded that the Claimants have any prospect (and certainly no real prospect) of persuading the court at trial of the opposite state of affairs.
- For all those reasons, I am satisfied that this is a case in which I must grant summary judgment to the bank in respect of the claim. I am grateful to both advocates for their concentrated and focussed submissions.
