Warner Retail Ltd v National Westminster Bank

This case concerns an allegation of mis-selling of interest rate swaps to a small family business, Warner Retail. It is a claim based on an allegation that the banks, which are the Defendants, gave negligent advice to the Claimant in June 2006 and November 2007. It is alleged that the bank assumed an advisory role, and gave advice negligently, or gave advice in breach of contract. The Claimant relies on an alleged breach of regulatory rules that applied to the banks at the time. These rules are relied on as informing the standard of care that the bank was required to achieve.

Those rules, I am told, were drafted in very broad terms, so that on the facts of a particular case, the Claimant says, the evidence of an independent expert as to how those very broad principles of guidance are applied in the market by banks, is essential to enable to court to understand properly what the yardstick is that the court is going to be asked to apply as regards the standards expected of the Defendants at the time. If there is, and the Claimants says there is, a recognised body of expertise out there in the market, and if their proposed witness is one of that body, that may well assist the court in establishing whether there has been a breach of the duty of care.

As regards the value of the claim, as pleaded it is in excess of £800,000 as at the date of the Particulars of Claim. That is the amount that had been paid under the swap agreement over and above what the bank had been paid under the loan itself. These were bank cancellable swaps, which are different from so-called ‘vanilla’ swaps, because the bank can, before the end of the term of the agreement (which was 15 years in both cases here) terminate the agreement at the end of any quarter after the 5th anniversary. Under a vanilla swap that ability to cancel is not present and it is simply a fixed term arrangement. The option to terminate given to the bank under a cancellable swap has consequences for the amount of money paid under the swap, because a client pays slightly less under the cancellable swap than it would pay under the vanilla swap. If the Claimant is not successful in this litigation, these agreements will remain in force for the next seven or eight years unless the bank decides to cancel them sooner.

The Claimant alleges that it would not have entered into the bank cancellable swap, or even into a vanilla swap, if it has been properly advised, but would instead have entered into a different hedging arrangement, in particular, it is now alleged, a cap. This would not be a fixed rate agreement but an arrangement whereby the amount payable is variable up to a ceiling. The complaint is that there was no proper explanation by the bank to the Claimant of the benefits or suitability of this cap product compared to the swaps in fact sold, and that the Claimant was not adequately informed about the financial consequences of the transaction it was entering into.

The trial of this matter is now set down for five days due to start on 30 June. Directions were given by order of Deputy Master Clarke on 16 May 2013. Those directions were that the trial should take place between 1 February and 30 April 2014; there should be standard disclosure; each party should serve on the other the witness statements of the oral evidence they intend to rely on by 16 December 2013; the parties have permission to apply to be able to rely on expert evidence; trial bundles are to be agreed and prepared 21 days before the trial and lodged 7 days before, and skeletons and chronologies to be lodged 2 clear days before the start of the trial. Although those directions envisage the trial taking place somewhat earlier this year, when the parties went to Chancery Listing, they were given the trial date of 30 June 2014, and they are informed about that by letter of 24 July 2013, so the parties have known since that date that the trial was going to take place on 30 June 2014.

As happens all too frequently, an entirely sensible timetable which would have given the parties plenty of time to prepare for trial in an orderly manner was effectively completely ignored them. They repeatedly agreed extensions for each other and these were the subject of consent orders. The result is, as also still often happens, that we are now about two weeks from trial and the parties have been distracted from their preparation by the need to deal with this application. The application has generated two lever-arch files of documents, both of which were entirely replaced with substituted corrected ones at about 9.45am this morning. There is a witness statement from the solicitor for the Claimant, a witness statement from the solicitor for the Defendants and two bundles of authorities. Both sides were represented by leading counsel, the Claimant with two junior counsel and the Defendant with one junior, and each side with several other people attending court as well.

The Claimants says it has now instructed an expert and they have a draft report ready. There should be a final report ready some time next week. The Defendants have not instructed an expert, as they do not want to incur the expense of that unless and until they know whether permission for the Claimant’s expert is going to be granted. Their main factual witness, the bank manager, Mr Park, gives some evidence, I am told, in his witness statement which could be described as expert opinion, since he is the person who sold the products to the Claimant. The Claimant accept that the trial would have to be adjourned now if this application was granted.

There are two issues that arise:

The Claimant says that there will be a serious inequality of arms if it is not allowed to call expert evidence to rebut what Mr Parks says. The question of the suitability of these products for this client is at the core of the case. In order to establish that case they need to be able to put forward expert evidence on that issue, and similarly a regards the issue as to what explanation ought to have been given of the products sold as compared with alternative products on offer. The Claimant has relied on the judgment of HHJ Havelock-Allen QC, the Mercantile Judge in the Queen’s Bench Division in Bristol, in the case of Battrick v The Royal Bank of Scotland, the judgment in my bundle was undated but was probably given towards the end of 2013. The Bristol court handles many mis-selling cases and that case involved the sale of a swap to a retail customer, Mrs Battrick. Because she was an individual, she was able to bring a direct claim for breach of statutory duty under the relevant regulatory rules, a course which is not open to the corporate entity which is the current Claimant, hence their reliance instead on a common law duty of care.

The judge in Battrick noted that although the ambit of the duty of care is informed by relevant regulatory rules, those rules probably impose obligations greater than those encompassed by the common law duty of care. The judge referred to Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197. The broad premise of these cases is that a professional person should not be regarded as being in breach of duty of care without regard to evidence, if it exists, of what his peers in that business, trade or profession regarded at the time as being the standard of behaviour or course of conduct that was appropriate as a minimum to comply with the relevant duty. The judge said further that it must be possible to determine that there is a recognised body of expertise, and that the evidence will genuinely assist the court in determining the issue. Judge Havelock-Allen also commented on the scope of the order that it was sought to make in that case, referring to the standards adopted in the banking industry to achieve compliance with the COBS rule alleged to have been breached. That is similar to the direction sought in this case. The reason for the breadth of that order was said to be because material identical orders have been made in the recent past.

As to the existence of a body of expertise on interest rate swaps, Judge Havelock-Allen said this at paragraph 10:

“I cannot accept that there does not exist an expertise in the practice of banks in selling IRHPs to retail customers. A distinction does need to be drawn between evidence of accepted practice which is admissible, and evidence which amounts to no more than the expert’s opinion of what he or she would have done in the circumstances, which is not admissible. But the sale of derivatives by banks to individual customers as a hedge for loan transactions, although a comparatively new phenomenon, has been recognised as highly regulated activity over the past 10-15 years. It is a specialist niche in lending by the major banks, for which their employees have, or ought to have been, specially trained. I am presently satisfied that there is, or is likely to be a body of practice that has grown up in the banking industry as to how these derivatives should be sold, and that there is a broad division in such practice between sales to retail customers and sales to professional customers and market counter-parties. To that extent, I am fortified in this conclusion by the fact that the parties in the swap cases, where I have already directed that there should be expert evidence, appear to have had no difficulty in identifying individuals able to give the relevant expert evidence.”

The learned Judge then dealt with submissions which were made there, and also in this case, that the inquiry as to whether there had been a breach of the regulatory rules is a factual issue that the court could decide, and the learned judge rejected that submission. He said that the rules do not speak for themselves, and the question: “what is the standard of conduct that the rules require of a financial advisor?” is one where expert evidence is likely to assist the court. He did note, however, that other judges managing swaps cases in their lists were not allowing expert evidence in every case, and that the Court of Appeal in one appeal had not decided that they were wrong to come to that conclusion.

At paragraph 40, the judge said:

“The risk in excluding expert evidence of the type I have described is that the court determines what is and is not good enough to meet the standard required by the relevant COBS rule in a vacuum which is filled only by the parties and submission. In my judgment, a court ought to be slow to hold that a bank acted in breach of its statutory duty, and or was negligent on that basis.”

He also sounded a word of warning in paragraph 15, by way of a post-script, where he said that the short judgment he was giving ought not to be treated as a tablet of stone to be touted around other Mercantile Courts as support for an order for expert evidence. There may be other swaps cases where, on the particular facts, such evidence would not be appropriate, even by his criteria.

Mr Spink, appearing for the Claimant also showed me the case of Zeid v Credit Suisse [2011] EWHC 2422 (Comm). That was a dispute about loan notes. Paragraph 9 of that judgment makes clear that there does not need to be a professional body specifically related to the particular product. Because these are complex products the court is likely to derive some assistance from people with a real understanding of them, who can explain various features of those products and can also give evidence of the context in which advice was given and the product sold. Finally, I was referred to the case of Braintree Leisure v Nationwide [2013] EWHC 4282 (QB) where an issue had arisen as to whether the transaction entered into was a swap or not, and therefore whether the regulatory rules applied to it. In that case, Flaux J did make an order allowing expert evidence, albeit that the application was made nine weeks before trial. However it seems on the particular facts of that case, the issue had only become apparent when one of the witness statements of the factual witnesses expressed the opinion that the transaction was not a swap for those purposes, and it appears not to have been a point that was apparent on the pleadings.

So, what has happened so far in this case? I have mentioned already the directions given some time ago by the Deputy Master. Those directions were given without an oral hearing. There had been no agreement between the parties as to the provision of expert evidence and that is why the Deputy Master included in the order that provision about the parties being able to apply for permission. Disclosure by list took place on 10 January 2014 and inspection on 30 January. Witness statements were due to be exchanged on 16 December 2013 but, as I have mentioned, there were a number of extensions of time, so that witness statements were in fact only exchanged on 28 April 2014. There was an attempt to mediate during August 2013, and there was considerable discussion about issues related to disclosure and the service of witness statements. It is not seriously suggested that the issues on which expert evidence is now sought to be adduced were matters which only arose because of what appeared in the disclosure given by the banks or because of what was said by the banks’ factual witnesses.

Nothing further happened as regards the Claimant making an application for permission to adduce expert evidence until 5 December 2013, when the Claimant’s solicitors wrote to the Defendants’ solicitors raising the question of expert evidence. In that letter they requested that the bank agreed to the scope of expert evidence covering five matters:

The banks replied on 3 January 2014. They disputed the scope of the evidence as outlined by the Claimant. They said that the Claimant had failed to identify with sufficient precision what were the issues to which expert evidence went; some of the issues which they sought to cover by expert evidence bore no relation to the pleaded case; and some were not suitable for evidence at all. They also complained that the Claimant had not identified the paragraphs in the Statement of Case to which the evidence was said to be relevant. In that letter the bank said that any expert evidence ought to be confined to three shorter points - so they were accepting at that stage that this was a case where some expert evidence might be appropriate but there was a dispute over its scope.

After that letter of 3 January 2014, there was further correspondence. On 21 January, Lexlaw for the Claimant wrote to the bank asking them to confirm that expert evidence is reasonably required to resolve the proceedings and that there was a relevant recognisable body of expertise. They went on to say that they thought the most sensible way to proceed was for the parties to agree, if possible, an order for directions as to expert evidence, failing which they would have to apply to the court. In their response of 12 February 2014, the banks’ solicitors did not confirm either of those points. They said that the draft order that had been provided was extremely vague and inappropriate. Thus the banks made clear that they were not agreeing to any expert evidence, at least anything beyond what they had outlined in their 3 January letter.

The Claimant did not promptly issue an application but waited until 6 May 2014. It is said that this was because they have waited for the witness statements to be exchanged. Their resources were devoted to dealing with difficult disclosure points and their own witness statements, and they submit that it was sensible to see what disclosure and witness statements said before trying to define the precise scope of the expert evidence. After issuing the application on 6 May 2014 they had difficulties in getting the application before a Master, and it was only last week that Master Price was able to hear the application. He adjourned the hearing to a judge because he concluded that he would be likely to give permission to appeal whatever decision he made.

In the period in which the Claimant was trying to get a hearing date, for the 6 May application, the Claimant continued to urge the banks to agree the scope of the expert evidence. It also suggested that the banks instruct their own expert in preparation to maximise the prospects of keeping the trial date. But the banks’ solicitors by this stage opposed the application root and branch because it was being made so close to the trial.

The draft order that has been provided to me, states that:

“The expert should be asked to give evidence on whether the Defendants’ actions or inactions fell below the standard of practice reasonably adopted in the banking industry, including by reference to its regulatory obligations, with respect to the sale of interest rate hedging products to private customers in respect of the 2006 swaps and to retail customers in respect of the 2007 swap, those terms being terms (reading to the words) ... under the regulatory rules.” This is [the order goes on] to include evidence as to whether and to what extent information about contingent liability of hedging products, which would widely (reading to the words) ...”

The other paragraphs of the proposed order say that the evidence should cover the salient characteristics of the product; it should deal with the cost of exiting the swaps (this being an important point in the quantum calculation). Paragraphs 6, 7 and 8 of the draft order deal with hypothetical transactions, including suitable interest rate cap products available in 2006 and 2007, namely on what terms they would have been available in the market and whether they would have been suitable for this customer.

The main focus of the submissions before me have been as to the exercise of my discretion as to whether to allow the Claimants to adduce expert evidence even if they are right in saying that this is a case where expert evidence could usefully be adduced to the court on the issues referred to in the order. The Defendants say that it is contrary to principle to allow this late application because the Claimant has not pursued this claim diligently. Not surprisingly, the Defendants have referred to the case law following the well-known judgment at the Court of Appeal of Mitchell as indicating that I should exercise my discretion against allowing this application.

The Claimant says that their application is not covered by the Mitchell principle because they are not seeking relief from a sanction. This is not an application under CPR 3.9, and nor is it an application which involves enforcing compliance with rules or a practice direction or an order of the court. Here, the Claimant says, there has been no failure to comply with a court order, as a result of which some sanction applies because there has been no court order setting a timetable in which expert evidence should be served. Insofar as I should focus on the need for an adjournment to the case, the Claimant says that the court has a general power to adjourn or bring forward a hearing, and that power is not expressly subject to the Mitchell criteria or CPR 3.9. Mr Spink, therefore, urges me to treat this case as covered solely by the application of the over-riding objective, to deal with the case justly and at proportionate cost. He emphasises the need to ensure that the parties are on an equal footing and that the case is dealt with expeditiously and fairly. He particularly referred me to the judgment of Nugee Jin Kaneria v Kaneria and Guidezone [2014] EWHC 1165 (Ch). That case concerned an in-time application to extend time for the service of the defence when the application was brought a few days before the time limit agreed by the parties had expired. Nugee J heard the matter after that time limit had expired. He held that an in-time application for an extension of time does not engage the Mitchell principles. He adopted the summary of those principles set out by Leggatt J in Summit Navigation Ltd & others v Generali Romania Asigurare Reasigurare SA [2014] EWHC 398 (Comm.). He held that the application before him was neither an application for relief against sanctions, nor was it to be treated as an application analogous to seeking relief against sanctions, because in that case the party was not in default of any rule. He considered himself bound so to approach the case by the decision of the Court of Appeal in Robert v Momentum Services Ltd [2003] EWCA Civ 299. There, the Court of Appeal had decided that one cannot import the checklist in CPR 3.9(i) into 3.1(ii)(a). Nugee J held that that still applied following the post-Jackson reforms. He therefore applied the over-riding objective, of course in the terms as amended by the Jackson reforms, but without giving primacy to the need to enforce compliance with rules, practice directions and orders as required by CPR 3.9.

Mr Spink says that this is an in-time application because CPR 35 does not set any particular time limit for making an application to the court for permission to adduce expert evidence. The order, made on 16 May 2013, giving the parties permission to apply for expert evidence was not strictly necessary and was probably included in that order as a marker, placed there by the Deputy Master to show the parties that she had not made any decision about the suitability of the case for expert evidence. In any event, that paragraph of the order did not set a time limit. Although I accept that that is true, it does not mean in my judgment that the court must treat an application made a few weeks before trial in exactly the same way as one which is made at the first CMC. The terms of the over-riding objective were changed by the Jackson reforms to make clear that arguments based on equality of arms may sometimes need to give way to the need to deal with cases at proportionate cost, and to allotting to the case the appropriate share of the court’s resources. Mr Taylor QC for the Defendants referred me to Mitchell, and to the subsequent decision at the Court of Appeal in Chartwell Estate Agents Limited v Fergies Properties [2014] EWCA Civ 506. He sought to distinguish the present case from Kaneria, as in that case the trial was due to take place many months ahead of the matter that was being considered by Nugee J. Mr Taylor said that this case is analogous to a sanctions case, the sanction being that if permission is not granted under CPR 35, the party cannot rely on expert evidence. He says that the application to adduce expert evidence should have been made at the CMC, and if it was contested, then it should have been made promptly after the directions order on the papers last summer. He also referred me to the case of Pantelli Associates Ltd –v- Corporate City Developments Number Two Ltd [2010] EWHC 3189 (TCC), where Coulson J said that it is standard practice where an allegation of professional negligence is to be pleaded, that the allegation must be supported in writing by a relevant professional with the necessary expertise. Mr Spink says in answer on Pantelli that that was a case concerning a quantity surveyor, and in many of these mis-selling of interest rate swaps case the banks have opposed reliance on expert evidence. He suggests that if the Claimant had taken the course which Mr Taylor now suggests was appropriate, the banks would have argued that it was premature to consider what expert evidence might be needed before the case went further along.

I do not need to decide how much of the Mitchell case-law I should import into my consideration, because I am fully satisfied that applying the over-riding objective in CPR 1(i), when considering this application for permission to adduce expert evidence under CPR 35.4, and to adjourn the trial under CPR 3.1(ii)(b), that that consideration leads me firmly to rejecting the current application.

Looking at the various matters to which I am enjoined to have regard by the over-riding objective when considering how to ensure that the case is dealt with justly and at proportionate cost, much has been made by the Claimant of the need for the parties to be on an equal footing. In fact neither side will be able to rely on expert evidence in this case, but I accept that to an extent, Mr Park may be in a better position to give factual evidence about the nature of these products than the factual witnesses on behalf of the claimants. Mr Spink has told me that Mr Park’s evidence does include material which might be considered expert opinion. It may well assist the court for the parties to be able to prepare a non-contentious description of the characteristics of interest rate swaps, the difference between bank cancellable swaps and vanilla swaps, and the difference between those products and interest rate capping products. I note that by mentioning those I should not be taken as indicating whether those have any relevance to the case as a matter of pleading. Such a document can be prepared by the parties without the need for expert evidence to be adduced at the trial. Similarly, if the claimants wish to instruct an expert to assist in preparing the cross-examination of Mr Park, then of course they are free to do so, and they need no order from the court to do that. I do not accept therefore that the Claimant is prevented from properly presenting its case at all at trial. It is clear from the judgment in the Battrick case that it is not always necessary to have expert evidence in these interest rate swap mis-selling cases.

However, I do accept that this factor of putting the parties on an equal footing is one that points in favour of allowing expert evidence, but not as strongly as the Claimant has asserted. The other factors in the over-riding objective point very strongly in favour of rejecting the application. As regards saving expense, clearly there would be very considerable expense in adjourning the trial now. It is not sufficient to mitigate that for the Claimant to accept that it may well have to bear the costs of that, assuming that they can pay for them. There is clear prejudice to the banks in putting off this trial, for which it has been preparing for many months.

As far as ensuring that the matter is dealt with expeditiously and fairly, in my judgment allowing this long-standing trial date to be vacated would be the antithesis of dealing with the case justly and expeditiously. Again, it is not enough that the Claimants has said that it is continuing to make the payments which are due monthly under the interest rate swaps. The bank is entitled to know what whether the swaps are valid and enforceable. Mr Taylor also makes the point, which I accept, that the bank manager, Mr Park, who is the main witness for the bank in this case, is facing an allegation that he has behaved negligently and fell below the standards of conduct that were expected of him as a professional person. He has had that allegation hanging over his head for some considerable time. He still is not fully cognisant of what the allegation comprises, but it would be unfair to him and to any other bank witnesses for the matter to be postponed now for several more months.

As regards allotting an appropriate share of the court’s resources and taking into account the need to allot resources to other cases, this factor in the overriding objective requires me to consider the value of the court’s resources, the disruption caused by the late removal from the list of this fixture, and the disruption to other court users of the matter having to be relisted for five days at some future date. I accept the relevance of what the Court of Appeal said in Chartwell, albeit that that was a Mitchell case. The court, when applying the over-riding objective should act with a view to protecting the wider interests of justice, including the interests of other court users who stand to be affected in the progress of their own case by delays and adjournments in the case under consideration: see paragraph 28 of the Chartwell judgment.

Finally, criterion (f) enforcing compliance with rules, practice directions and orders. This last was the addition made by the Jackson reforms. As I have said, the decision of Nugee J in Kaneria confirms that this is a factor to be taken into account, although not to be given paramount status as it has under a relief from sanctions case. The new culture, exemplified by Mitchell means that Claimants must explain to the court why, if in application is made late in the day, it has not been made earlier. Although there is no particular rule or court order that the Claimant has breached here, it is part of the over-riding objective that parties bring applications to court to resolve disputes between them in good time before the trial date that has been set.

As I have outlined in describing what has happened since the directions were given in May 2013. I do not consider that any good reason has been put forward as to why this matter could not have been dealt with very shortly after that directions CMC. It is counter-intuitive in this case to regard the Claimant as being in a stronger position in asking for the court’s indulgence, having delayed bringing their application to the last minute, than they would have done if they had brought the application in good time, but failed for some reason to comply with an order setting a reasonable deadline. One can easily see that if parties thought they were more likely to get a late order allowing expert evidence, even if this meant the adjournment of the trial, by leaving it very late indeed to make that application rather than getting an order that they risk breaching, such an approach might have an effect entirely contrary to the aims of the Jackson reforms and the Mitchell line of cases.

I do not regard placing reliance on factor (f), albeit as only one of the factors in the over-riding objective, as being contrary to the policy objectives discussed by Nugee J in the Kaneria case in paragraphs 52 onwards of that judgment. This would not amount to an indiscriminate application of Mitchell principles or quasi-Mitchell principles. Even if this is properly to be regarded as an in-time application, it is still the case that the Claimant has not acted promptly and reasonably, and that the Defendants here have not been obstructive and have not adopted a stance of aggressive non-cooperation.

In this case there is no reason for the delay in making the application. The Claimant clearly had in mind a need for expert evidence right from the start, but they did nothing between June and December 2013, despite knowing that there was a dispute because of the correspondence that had taken place. They should have brought the application promptly then. It is not acceptable that the Claimant should agree successive extensions of time so that witness statements are exchanged only two months before the trial is due to start, and then say that everything has to wait on that and that they were entitled to leave this application so late. Therefore, applying the over-riding objective, I will dismiss the application to adduce expert evidence and also the dismiss the application to adjourn the trial.