LEEDS DISTRICT REGISTRY
The Court House
Oxford Row
Leeds LS1 3BG
Before :
His Honour Judge Behrens sitting as a Judge of the High Court in Leeds
Between :
MORTGAGE EXPRESS | Claimant |
- and - | |
COUNTRYWIDE SURVEYORS LIMITED | Defendant |
Charlotte Eborall (instructed by Walker Morris LLP) for the Claimant
Michael Douglas QC (instructed by DAC Beachcroft LLP) for the Defendant
Hearing date:
1 June 2016, 11 July 2016
Judgment Approved by the court
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Judge Behrens:
Introduction
This is the assessment of damages following the judgment that was handed down on 12 February 2016. In that judgment I found that CWS was liable in deceit to MEX in respect of the 39 loans falling into Categories A, B and D as set out in paragraph 13 of the judgment.
In this judgment I shall adopt the same abbreviations as were contained in that judgment.
It is common ground between the parties that damages should be assessed on the basis that none of the 39 loans would have been made in the absence of the deceit by Mr Driver and that the damages should be assessed in accordance with the decision of the House of Lords in Swingcastle Ltd v Alistair Gibson (a firm) [1991] 2 AC 223.
Thus, in respect of each of the 39 cases the loss should be calculated as
the Amount Loaned plus the Costs of Realisation less
the Sale Price achieved plus the Repayments made by the Borrower.
No dispute arises in respect of any of these items. The figures are substantially agreed. Furthermore there is no suggestion that MEX failed to mitigate its loss, for example by failing to achieve a higher sale price.
The dispute between the parties relates to the question of interest which is claimed in addition to the above sums.
MEX contends that it is entitled to
Interest as damages to be assessed on a compound basis at LIBOR rates with 3 monthly rests from the date of the advance to the date of the sale. MEX accepts that in making the calculation credit must be given for the actual repayments in the quarter that they were made and
Simple interest under section 35A of the Senior Courts Act 1981 (“the 1981 Act”) at the rate of LIBOR plus 1% on the whole of the damages from the date of the sale until the date of the judgment.
CWS on the other hand contends that this is not a case for the award of interest as damages at all. In particular it contends that the evidence does not justify such an award. Its prime position is that MEX is simply entitled to simple interest under s 35A at LIBOR rates from the date the cause of action arises to the date of judgment. It contends that the cause of action does not arise until the date of default (rather than the date of the loan).
The difference in money terms between the two contentions is considerable. As an appendix to this judgment I have summarised the effect of these contentions as set out in the Schedules prepared by the parties. A number of points can be made
Although there are differences between the parties in respect of the claims before interest (MEX- £1,650,098, CWS - £1,644,547) the differences are not substantial. I have in any event not been asked to resolve them. It is assumed they will be compromised.
MEX’s overall claim for compound interest amounts to £1,395,356 and for statutory interest amounts to £340,850 (Footnote: 1) whereas CWS only concedes statutory interest totalling £196,732. MEX’s claim amounts to £3,386,304 whereas CWS concedes only £1,841,279. Thus the difference between the parties is the substantial sum of £1,545,025.
CWS have a number of secondary submissions which arise in the event that the claim for interest as damages succeeds. These relate to the question whether the interest should be compounded at LIBOR rates or at a lower rate referred to as the implied average cost of funding (“IACF”) and whether the appropriate rate for Statutory Interest is LIBOR or IACF. These submissions have a far smaller effect on the end result. They reduce the claim to £3,089,208 or £3,126,160.
Thus the principal issues that arise for determination are:
Whether MEX has established its claim to interest as damages. If so, whether in computing the claim interest should be compounded at LIBOR or some other rate.
Whether interest under s 35A should be computed at LIBOR plus 1%, LIBOR or some other rate.
The Law
Interest as Damages
Three cases of the highest authority are central to the submissions on this area of the law. Ms Eborall referred to a number of other authorities in the course of her submissions. I shall refer to them briefly when I consider the submissions.
Swingcastle v Alistair Gibson (a firm)[1991] 2 AC 223
This case concerned a claim by a lender against a surveyor following a negligent survey where the lender would have made no loan at all if it had known the true position. It was thus a “no transaction” case. At first instance and in the Court of Appeal the Claimant’s loss was held to include the contractual interest it would have earned from the transaction mainly on the basis that it was bound by the Court of Appeal decision in Baxter v Gapp [1939] 2 KB 271. The House of Lords held that this was incorrect and overruled Baxter v Gapp. The only speech was given by Lord Lowry. At page 230C – 231A Lord Lowry set out part of the judgment of Neill LJ in the Court of Appeal:
[Neill LJ] divided lenders' actions arising out of negligent valuations into two types, the first being where the valuer's client had lent more than he would have done if competently advised, and the second where, if competently advised, he would (as in the present case) not have lent at all. In his consideration of the second type he said, at pp. 1231-1232:
"A number of approaches are possible, including the following. (a) The lender could be awarded the unpaid interest owed by the borrower at the date when the security was realised. This was the method adopted in Baxter v. F. W. Gapp & Co. Ltd. [1939] 2 K.B. 271. But to award damages on this basis is in effect to treat the valuer as the guarantor of the contract of loan. In the absence of authority I would for my part reject this solution. (b) The lender could be awarded a sum equivalent to the amount he would have earned by way of interest on another loan if he had had the money available for this purpose. In my view, however, such an award should not be made in the absence of evidence that the money lent would have been used for another transaction. This evidence would have to be directed to proving an unsatisfied demand for loans and I anticipate that such evidence might seldom be forthcoming. Moreover, even if evidence of a lost transaction were available, I see no reason why the interest should be at the default rate rather than at the ordinary rate provided for in a standard contract for this type of business. (c) The lender could be awarded a sum equivalent to the interest which would have been earned if the sum had been placed on deposit. (d) The lender could be awarded a sum to represent the loss of the opportunity to invest the money elsewhere. This was the solution adopted by the Supreme Court of British Columbia in Seeway Mortgage Investment Corporation v. First Citizens Financial Corporation (1983) 45 B.C.L.R. 87, where it was said, at p. 101: 'What the plaintiff lost then was the opportunity to invest its $50,000 in a security which had the same risks except that the appraisal would be accurate.' I do not propose to express any concluded view about these methods of assessment. I do not consider that any one of the last three methods of assessment wouldnecessarily be right to suit all cases. It would depend on the evidence."
After analysing the decision in Baxter v Gapp Lord Lowry continued (p 237A – B):
The approach of the valuer in this case and the analysis of Neill L.J., which I have reproduced above, seem to me to be correct. What the lenders lost, in addition to their other damages, was the use of the £10,000 while it was perforce locked up in the loan. I say "perforce" because I do not overlook the duty of the injured party to mitigate his loss or the fact that, once the borrowers had well and truly defaulted, the lenders had access to their remedy and thereby to their money.
There is, as Neill L.J. perceived, no cut and dried solution to calculating the amount of damages in cases of this kind. It depends on the evidence.
Lord Lowry went on to consider the figures in relation to the loan and realisation. He continued at 239 B – E:
In the absence of any evidence as to how the lenders financed the loan or evidence showing how the money, if not lent to the borrowers, could have been profitably employed, I consider that 12 per cent interest, which would correspond to the 9 per cent. allowed by Ralph Gibson J. in Corisand Investments Ltd. v. Druce & Co., 248 E.G. 315, is the proper rate at which to recompense the lenders for being deprived of their £10,000. The actual time was two years, which would yield a result of £2,400, but one may ask whether it was reasonable for the tortfeasor to bear the liability up to the date of sale in February 1987, possession of the property having been surrendered on 30 June 1986. Moreover, it is not clear how a calculation of damages would be affected by the incidence of tax or whether this is a case in which it would have been reasonable for the court to contemplate partial recovery by the lenders against the borrowers: see London and South of England Building Society v. Stone [1983] 1 W.L.R. 1242.
It was for the lenders to furnish the evidence by which to prove their case on the correct basis.
Nykredit v Edward Erdman No 2 [1997] 1 WLR 1627
This case concerned the award of interest under s35A of the 1981 Act in a claim for professional negligence by a valuer. The speeches were delivered by Lord Nicholls and Lord Hoffmann. It had been held in Nykredit v Edward Erdman No 1 [1997] AC 191 (one of the three cases commonly referred to as SAAMCO) that the measure of damages was limited to the difference between the incorrect value ascribed to the property by the valuers and the true value of the property. However the House of Lords adjourned the question of interest at that time.
Section 35A(1) of the 1981 Act empowers the court to award simple interest on:
"all or any part of the debt or damages in respect of which judgment is given ... for all or any part of the period between the date when the cause of action arose and ... (b ) ... the date of the judgment."
In order to determine the period for which interest may be awarded it is accordingly necessary to determine the date upon which the cause of action arose. As Lord Nicholls pointed out (at p 1630G) this presents no difficulty in the case of a claim by a purchaser who agrees to buy a house that has been negligently overvalued and who would not have bought if he had known the true position. Such a purchaser suffers damage by parting with his money and receiving in exchange property worth less than the price paid.
The position of a lender is more difficult because (as Lord Nicholls points out at 1631 B – C) the lender has the benefit of the borrower’s covenant.
In another sense he may suffer no loss [at the date of completion of the loan] because often there will be no certainty he will actually lose any of his money: the borrower may not default. Financial loss is possible, but not certain. Indeed, it may not even be likely. Further, in some cases, and depending on the facts, even if the borrower does default the overvalued security may still be sufficient
Lord Nicholls went on to consider the date when the cause of action accrued in a no transaction case at 1631F – 1632C:
When this is so, a professional negligence claim calls for a comparison between the plaintiff's position had he not entered into the transaction in question and his position under the transaction. That is the basic comparison. Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower's covenant and the true value of the overvalued property.
However, for the reasons spelled out by my noble and learned friend, Lord Hoffmann, in the substantive judgments in this case [1997] A.C. 191, a defendant valuer is not liable for all the consequences which flow from the lender entering into the transaction. He is not even liable for all the foreseeable consequences. He is not liable for consequences which would have arisen even if the advice had been correct. He is not liable for these because they are the consequences of risks the lender would have taken upon himself if the valuation advice had been sound. As such they are not within the scope of the duty owed to the lender by the valuer.
For what, then, is the valuer liable? The valuer is liable for the adverse consequences, flowing from entering into the transaction, which are attributable to the deficiency in the valuation. This principle of liability, easier to formulate than to apply, has next to be translated into practical terms. As to this, the basic comparison remains in point, as the means of identifying whether the lender has suffered any loss in consequence of entering into the transaction. If he has not, then currently he has no cause of action against the valuer. The deficiency in security has, in practice, caused him no damage. However, if the basic comparison throws up a loss, then it is necessary to inquire further and see what part of the loss is the consequence of the deficiency in the security.
Typically, the answer to this further inquiry will correspond with the amount of the loss as shown by the basic comparison, for the lender would not have entered into the transaction had he been properly advised, but limited to the extent of the overvaluation. This was the measure applied in the present case. Nykredit suffered a loss, including unpaid interest, of over £3m. Of this loss the amount attributable to Erdman's incorrect valuation was £1.4m., being the extent of the over-valuation.
The basic comparison gives rise to issues of fact. The moment at which the comparison first reveals a loss will depend on the facts of each case. Such difficulties as there may be are evidential and practical difficulties, not difficulties in principle.
Lord Hoffmann first emphasised that the duty owed by the valuer was in respect of any loss that the lender might suffer by reason of the security being worth less than the sum which the valuer had advised. At p 1638 D – F he analysed the lender’s position.
What he must show is that he is worse off as a lender than he would have been if the security had been worth what the valuer said. It is of course also the case that the lender cannot recover if he is, on balance, in a better or no worse position then if he had not entered into the transaction at all. He will have suffered no loss. The valuer does not warrant the accuracy of his valuation and the lender cannot therefore complain that he would have made more profit if the valuation had been correct. But in order to establish a cause of action in negligence he must show that his loss is attributable to the overvaluation, that is, that he is worse off than he would have been if it had been correct.
He pointed out (at 1638F) that this was a consequence of the limited way in which the House defined the valuer’s duty of care. The valuer is responsible only for the consequences of the lender having too little security. He went on (at 1638H – 1639c) to consider the accrual of the cause of action:
Proof of loss attributable to a breach of the relevant duty of care is an essential element in a cause of action for the tort of negligence. Given that there has been negligence, the cause of action will therefore arise when the plaintiff has suffered loss in respect of which the duty was owed. It follows that in the present case such loss will be suffered when the lender can show that he is worse off than he would have been if the security had been worth the sum advised by the valuer. The comparison is between the lender's actual position and what it would have been if the valuation had been correct.
There may be cases in which it is possible to demonstrate that such loss is suffered immediately upon the loan being made. The lender may be able to show that the rights which he has acquired as lender are worth less in the open market than they would have been if the security had not been overvalued. But I think that this would be difficult to prove in a case in which the lender's personal covenant still appears good and interest payments are being duly made. On the other hand, loss will easily be demonstrable if the borrower has defaulted, so that the lender's recovery has become dependent upon the realisation of his security and that security is inadequate
Sempra Metals v IRC [2008] 1 AC 561
The law relating to interest as damages was radically altered by this decision of the House of Lords. The issue in the case concerned the interest to be paid on prematurely paid tax. The Revenue conceded that simple interest should be paid but the Claimant contended it was entitled to interest as damages and by way of restitution. The speeches in relation to interest as damages are relevant to the issues in this case.
All of their Lordships agreed that there was jurisdiction to award compound interest as damages at common law. At paragraphs 94 – 97 Lord Nicholls explained his conclusions:
[94] To this end, if your Lordships agree, the House should now hold that, in principle, it is always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt. These losses will be recoverable, subject to the principles governing all claims for damages for breach of contract, such as remoteness, failure to mitigate and so forth.
[95] In the nature of things the proof required to establish a claimed interest loss will depend upon the nature of the loss and the circumstances of the case. The loss may be the cost of borrowing money. That cost may include an element of compound interest. Or the loss may be loss of an opportunity to invest the promised money. Here again, where the circumstances require, the investment loss may need to include a compound element if it is to be a fair measure of what the plaintiff lost by the late payment. Or the loss flowing from the late payment may take some other form. Whatever form the loss takes the court will, here as elsewhere, draw from the proved or admitted facts such inferences as are appropriate. That is a matter for the trial judge. There are no special rules for the proof of facts in this area of the law.
[96] But an unparticularised and unproved claim simply for 'damages' will not suffice. General damages are not recoverable. The common law does not assume that delay in payment of a debt will of itself cause damage. Loss must be proved. To that extent the decision in the London, Chatham and Dover case remains extant. The decision in that case survives but is confined narrowly to claims of a similar nature to the simple claim for interest advanced in that case. Thus, that decision is to be understood as applying only to claims at common law for unparticularised and unproven interest losses as damages for breach of a contract to pay a debt and, which today comes to the same, claims for payment of a debt with interest. In the absence of agreement the restrictive exception to the general common law rules prevails in those cases.
[97] The common law's unwillingness to presume interest losses where payment is delayed is, I readily accept, unrealistic. This is especially so at times when inflation abounds and prevailing rates of interest are high. To require proof of loss in each case may seem unduly formalistic. The common law can bear this reproach. If a party chooses not to prove his interest losses the remedy provided by the law is to be found in the statutory provisions.
Lord Scott, who dissented on the restitution issue, put the matter in this way at paragraph 132:
[132] … I shall content myself with expressing my concurrence with the conclusion which appears to me to have been reached by all my noble and learned friends, that interest losses caused by a breach of contract or by a tortious wrong should be held to be in principle recoverable, but subject to proof of loss, remoteness of damage rules, obligations to mitigate damage and any other relevant rules relating to the recovery of alleged losses.
The rate of statutory interest on damages
It is common ground that the rate of interest is discretionary. Ms Eborall helpfully referred me to the decision of Warren J in Reinhard v Ondra [2015] EWHC 2943 (Ch) from which she sought to derive the following propositions:
The courts award statutory interest on a number of different bases (see the commentary to the White Book at 7.0.16), but a rate commonly used in the commercial context is the rate which the claimant would have had to pay to borrow money: Tate & Lyle Food and Distribution v GLC [1982] 1 WLR 149 (Forbes J). Since, Tate & Lyle, one per cent above base rate has become the norm in commercial cases: Reinhard at [6].
However, simple interest does not properly compensate a claimant, because it does not reflect interest charges or compounding of interest. Over a short period one might increase the rate in order to achieve a similar economic result: Reinhard at [7].
Although one per cent over base rate (or LIBOR) has become the norm in commercial cases, it is a presumption which can be displaced if unfair to either party: Reinhard at [8].
In assessing what rate of interest to award, the court will not have regard to the rate at which a particular recipient of compensation might have borrowed funds – this is a matter of policy adopted in order to control the extent of the enquiry to ascertain the appropriate rate. Instead, the court considers their general characteristics in order to decide whether a higher or lower rate than is conventional would be appropriate: Reinhard at [9] by reference to Fiona Trust v Privalov [2011] EWHC 664 (Comm) per Andrew Smith J at [16]; (Footnote: 2)
in seeking to determine an appropriate rate the court will seek to determine whether the case is one of money lost or one where an award will be an accretion to the funds of the claimant. In the former case, the court will be concerned to discover whether as a fair basis of compensation it should seek to assess the cost of borrowing money and in the latter, the rate that the claimant might have earned if it had the money, i.e. the “investment rate” Reinhard at [14]-[18] by reference to Challinor v Juliet Bellis Ltd [2013] EWCA Civ 620 (Ch)at [30] and [31].
Mr Douglas QC did not seriously challenge these propositions of law. However he made the point that where, as here, there is evidence as to the actual cost of borrowing the Court will not ignore it.
The Pleading
In the original Particulars of Claim MEX claimed loss and damage as set out in Schedule A. The figures in Schedule A gave a figure for loss for each of the 39 properties but no indication of how that figure was calculated. There was no indication that the calculation included compound interest as damages. The prayer for relief included a claim for interest under the 1981 Act and its equitable jurisdiction.
In January 2016 MEX’s solicitors submitted a document in respect of each property described as a “Calculation of Full Loss”. Each document contained a calculation of the loss including a claim for compound interest at LIBOR rates. However it gave no clue as to the basis upon which compound interest was claimed.
At the trial in January 2016 it was made clear that the claim for compound interest was on the basis of the cost of funding. Following the judgment which was handed down on 12 February 2016 and a telephone hearing on 10 March 2016 MEX served Voluntary Particulars of its Loss on 14 March 2016. On about 21 April 2016 MEX served Amended Voluntary Particulars. Paragraph 3 of those Amended Particulars reads:
The calculations in respect of loss suffered in respect of each property are particularised in the schedules which were before the Court at Trial in Trial Bundle 7 and include, for the avoidance of doubt, interest at LIBOR rates, compounded quarterly, from the date of the mortgage advance until the date of sale, which represents the damage that the Claimant has suffered as a result of being kept out of that money from the date of the advance, and upon which it would have earned interest at LIBOR on a compounded basis in the wholesale money markets for a short period of time (3-6 months) before being loaned to other borrowers at a similar commercial rate to that made in respect of the 41 Claim Properties.
It will thus be seen that MEX has changed its position in that it now seeks compound interest on the basis of the loss of opportunity to make an alternative loan rather than the cost of borrowing.
On the first day of the damages hearing I ruled that it was necessary formally to plead the basis on which interest as damages was being claimed. However in the absence of an objection by CWS I granted permission to MEX to amend by incorporating the Amended Voluntary Particulars as part of the claim.
The Evidence
Two witnesses gave evidence at the damages hearing - Mr Atkinson on behalf of MEX and Mr Leverick on behalf of CWS. Both witnesses were called as witnesses of fact. However much of both of their evidence was opinion/expert evidence or comment on the views of the other.
In addition to their oral evidence I was referred to various parts from the annual reports and accounts of Bradford & Bingley plc (“B & B”).
Mr Atkinson was first employed by B&B when it merged with the Leamington Spa Building Society in 1991. He has always held a Treasury position during his employment at B&B, although his job title has changed over the years.
In 2005, B&B (and MX) were non nationalised companies in the business of Residential and Commercial lending and borrowing. However, since September 2008 B&B (and MX) are now nationalised and prohibited from new lending, except where contractually obliged to do, and from the issuance of new borrowing (unless from a HMT funding facility).
The loans subject to this claim were advanced on a fixed rate basis at between 3.44% and 4.74% depending upon the initial fixed rate term (between one and five years). One loan was on a five year fixed rate at 5.14%. It was common ground between Mr Atkinson and Mr Leverick that B&B would have hedged its fixed rate risk with interest rate swaps that would have converted the fixed income cash flow into LIBOR plus a spread.
When he gave evidence Mr Atkinson explained that the swaps would not have been arranged on a loan by loan basis. This type of product would have been offered on a tranche by tranche basis possibly in tranches of £100 million. Each tranche would have been supported by a swap. If the product had been successful further tranches with a further interest rate swap would be taken out.
The loans that are the subject of this claim amount to only £8.2m odd. Individually, they were less than a quarter of a million. The B & B annual report for 2005 shows that its income earning assets in 2005 amounted to £38,660m. Thus these loans represent a very small proportion of B & B’s overall lending. An analysis of B & B’s accounts shows that this figure (£38,660m) increased to £42,692m in 2006, £49,743m in 2007 and £50,443m in 2008.
In paragraph 5.2 of his witness statement Mr Atkinson makes the point that
B&B/MX would never have funded each loan specifically by obtaining funding for one specific loan in the wholesale lending market. Nor would it have tied lending on any particular loan to any particular savings deposit or group of savings deposits. Instead, B&B entered into commercial arrangements to fund its loan book as well as having resort to the cash deposits of its customers to funds its loan book and treated all those monies on a pooled basis. It is therefore impossible to point to a particular loan, or even a bundle of loans and explain how that particular loan or bundle of loans was funded.
In paragraph 6.1 he sets out what he says would have happened:
As I have indicated above, I am unable to say whether MX’s mortgage advances the subject of this claim were funded from B&B’s retail customers, from the wholesale lending market or from a mix of the two funding sources, although the mix is the most likely.
But by making the advances which are the subject of this claim:
B&B would have lost the opportunity to use those funds to make another mortgage advance at a similar commercial rate to that made to the borrowers in these cases.; or
B&B lost the interest which it would have earned in the money markets by investing those funds in short term liquidity, which would have been a rate around LIBOR less 0.10%. B&B operated on an assumption of a 3-6 month pipeline phase for loans to convert from a borrower application to loan advance. On that basis short term liquidity would have been on a 3-month LIBOR basis. Of course in this situation B&B would already be funding the original borrowing at LIBOR plus a margin; and
Following that short term liquidity investment B&B would have loaned the funds to other borrowers in accordance with (i) above.
In cross-examination Mr Atkinson initially suggested that the interest referred to in (ii) was lost because MEX was tied into a swap. However he resiled from this later in his evidence.
As will be recalled from the previous judgment there was a very short period of time between the mortgage application and the initial lending decision. If Mr Driver had provided honest rental valuations the applications would have been rejected. It is difficult to see why any moneys would have been invested in the manner suggested in (ii). When this point was put to Mr Atkinson he accepted that MEX would have reverted to the further loans very soon.
JUDGE BEHRENS: It is all there in the witness evidence. There is not going to be that three months in this case. It is going to be thrown out within hours, the application.
So, in that case, we would revert straightaway, or very soon, to (iii). We would have lent it to new borrowers on the terms, on the same or similar terms.
In the light of this evidence Ms Eborall did not pursue the claim under (ii)
The evidence in relation to the swaps was in fact very vague and imprecise. No documents at all were exhibited in relation to the swaps. Mr Atkinson’s evidence included:
JUDGE BEHRENS: Before you move on, it may be your answer is the same for each, but you have told me in your witness evidence that there were two offers; one was a one year offer and one was a five year offer.
A. Yes.
Q. Now, counsel asked one question, "Do you know the take-up?" I want you to bring - do you know the take-up on the five year offer?
A. I don't know the take-up.
Q. On either?
A. On either.
Q. Now you can move on.
MR DOUGLAS: Was it an offer that went national?
A. It would have been an offer that went national.
Q. So, you do not know ----
JUDGE BEHRENS: Wait a minute.
MR DOUGLAS: I am sorry, my Lord.
JUDGE BEHRENS: You do not know - well, do you know what the total funding was?
A. I don't, no.
Q. Before, you were talking about a hundred million tranches. That was just guessing?
A. That was guessing, hypothetical, yes.
Q. "I do not know how much funding was available. The hundred million tranche was hypothetical."
MR DOUGLAS: So, you do not know whether a first or a second - we know there was a first tranche, but do you know whether there were second or third tranches of lending made available?
A. I think I answered this before lunch, and I think it's highly likely that similar products were released, because that was our general type of business, but my answer was that each time the tranche would have been regarded as a new tranche, with a new swap rate, because a new swap rate would have been transacted.
Q. Sure, but it would have been money that was available to lend to borrowers who were interested in borrowing on the product?
A. On those terms, yes.
Mr Atkinson also accepted that he had no evidence that loans were refused because of the loans made at Eastbourne.
Q. Now, we know that borrowers, if they do not meet any access criteria, will not be offered a loan.
A. Yes.
Q. Or if the property, whatever the values or the rental values, they will not be offered a mortgage. Do you know of any mortgages which were - do you know of any refusals of mortgages to willing borrowers who met the criteria, or is that completely outside your remit?
A. That's completely outside my remit.
JUDGE BEHRENS: But there was some evidence before me last time which was that Mortgage Express were in the business of making loans and, if someone met the criteria, they got an offer.
MR DOUGLAS: They are very competitive and would loan?
A. Yes, if they had met the criteria.
JUDGE BEHRENS: I mean, you are in the business of making loans.
A. Yes.
Q. I am sure that is what was said.
MR DOUGLAS: Absolutely, I am sure that is right, my Lord. And I am just asking this witness because - are you aware of any loans which were refused because somebody had been granted a loan on this product in Eastbourne?
A. No.
Mr Atkinson also agreed that B & B had the means to fund any mortgage offer to anyone willing to accept it.
MR DOUGLAS: Yes. So, there is no suggestion, is there, that - so, that is an increase of over 10 billion in the course of two years, and the 38.66, as we have already seen this morning, was up by about 4 billion on the previous year. So, there is no question at all, is there, that if Bradford & Bingley - if somebody was willing and wanted to accept a mortgage offer, Bradford & Bingley had the means and would meet it?
A. In general lending, yes.
Q. And you, I think, have admitted already that you are quite unable to say that, because these loans were advanced in Eastbourne, that other loans to an equivalent value could not be advanced to other people anywhere else in the country?
A. That's correct.
Q. And Bradford & Bingley would have had the means to satisfy a demand for such loans if they had been made, if they existed?
A. That is correct, but I'd like to caveat that this is a fixed rate tranche; this isn't general lending.
Q. But we have a problem, do we not, because we do not know whether there were more tranches and we do not know how much was lent, do we?
We don't, but, because we don't know the size of the tranche - I mean, typically, the tranche sizes were 50 to a hundred million. Unsatisfied - had we been aware that 8 million had not been advanced, we would have had to have done something about the tranche size; we would have had to have reduced the tranche size or lent on the same terms.
There was a debate between Mr Atkinson and Mr Leverick as to B & B’s cost of borrowing. The principal (but not the only) difference between them related to the question of whether shareholder funds should be reflected as part of the cost of borrowing. Fortunately it is not necessary for me to resolve that difference and I do not propose to do so.
Mr Leverick has produced a table which shows that B & B’s average cost of funding between 1 January 2015 and 30 September 20015 is LIBOR minus 0.1%; Mr Atkinson’s comparable figure was LIBOR plus 0.03%. As neither Mr Atkinson nor Mr Leverick were called as experts and the analysis is in reality expert evidence I propose to treat the average cost of funding as LIBOR.
Submissions
Ms Eborall submitted that this was an appropriate case for interest as damages. Her submissions are summarised in paragraph 10 of her closing submissions:
The Loans were offered at a fixed rate for a certain introductory period. These loan products were limited offerings of which MEX decided to offer only a finite amount by way of separate ‘tranches’.
MEX entered into interest rate swaps, before any mortgage applications were made, to hedge the introductory fixed rate period of each tranche, which protected against the interest rate risk of generally funding on floating interest rates, but lending within these tranches (including the Loans) on a fixed rate basis.
However, MEX cannot identify one specific funding source as the source from which these Loans were certainly funded. MEX’s funding was obtained from the BBG overall pool of funding, which included retail deposits; wholesale funding; securitised funding; covered bonds; and capital/other.
Had the Loans not proceeded, MEX would have been exposed to an interest rate risk by virtue of the tranche swaps entered into prior to application. Accordingly, MEX would (as was its business) have entered into alternative loans with other borrowers, on the same or similar commercial rates as the Loans.
MEX would have earned a return of LIBOR plus 0.5% from such loans, evidenced both by calculations on the Loans and, by way of general indicator, BBG’s 2005 accounts, and such interest would have been at a compounded rate.
She referred me to Parabola Investments v Browallia Ltd [2011] QB 477 where the Court of Appeal dismissed an appeal against a decision regarding recovery of damages for lost investment opportunity after a fraud because, although the evidence was not certain, the judge had made a reasonable assessment of the evidence, and had reached his conclusions rationally. She referred me in particular to paragraphs 22 – 24 of the judgment of Toulson LJ. However as Mr Douglas QC pointed out in that case Flaux J had held that, but for Mr Bomford's fraud, on a balance of probability Tangent would have traded profitably at stage 1, and would have traded more profitably with a larger fund at stage 2. Thus, it was a case about the assessment of loss in the light of that finding. In such a case the Court estimates the loss by making the best attempt it can to evaluate the chances, great or small (unless those chances amount to no more than remote speculation), taking all significant factors into account. It rejected the suggestion that, before any damages for loss of profits are recoverable in deceit, the claimant must have identified a specific alternative transaction into which it would have entered had it not been for the fraudulent misrepresentation.
She also referred me to Nationwide v Dunlop Haywards [2010] EWHC 254 (QB) where Christopher Clarke J awarded against a deceitful valuer the interest the lender would have earned on a loan to another commercial customer. However it is by no means clear what evidence was before the court in that case. Furthermore the valuer did not appear and thus there may well have been no argument on the point.
Mr Douglas QC submitted that the claim for a lost return on alternative loans is essentially speculative and hypothetical. He drew my attention to the passage from the judgment of Neill LJ in Swingcastle (at 1231G) cited above and to a comment in Grant & Tomlinson on Lender Claims (2010), para 6-29 where it is stated:
“The great likelihood is that any prospective borrowers whose applications were rejected at the time of the advance were rejected because they did not meet the lender’s lending criteria. It is not credible that those criteria would have been relaxed had the particular advance not been made. Therefore, the lender will have to show that there was an unsatisfied demand for loans from persons meeting its lending criteria. This may be unlikely, particularly given the profligate rate of lending at the time which is relevant to most lender claims”
He submitted that there was:
No evidence of a pool of prospective borrowers that MEX could not satisfy.
Evidence that that MEX would and could have met any demand for loans which it faced, and certainly had sufficient funds to satisfy a demand for up to £8.2 million.
No evidence as to the total offering made in respect of the 1 year fixed rate and 5 year fixed rate loans which were the subject of the Claim Loans.
No evidence as to the tranches which were the subject of the interest rate swaps.
No detailed evidence as to the nature or the terms of the swaps.
No evidence as to the extent to which the tranches were subscribed.
No evidence of any borrower being refused a loan in any circumstances because the Claim Loans were advanced.
He accepted that this was a claim in deceit and not negligence as in Swingcastle and Nykredit and Sempra Metals. He also accepted that there are some differences between the measures of damages between the two torts. In deceit it is not necessary that the damage is reasonably foreseeable. However he submitted that it was still necessary for MEX to plead and prove its loss.
Discussions and Conclusion
Interest as Damages
I prefer the submissions of Mr Douglas QC. In my view the burden is on MEX to establish that it would have made alternative loans. As Neill LJ recognised in Swingcastle this is likely to be a difficult task. In my view MEX have not come within a measurable distance of succeeding in that task. Such evidence as there is indicates that it was able to satisfy whatever demand there was for mortgages. If there had been an unsatisfied demand for mortgages in 2005 I would have expected that some evidence of it would have been available. In fact Mr Atkinson was unable to provide any evidence of such demand. As can be seen from the parts of the transcript set out above his evidence in relation to the demand for mortgages was in fact very limited. I agree with Mr Douglas QC that this case is distinguishable from Parabola Investments where there was an express finding that there would have been profitable alternative trading.
In my view, therefore MEX has not established that it would have made alternative loans. The claim that the money would have been placed on the short term money market was, as I understood it, not pursued. In any event I would have rejected it.
It follows, in my view that the claim for interest as damages fails.
Statutory Interest
It is common ground that in the light of my decision that MEX is only entitled to simple interest on its loss from the date of default to the date of the order. There is, however a dispute as to the rate. MEX claims interest at LIBOR plus 1%. CWS contends that as the cost of borrowing was in fact LIBOR interest should only be awarded at LIBOR.
Ms Eborall points to the conventional rate as being LIBOR plus 1% and to the fact that simple interest does not in fact compensate MEX fully. She draws my attention to proposition 2 of her submissions. She points to the fact that LIBOR fluctuated between 4.6% and 6% between 2005 and 2008 and did not fall to its current low levels until 2009.
Mr Douglas QC reminds me that there is no presumption that the rate should be LIBOR plus 1% and invites me to take into account the actual cost of borrowing to B & B. He points out that the period over which interest is claimed is a relatively long one and thus this case is not on all fours with the second of Ms Eborall’s propositions. He also pointed out that from about 2009 LIBOR has been at less than 1% with the result that to increase the rate by 1% would more than compensate MEX for lack of compound interest.
Neither side produced any calculations to show the effect of awarding LIBOR plus 1% as against the effect of awarding LIBOR compounded with quarterly rests. Neither side sought an adjournment for such calculations to be prepared.
I think that the starting point for the rate of interest should be B & B’s cost of borrowing which I am taking to be LIBOR. However I think there is force in Ms Eborall’s point that there should be some increase to reflect the fact that the award is of simple interest only. However there is also force in Mr Douglas QC’s point that at least since 2009 LIBOR has been at less than 1%. Doing the best I can in the absence of worked examples I propose to order simple interest at LIBOR plus 0.5% from the date of default.
Appendix
MEX's assessment | CWS's assessment | |||||||||
No | Capital Loss | Compound Interest | Loss | S 35A Interest | Total Claim | No | Cap Loss | S 35A Interest | Total Claim | |
1 | 31,360 | 41,624 | 72,984 | 7,070 | 80,053 | 1 | 31,777 | 1,442 | 33,219 | |
2 | 49,355 | 40,664 | 90,018 | 7,408 | 97,427 | 2 | 49,010 | 5,259 | 54,269 | |
3 | 21,131 | 39,330 | 60,460 | 5,756 | 66,217 | 3 | 20,202 | 3,193 | 23,395 | |
4 | 20,329 | 39,981 | 60,310 | 5,243 | 65,552 | 4 | 18,743 | 1,762 | 20,505 | |
5 | 45,645 | 24,440 | 70,085 | 13,560 | 83,645 | 5 | 45,372 | 8,358 | 53,730 | |
6 | 56,895 | 24,483 | 81,378 | 15,745 | 97,123 | 6 | 56,611 | 10,429 | 67,040 | |
7 | 25,895 | 20,095 | 45,991 | 8,899 | 54,889 | 7 | 30,976 | 5,706 | 36,683 | |
8 | 33,892 | 39,620 | 73,512 | 6,225 | 79,737 | 8 | 33,873 | 2,308 | 36,181 | |
9 | 38,282 | 39,262 | 77,544 | 6,665 | 84,209 | 9 | 41,487 | 8,789 | 50,276 | |
10 | 22,872 | 44,668 | 67,539 | 4,153 | 71,692 | 10 | 21,719 | 915 | 22,635 | |
11 | 39,606 | 41,351 | 80,958 | 5,686 | 86,644 | 11 | 41,727 | 2,843 | 44,570 | |
12 | 68,221 | 29,309 | 97,530 | 15,961 | 113,492 | 12 | 67,341 | 12,405 | 79,746 | |
13 | 28,753 | 44,763 | 73,516 | 4,570 | 78,086 | 13 | 28,418 | 1,936 | 30,354 | |
14 | 23,600 | 38,397 | 61,996 | 5,905 | 67,902 | 14 | 23,691 | 1,712 | 25,403 | |
15 | 27,893 | 40,349 | 68,241 | 5,271 | 73,513 | 15 | 28,908 | 2,089 | 30,997 | |
16 | 30,438 | 38,655 | 69,093 | 6,631 | 75,724 | 16 | 27,232 | 5,769 | 33,002 | |
17 | 31,458 | 39,265 | 70,723 | 6,082 | 76,805 | 17 | 31,301 | 2,262 | 33,563 | |
18 | 46,764 | 39,555 | 86,319 | 7,188 | 93,507 | 18 | 47,140 | 5,806 | 52,946 | |
19 | 34,843 | 38,121 | 72,964 | 7,111 | 80,075 | 19 | 34,693 | 2,364 | 37,057 | |
20 | 24,363 | 38,595 | 62,958 | 5,874 | 68,832 | 20 | 24,262 | 1,653 | 25,915 | |
21 | 65,601 | 27,791 | 93,392 | 16,076 | 109,468 | 21 | 65,601 | 12,085 | 77,686 | |
22 | 34,702 | 37,623 | 72,325 | 6,984 | 79,309 | 22 | 35,827 | 2,431 | 38,257 | |
23 | 49,128 | 40,232 | 89,361 | 6,933 | 96,294 | 23 | 46,380 | 9,790 | 56,170 | |
24 | 34,286 | 38,950 | 73,237 | 6,397 | 79,634 | 24 | 35,276 | 1,487 | 36,762 | |
25 | 50,625 | 38,430 | 89,055 | 8,267 | 97,322 | 25 | 49,799 | 4,243 | 54,042 | |
26 | 53,610 | 37,876 | 91,485 | 9,188 | 100,673 | 26 | 53,559 | 3,314 | 56,873 | |
27 | 65,314 | 23,952 | 89,266 | 16,920 | 106,186 | 27 | 65,147 | 12,001 | 77,148 | |
28 | 39,297 | 37,971 | 77,268 | 7,590 | 84,857 | 28 | 38,106 | 1,606 | 39,712 | |
29 | 63,387 | 39,810 | 103,196 | 8,313 | 111,510 | 29 | 62,336 | 4,247 | 66,583 | |
30 | 28,206 | 37,978 | 66,185 | 6,262 | 72,447 | 30 | 27,500 | 1,866 | 29,366 | |
31 | 51,745 | 39,957 | 91,702 | 6,702 | 98,404 | 31 | 51,350 | 3,499 | 54,849 | |
32 | 46,485 | 23,968 | 70,452 | 13,182 | 83,634 | 32 | 46,485 | 8,563 | 55,048 | |
33 | 67,937 | 24,900 | 92,836 | 16,882 | 109,719 | 33 | 67,899 | 12,508 | 80,407 | |
34 | 29,017 | 38,479 | 67,496 | 5,821 | 73,317 | 34 | 28,404 | 1,197 | 29,601 | |
35 | 49,107 | 37,151 | 86,257 | 8,560 | 94,818 | 35 | 48,158 | 2,029 | 50,187 | |
36 | 43,319 | 38,010 | 81,329 | 7,277 | 88,606 | 36 | 40,896 | 1,723 | 42,619 | |
37 | 64,852 | 32,571 | 97,423 | 13,433 | 110,856 | 37 | 64,165 | 11,577 | 75,742 | |
38 | 64,241 | 21,509 | 85,750 | 16,591 | 102,341 | 38 | 63,986 | 11,787 | 75,773 | |
39 | 47,645 | 35,673 | 83,318 | 8,467 | 91,785 | 39 | 49,190 | 3,778 | 52,968 | |
1,650,098 | 1,395,356 | 3,045,454 | 340,850 | 3,386,304 | 1,644,547 | 196,732 | 1,841,279 | |||