London Executive Aviation Ltd v The Royal Bank of Scotland Plc

The Claimant company (‘LEA’) operates a business chartering private aircraft. In 2007 the business was thriving and its owners, Patrick Margetson-Rushmore and George Galanopoulos decided to buy more private jets to increase LEA’s fleet of modern aircraft so that the company could widen its client base. They started to negotiate substantial new loan facilities with their existing lender, Lombard North Central plc (‘Lombard’), to finance these purchases. Lombard is part of the RBS group of companies. LEA had had its bank account for a number of years with National Westminster Bank plc (‘NatWest’) also part of the RBS group. LEA’s relationship manager at NatWest was Mr Adrian Wood.

The terms of the loan facilities that LEA was negotiating with Lombard in Autumn 2007 obliged LEA to pay interest set at a variable rate based on NatWest’s base rate plus a small percentage. At the time of these discussions the NatWest base rate was about 5.75%. In about July 2007 Mr Wood suggested to LEA that they discuss with a colleague of his, Dominic Brindley, the possibility of entering into a hedging product to protect the company against the possibility of interest rates rising over the period of the loans. Mr Brindley held meetings and phone conversations with the directors of LEA and also with Isabel Margetson-Rushmore who is Mr Margetson-Rushmore’s wife but who was neither a director nor shareholder of LEA. She was brought into the discussions because of her previous banking experience.

In November 2007 LEA decided not to enter into any hedging product, at least for the time being. However, in January 2008 discussions were restarted following the delivery of LEA’s first new Mustang jet. By this time LEA had entered into two loans with Lombard. An important feature of the loans was that although interest was calculated at a variable rate (subject to a minimum base), the monthly payments made by LEA to Lombard were fixed throughout the life of the loan. Depending on what happened to interest rates, the monthly fixed instalments would pay off the interest accrued and a portion of the principal owed. At the maturity of the loans, LEA would be obliged to make a single lump sum payment, referred to at the trial as the balloon payment, to pay off what was still owed. Thus, if interest rates had been high over the life of the loan, the balloon payment would be larger because the monthly payments would not have eroded much of the principal. If interest rates had been low over the life of the loan, the balloon payment would be small because the monthly payments would have paid off much of the principal as well as the accruing interest.

In the course of a meeting on 8 February 2008, LEA agreed to enter into two hedging products with the Bank. The contracts for the two products were concluded during a phone call on 12 February 2008. One of the issues between the parties is which entity within the RBS group was actually the counterparty to these hedging products so I shall refer to that counterparty in a neutral way as “the Bank”. Broadly the terms of the hedging products were as follows:

During the second half of 2008 interest rates fell dramatically and have remained at very low levels since then. The effect of this has been that although LEA has been able to pay off its loans to Lombard more speedily than expected, the company has remained saddled with the obligation to make substantial payments to the Bank under the two hedging products.

LEA bring this action against the Defendant alleging that they were mis-sold these products. They alleged that Mr Brindley advised them to enter into the hedging products and that that advice was negligent. They allege that the hedging products are liable to be rescinded for misrepresentation or that they are entitled to damages in lieu of rescission in the sum of £3,844,574.

The Defendant contests the claim on a number of grounds. First they say that LEA has sued the wrong party because the relevant contracts were entered into between LEA and NatWest not between LEA and the Defendant and that any advice which Mr Brindley gave must have been given on behalf of NatWest as well. They also deny that Mr Brindley gave any advice to LEA about the wisdom of entering into the hedging products; they deny that the Bank accepted any legal responsibility for anything Mr Brindley may have said that could be construed as advice and in any event they deny that the advice was negligent. They say there was nothing wrong with the hedging products sold to LEA. No one foresaw what has happened to interest rates; LEA made what turned out to be a bad bargain but that is no reason not to hold them to it.

The trial of this claim began in June 2017. Unfortunately, after five days the illness of LEA’s leading counsel meant that the trial had to be halted. After the case was adjourned, amendments were made to the Particulars of Claim with the permission of Barling J. These amendments introduced an allegation that Mr Brindley fraudulently misrepresented the risks to which LEA was subject under the products. He did this by giving them a figure, £1.5 million, as the maximum amount that LEA might be liable to pay as the balloon payment over and above what they expected to pay if interest rates followed the then current forward rate. Shortly after he made that statement, Mr Brindley found out that Bank’s internal calculation of the credit risk facing the Bank if LEA defaulted on the hedging products – referred to as the ‘credit line utilisation’ or ‘CLU’ – was roughly the same amount. This indicated, it is alleged, that the value of the risk that the company faced under the hedging products if interest rates fell was just as great as the risk that they were supposedly mitigating by entering into the hedging products if interest rates rose, showing that the hedging products were a bad bargain. It is alleged that Mr Brindley dishonestly failed to inform LEA of this, knowing that if he told them, it would discourage them from buying the hedging products.

The trial restarted before me with new leading counsel, Mr Richard Edwards QC appearing for LEA with Ms Olivia Chaffin-Laird. Mr Paul Sinclair and Mr Daniel Khoo appeared for the Bank.

LEA was incorporated in October 1995 and started to trade in April 1996. By March 2008 it had around 110 employees most of whom were commercial pilots. On the financial side of the company was Peter Heatherley the financial controller. The company’s turnover in the year to March 2007 was about £15 million and in the year to March 2008 it was about £20 million. The turnover figures may exaggerate the scale of the business since they include aircraft owner expenses which are recharged at cost. But LEA was profitable from its launch in 1996 until the end of March 2009. The average annual profit in the two years 2006/7 and 2007/8 had risen to about £1 million.

Patrick Margetson-Rushmore is the Chief Executive Officer and a director of LEA. He has a degree in economics and accounting and trained as a chartered accountant with Ernst & Whinney. He worked in various accountancy firms for about 10 years including as a partner. From about the end of 1991 he worked from home as a self-employed accountant until he started working for LEA first on a part-time basis and then full-time from about 2000. His role in LEA was to deal with the financial side of the business whereas Mr Galanopoulos was more involved in the aircraft and piloting side of the company. In February 2008 Mr Margetson-Rushmore owned 13.5% of the issued share capital of LEA.

Isabel Margetson-Rushmore has never been a shareholder in or director or employee of LEA. She is a qualified solicitor who trained at Linklaters & Paines leaving there in 1984. She was recruited to manage the execution of Eurobond transactions for Svenska Bank and shortly afterwards moved to the Eurobond team at Bankers Trust Company. She worked there for about 10 years including spells at the loan trading desk and as a member of the leveraged loan team which provided debt to financial sponsors and clients seeking to acquire companies. In 1995 she was recruited by UBS AG to head their UK leveraged finance team to help them upgrade their business to become a lead arranger and underwriter. In 2000 she retired from UBS ending a 15 year banking career and for a few years worked on a part-time basis providing consultancy services on debt finance to her old client base on a very occasional basis. Since 2004 she has had no involvement with banking or financial services but she has helped Mr Margetson-Rushmore when requested in his work at LEA.

In her written evidence Mrs Margetson-Rushmore emphasises that during her banking career she had no involvement with structuring or marketing derivative products. She understood the basics of how simple derivatives such as swaps work and she understood that derivatives can be used to protect against risks which cannot be controlled. She states that she was aware that in almost all the leveraged finance deals she worked on, the bank would make it a condition of lending that the borrower bought protection against interest rate rises or currency exchange rate movements. But it had not been her role to organise the necessary transaction.

Mr and Mrs Margetson-Rushmore were generally straightforward and honest witnesses and I am sure they were both doing their best to assist the court. There is no doubt that they feel that the existence of the company that Mr Margetson-Rushmore has worked hard to nurture over many years has been greatly imperilled by the burden of servicing the payments due under the hedging products. Given the time that has passed since the events giving rise to the claim, their recollection is understandably unclear and has been reconstructed from the documents. In his written statement, Mr Margetson-Rushmore refers as much to internal Bank emails as to emails passing between LEA and the Bank. He has interpreted these internal emails as showing that Mr Wood and Mr Brindley were not acting in LEA’s best interests. In my view Mr and Mrs Margetson-Rushmore’s evidence about what they thought and felt during the discussions with the Bank has been affected not only by the passage of time but also by the impact that the hedging products have had on the company and by the internal exchanges between members of the Bank’s team although they did not of course see these emails until much later when disclosure took place in the course of these proceedings.

George Galanopoulos is a qualified commercial pilot and in February 2008 he was a director of LEA and an owner of 16.5% of the issued share capital of the company. He was frank in his evidence that he left the decisions about financial matters to Mr Margetson-Rushmore. Although he was by nature more willing to take risks than they were, I find that he would have agreed with what Mr and Mrs Margetson-Rushmore had decided to do about hedging LEA’s risks whether that had been for or against entering into hedging products.

The holding company of the RBS group is The Royal Bank of Scotland Group PLC. Its direct subsidiary is the Defendant company, the Royal Bank of Scotland plc. The group structure at the time of these events was that the Defendant had two direct subsidiaries, National Westminster Bank plc and Lombard North Central plc.

Adrian Wood gave evidence for the Bank. I found him to be an engaging and straightforward witness and I am not surprised that he has been successful in the role of relationship manager for NatWest. Reading the contemporaneous record in this case provides a good picture of what a relationship manager does; bringing together people from the different teams within the Bank who might be able to assist the client, gently but persistently nudging colleagues to respond to the client’s requests, praising them enthusiastically when they do so and providing what assistance he can to those colleagues. Mr Wood is clearly dismayed that his long career working with NatWest’s business customers is being impeached by the allegations made against him and the Bank in this claim.

Mr Brindley also gave evidence for the Bank and was also an honest and helpful witness. Mr Brindley was approved by the Financial Services Authority (‘FSA’) under the FSA’s rules as an employee of a regulated firm. He was approved by the FSA in January 2006 to perform the investment adviser (trainee) function and in March 2006 he was approved as an investment adviser on behalf of both the Defendant and Nat West.

In the pleaded case, in cross-examination and in their written submissions LEA drew on comments made in internal email traffic between Mr Wood, Mr Brindley and their Bank colleagues to portray them as hard-nosed, money-grasping and cynical bankers, interested primarily in furthering their own careers and maximising their financial bonuses. It is alleged that they were prepared to that end to pressure LEA into buying unsuitable products by deliberately misleading them about the nature of those products, without any thought of whether they were providing a helpful, appropriate service to the Bank’s client.

I entirely reject that view of Mr Wood and Mr Brindley on the basis both of what I have seen of them giving evidence and on my reading of the contemporaneous correspondence. Mr Brindley fairly and frankly accepted that his job is to sell the Bank’s products to customers and he was keen to do so in this case. There is nothing wrong with that. Most professional people make more money either for themselves or for their employer if customers agree to acquire more rather than less of their services. That does not prevent them from trying to provide a good service to their clients. I have considered all the email exchanges on which LEA rely as evidencing an inappropriate attitude or an over emphasis on their own remuneration or the Bank’s profits. In my judgment, that material is a world away from showing that the urge to win revenue had eclipsed any consideration of LEA’s interests in Mr Brindley’s or Mr Wood’s minds.

There were also witness statements from Mr Michael Savage concerning how the credit line utilisation is computed within the Bank and from Mr Martin Merryman concerning the issue of whether new terms of business were sent to LEA. Mr Savage was called for cross-examination and was a helpful and straightforward witness. Mr Merryman was not cross-examined.

Both sides instructed experts to give their opinion on the issues arising in the misrepresentation claim that was introduced by amendment in July 2017. LEA’s expert witness was Mr Virji who is a partner of AHV Associates LLP and a director of AHV Financial Markets Limited, a derivatives and corporate finance advisory firm. The Bank instructed David Croft who is a director of GBRW a consultancy specialising in providing advice on banking and financial markets issues. Both experts were knowledgeable and provided helpful reports.

The Lombard Loans

In order to understand the background to the decision to enter into the hedging products, it is important to understand the features of the loan facilities that LEA had with Lombard. Part of Lombard specialises in loaning money secured against plant and assets. There are two loans that are relevant to these proceedings. The first was entered into on 14 June 2007. The facility amount was £2,500,000 and the purpose of the loan was to pay off two earlier loans. The interest rate was NatWest base rate (which is equivalent to the Bank of England base rate) with an add-on percentage of 1.4% and a minimum base rate of 2.5%. The estimated period of the loan would be five years and one month if the base rate remained constant at 5.5%. The instalments were fixed monthly payments of £32,874.52 followed by the final balloon payment estimated to be £1,140,000 due at the end of the five-year period if interest rates remained at 5.5%. The loan was secured against three specified aircraft.

The second loan agreement was dated 16 January 2008 and was secured against seven aircraft. The facility amount was £10,380,196.55 and the purpose of the loan was said to be for the acquisition of five Citation Mustang aircraft each costing $1.3 million and the repayment of another loan agreement. The interest rate was NatWest base rate with an add-on percentage of 1.25% and a minimum base rate of 2.5%. The estimated period of the 2008 Loan would be 10 years and one month if the base rate remained constant at 5.75%. The 2008 loan agreement set out monthly instalments which varied during the first few months but then settled down to 116 instalments of £78,822.54 followed by one final balloon payment of £5,061,175.90 due on 15 January 2018 if interest rates remained at 5.75%.

The key features of these two loans (together, ‘the Lombard Loans’) for our purposes are therefore:

In February 2008 when LEA entered into the hedging products, around £7.1 million was outstanding under the Lombard Loans.

Early contacts between the parties and the 2006 Terms of Business

On 11 January 2006, the Bank sent a notice to LEA of its regulatory classification, enclosing with the letter the Bank’s terms of business. The covering letter had the prominent RBS name and logo in the top right-hand corner under which was written “Financial Markets Corporate Treasury Solutions” with the address at 135 Bishopsgate, London. The footer referred to the Royal Bank of Scotland plc with a registered office in Edinburgh. The letter was signed by Simon Hawkes and under his name was written “The Royal Bank of Scotland plc and National Westminster Bank plc”.

The letter opened by stating that it was being sent in accordance with the Bank’s regulatory requirements and that it enclosed the terms of business which would apply to all dealings going forward (‘the 2006 TOBs’). The letter notified LEA that they were to be treated as a Private Customer the purposes of FSA rules. It said:

“We bring your attention to the Risk Warning, attached as Schedule 1 to this letter. By signing and returning this letter, you acknowledge receipt of the risk warning and confirm acceptance of its contents.”

The letter continued: (emphasis in the original)

“Action to be taken

Please read our Terms of Business carefully. They contain important information about our respective rights and obligations, including about certain limitations on our liability to you. When you have reviewed the enclosed documents, you should keep them and this letter for guidance and reference. By signing and returning this letter, you will be deemed to have agreed and accepted our Terms of Business which will therefore become legally binding on you and, in the absence of any other agreement between us and you, will apply to all dealings which we may conduct with you or on your behalf. If you are in any doubt about the meaning or the legal or financial effect of these Terms of Business or any other documents we provide to you, you should obtain professional advice as necessary.”

The letter was signed on 11 January 2006 by Mr Margetson-Rushmore and Mr Heatherley.

The 2006 TOBs contain the following provisions (emphasis in the original):

“1.

Our Status

1.1

These Terms of Business apply to all designated investment business carried on by The Royal Bank of Scotland plc and National Westminster Bank plc together or, as the context may require, each being referred to as The Royal Bank of Scotland Financial Markets (“RBSFM”), with or on behalf of you. The principal address of RBSFM in the UK is 135 Bishopsgate, London EC2M 3UR. Details of our EEA branches are given in Appendix 1.

1.2

Our affiliates may act as agents for RBSFM. This will be disclosed at or before the time of executing a transaction. It will also be recorded on the confirmation. These Terms shall apply unless our affiliate expressly agrees otherwise.

3.2

We will provide you with general dealing services on an execution-only basis in relation to shares, debentures, government and public securities, certificates representing certain securities, units, options, futures, contract the difference and rights or interests in investments (together “Investments” and individually “Investment”) together with related research and valuation facilities. …

3.3

We will not provide you with advice on the merits of a particular transaction or the composition of any account nor will we bring investment opportunities to your attention. You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information and do not amount to advice, an assurance or guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete. …

4.2

Provision of services by us pursuant to these Terms will not give rise to any fiduciary or equitable duties on our part or that of our affiliates.

4.6

Any information we have provided to you relating to trades is believed to be reliable, but no representation is made or warranty given or liability accepted, as to its completeness or accuracy. In particular, market conditions and pricing may have changed by the time you approach us with a view to entering into a trade. Any opinions constitute our judgement as of the date indicated and do not constitute investment advice or an assurance or guarantee as to the expected outcome of any transaction.”

The Risk Warning Notice in Schedule 1 to the 2006 TOBs stated that it was provided to LEA as a private customer in compliance with the FSA rules. It said:

“This notice cannot disclose all the risks and other significant aspects of warrants and/or derivative products such as futures, options, and contracts for differences. You should not deal in these products unless you understand the nature and the extent of your exposure to risk. You should also be satisfied that the product is suitable for you in the light of your circumstances and financial position.”

The 2006 TOBs also provided:

In May 2006 there were discussions between Mr and Mrs Margetson-Rushmore and Paul Samuels of RBS Global Banking & Markets (‘GB&M’) about managing the exchange rate risk that LEA was exposed to. At that point the company had borrowed nearly US$2 million from Lombard. Payments under the loan were due in dollars but most of LEA’s income was in sterling. LEA therefore wanted to hedge against its foreign exchange exposure and its exposure to US dollar LIBOR. In a lengthy email on 25 May 2006 when setting out the detailed terms in response to various queries raised by Mr and Mrs Margetson-Rushmore, Mr Samuels referred to the credit line utilisation or CLU that was attributed to the trade. He described what the CLU is in the following terms:

“This CLU figure represents with 95% confidence, based on historic rate movements, the most that the Bank would expect to lose in the event of your default on this trade. Clearly this impact would only be felt to this extent in the event of aggressive $ strengthening. Put another way, according to our calculations, and with a 95% confidence level, this is the maximum negative value that we foresee this trade accruing from a close out/valuation standpoint.

Our calculation of CLU is our internal expectation of the maximum close out cost and is by no means a guarantee that this will be the case, in extreme market conditions, this figure could be higher. Please use this calculation as a guide only.”

This is important because the misrepresentation claim made by LEA in these proceedings arises because the CLU used for the hedging products was not disclosed by Mr Brindley to LEA.

The exchanges over this hedging of the dollar exchange rate risk also demonstrate that Mrs Margetson-Rushmore was deeply involved in the discussions between LEA and the Bank about hedging the foreign currency risk and was both able and willing to provide her views to Mr Margetson-Rushmore on the products which Mr Samuels was offering. For example, when Mr Samuels suggested two alternative kinds of hedging protection Mr Margetson-Rushmore forwarded the suggestions to his wife. She replied:

“I would probably do ½ and ½ subject to cost. I find it hard to believe that the $ will move much beyond 2 but also given Iraq and the start of the election race uncertainties are unlikely to provide any dollar strength. There is no evidence that the long-term interest rates are moving back into a normal curve so I think both look quite interesting. … I suspect the dollar will move between 1.90 and 2 you should have some protection over [the period January to July 2007].”

In evidence Mrs Margetson-Rushmore said she would have taken this information from something provided to her by an old banking contact whom she would have spoken to. But it shows that she was prepared to provide this kind of guidance to LEA to help them make decisions about whether to hedge and what kinds of contracts were appropriate.

The July 2007 meeting and the September 2007 Meeting

In June 2007 Tanya Pierce at Lombard emailed Mr Wood to say that Lombard and LEA had agreed the terms of a loan facility to fund the purchase of five Mustang aircraft, one to be acquired in December 2007 and four in March 2008. This prompted Mr Wood to contact Mr Brindley to suggest that they go to see Mr Margetson-Rushmore. Mr Wood’s evidence was that it was his practice to introduce any customer with a debt of more than £500,000 to RBS GB&M.

The first meeting took place on 25 July 2007 at the Bank’s offices at 135 Bishopsgate where Mr Brindley worked at the time. The meeting was attended by Mr Wood and Mr Brindley for the Bank and Mr Margetson-Rushmore, Mr Heatherley and Mrs Margetson-Rushmore for LEA. At the meeting, they discussed a paper called “UK Base Rate: A view from RBS Global Banking & Markets” written by Neil Parker, a UK economist. The first page of the presentation was a historic view of UK base rate from about 1968 to 2007. It showed extreme fluctuations with peaks of about 17% in 1979 to a trough of under 4% in 2003. Each sharp movement on the graph was labelled with the global event thought to have caused the movement. Between 1992 and 2007, the range of interest rates shown was between about 7% and 3.5%. The narrative description of the period stated that “it seems to be virtually littered with financial market disasters”. There is reference to various macro-economic factors such as the shift of production from Western economies to low-cost centres in Asia, strong growth in Europe, Asia and domestically, and the risks of higher inflation looming. As to the likely course of interest rates for the next 10 years as from July 2007, (from a standpoint when base rate was 5.75%) the paper states:

“So what does that mean for interest rates?

•

We do not believe that UK interest rates are set to fall back below 5% for the foreseeable future. In fact over the next 18 months – 2 years, we think that rates will most likely have to rise to 6.25 or even 6.5%. Certainly there are few signs that the current monetary stance is doing anything to undermine growth in the UK economy.

•

It is also likely that we will see UK interest rates range mainly between 5 and 6.5% over the course of the next 10 years, with visits below 5% and above 6.5% likely to be roughly equal in probability”

The final page of the presentation used at the July meeting was headed “Disclaimer” and stated that although the information was believed to be reliable, RBS did not accept any responsibility or liability of any kind with regard to the accuracy or completeness of the information. Each recipient of the material should make its own independent evaluation of the information and make such other investigations as it deems necessary before participating in any transactions. Mr Margetson-Rushmore’s evidence was that he doubts that he read the disclaimer.

After the meeting, Mr Wood and Mr Brindley discussed applying for a credit line to cover any transaction entered into with LEA. They prepared a report for the credit management team within the Bank describing LEA’s business including the boom in the demand for private air travel generating the need for more aircraft. The report stated that Mr Brindley had been asked to work on a number of hedging scenarios ranging from 5 year to 10 year cover and 50% to 100% debt cover. The Bank wanted the discussions with LEA to be “credit backed” so that LEA could conclude a trade straight away if they saw a proposal they liked. Mr Brindley was seeking a credit limit of £750,000 which was based on 100% cover for 10 years. The report also referred to the forecast income for the Bank if a trade was concluded, being about £80,000 per annum from the Lombard Loans and a one-off revenue of £80,000 from the hedging product.

On 8 August 2007, a credit limit of £750,000 for an interest rate swap or hedging product was agreed by the Bank’s credit team with a review date of 1 February 2008.

At the start of September 2007 Mr Margetson-Rushmore was keen to finalise the funding for the new Mustang jets and any hedging at the same time. Mr Wood began to prepare for a meeting in mid-September asking Ms Pierce to provide him with details of the loan facility including the repayment profile and balloon payments so that Mr Brindley could build those into his material for the meeting.

The negotiations between LEA and Ms Pierce on the terms of what became the Lombard Loans continued and Mr Wood and Mr Brindley were copied in to the quotes provided to LEA setting out the proposed terms. However, their evidence was that although they may have read the documents at the time, the fact that LEA made fixed monthly payments under the loans even though the loans were subject to a variable interest rate was not something that particularly registered in their minds.

The next meeting between the parties took place at LEA’s offices on 18 September 2007 (‘the September Meeting’). The meeting covered a number of topics including hedging products. The night before the meeting Mr Brindley emailed through the presentation that he had prepared for LEA called “Interest Rate Risk Management” (‘the September Presentation’). Neither Mr nor Mrs Margetson-Rushmore had time to read it before the meeting took place but Mr Brindley talked them through the slides during the course of the meeting. Those present at the meeting were Mr Wood and Mr Brindley from the Bank, Ms Pierce from Lombard and Mr and Mrs Margetson-Rushmore and Mr Heatherley from LEA.

The summary page of the September Presentation said that “RBS Global Banking & Markets aims to work with our customers to provide tailored solutions to your specific risk management requirements”. The first stage was for the Bank to understand as much as possible about LEA’s business objectives. The paper highlighted “the relative merits and considerations of the solution”. The September Presentation reproduced the earlier UK base rate graph showing interest rates between 1970 and 2007 annotated with historic events. It referred to the trend of UK base rate rising by 0.25% on four occasions from August 2006, arriving at the rate of 5.75% in July 2007. The slide purporting to describe LEA’s underlying debt facility with Lombard was rather garbled and referred to an attached profile of the existing debt and new debt. It referred to the fact that the financing would be in place over the next 10 years and that since LEA did not envisage making lump-sum repayments “it is suitable to discuss a hedging strategy for the period that the aircraft assets are to be financed over (10 years).”

In a slide headed “Important information” the September Presentation said:

“Should you decide to terminate any structure ahead of maturity, you may have to pay market related breakage costs (these could be benefits however). These costs are not predeterminable, depending on prevailing market conditions at the time of breakage.”

At the bottom of that page, after other wording, was the statement “The Notes to this paper are important- please take the time to read them.”

The September Presentation then set out five possible hedging solutions. All of the solutions covered 100 percent of the expected debt for the whole life of the Lombard Loans, that is for 10 years. Mr Brindley said in evidence that he could not remember why he did not also include diagrams for hedging only part of the debt or hedging the debt for a shorter time period.

Solution 1 was a vanilla base rate swap for 10 years at a swap rate of 5.68% (that is, the Bank pays LEA the base rate applied to the notional amount and LEA pays the Bank 5.68% on that notional). This solution had the benefit that no upfront premium was required from LEA and by fixing the interest rate meant that LEA was not exposed to the unknown course of interest rates over the period of the loan: “With known repayments, you can budget more effectively.” The “Considerations” referred to were possible breakage costs if LEA chose to close out the deal early but it noted that early closure might, depending on market conditions, result in a benefit being paid to LEA. The other consideration was that even if base rate falls below the fixed rate, LEA would be obliged to pay interest at the fixed rate.

Solution 2 was a dual fixed rate protection product. As the name suggests, under this solution, LEA would pay one of two rates, in the example given either 5% or 6.25% depending on where base rate lay. If base rate was between a floor of 5.25% and a ceiling of 6% in a given period, LEA would pay the Bank a fixed rate of 5.35%. If base rate was above the ceiling of 6% or at or below the floor of 5% in a given period, LEA would pay a fixed rate of 6%. The benefits of this were that the initial fixed rate was lower than current base rate and the maximum rate that LEA would pay would be 6% no matter how high base rate rose. In this solution, of course, the Bank would be paying LEA base rate throughout the life of the loan so that if base rate was higher than 5.35% LEA would be in the money but if base rate fell below 5.35% the Bank would be in the money.

Solution 3 was referred to as “Enhanced dual fixed rate protection”. This was similar to solution 2 except that the rates were improved from LEA’s point of view because it would pay only 5.10% if interest rates were above the floor of 4.75% and below the ceiling of 6.25% in a given period and would pay 6% if interest rates either fell to 4.75% or below or rose to 6.25% or above. The disadvantage of this solution was that the Bank had the right to call the trade (that is cancel the contract without penalty) at the end of five years and every quarter thereafter. Mrs Margetson-Rushmore said in evidence that she understood that the trade-off for LEA paying a lower interest rate and for the floor rate of the range being lowered was granting the call to the Bank.

Solution 4 was a collar type product providing for a floating rate between a ceiling and a floor. The example given was that if base rate was set between 5.5% and 6.5%, there would be no payment in either direction. If interest rates rose above 6.5% the ceiling would come into operation and the Bank would pay LEA the difference between base rate and 6.5%. If base rate fell below 5.5% LEA would pay the Bank the difference between base rate and 5.5%. A premium would be payable if LEA chose this product.

Solution 5 would be similar to solution 4 but would avoid the need for a premium by increasing the interest rate payable by LEA if base rate fell below the floor rate. But there would also be a maximum rate of 6% if interest rates were high and a knock in rate of 5.85% if interest rates were low. Thus in the example given in the September Presentation, if base rate was between the floor of 5.25% and the ceiling of 5.75% no payment would be made in either direction. If base rate rose above 5.75%, LEA would pay base rate up to a maximum of 6%. If base rate was between 5% and 5.25% LEA would pay the Bank 5.25%. But if base rate dropped below 5% then LEA would pay the knock in rate of 5.85%, that is to say LEA would pay the Bank the difference between base rate and 5.85%. With this solution the Bank would have a one-time right to cancel the contract after five years.

The slides after the graphs and diagrams explaining the five solutions showed an amortising debt profile. It purported to show the monthly amortisation between 17 September 2007 and 18 September 2017 of the three loan agreements entered into between LEA and Lombard. Unfortunately, at the trial none of the witnesses was able to explain how the debt profile had been calculated. It was clear however that the amortisation rate did not reflect the effect of the fixed monthly payment regime in the actual Lombard loans, because if interest rates fell, the debt would amortise at a faster rate because the fixed monthly payments would exceed the interest accrued and pay off more of the principal.

Following the debt profile was a page of contact details for Mr Brindley. After that were two pages of Notes in smaller but nonetheless clear type. Mr Margetson-Rushmore says that at the meeting Mr Brindley did not draw their attention to the notes and he did not read them either at the meeting or later.

The first page of Notes included some important warnings:

The second page of Notes again warned the customer to ensure that “it fully understands the potential risks and return of the proposed transaction” and to determine whether the transaction is appropriate. It stated that nothing in the document should be construed as investment advice and that “RBS will not act as the Recipient’s adviser or owe any fiduciary duties to the Recipient in connection with this, or any related transaction and no reliance may be placed on RBS for advice or recommendations of any sort.” The Notes in particular drew attention to the risks involved in OTC derivatives. These include the risk of adverse or unanticipated market, financial or political developments. In the event that such risks arise, substantial costs and/or losses may be incurred: “Therefore the Recipient should ensure that, before entering into any OTC derivative transaction, the potential risks and return thereof is fully understood and the Recipient should also determine whether the OTC transaction is appropriate for the Recipient given its objectives, experience, financial and operational resources, and other relevant circumstances.”

The new Terms of Business

There is a dispute between the parties as to whether in mid September 2007 the 2006 TOBs were replaced by new terms of business. The new terms of business were devised by the Bank to ensure compliance with the Markets in Financial Instruments Directive 2004/39/EC (‘MIFID’) which was adopted by the European Union in 2004 and followed by an implementing directive issued by the EU Commission in 2006. Amongst other changes, MIFID revised the categories into which clients of financial advisers were divided into retail clients, professional clients and eligible counterparties. It is common ground that LEA was a retail client for these purposes. The Bank says that on 10 September 2007 a letter was sent to LEA classifying it as a retail client under the new FSA rules due to come into force on 1 November 2007. Accompanying that letter were new terms of business (‘the MIFID TOBs’) which governed the relationship between the Bank and LEA thereafter. LEA say that they have no record of having received the letter or the MIFID TOBs.

In support of its case that the MIFID TOBs were sent, the Bank relies on a printout of a computer entry which does not refer in terms to LEA but says:

“This client has been re-categorised as ‘Retail’ in accordance with the new regulations. A letter and revised Terms of Business was sent to the client on 10 September.

Click here to view the Categorisation Letter and Terms of Business.”

To explain this computer entry the Bank provided a witness statement of Mr Martin Merryman, a director of the Bank’s NatWest Markets division. Mr Merryman states that he has been shown the printout of the computer entry from the Bank’s Connect system “indicating that LEA had been re-categorised as a Retail client and a letter and revised Terms of Business were sent to LEA on 10 September 2007”. He says that the computer entry contains a link to the letter and the revised terms of business “as they had been sent to LEA”. He explains that the computer entry is raised automatically by the Bank’s systems and as part of the same process by which the covering letter and accompanying terms of business are sent. He says:

“Accordingly, given my knowledge of the Bank’s computer systems, I am confident that the fact that the computer entry on the ‘Connect’ system was raised, this means that the cover letter… and the revised Terms of Business … would have been sent by the Bank to LEA”.

He explains further that the Bank would not retain a copy of the actual letter as sent and there was no need for the client to sign or acknowledge receipt of the letter or the MIFID TOBs.

Mr Merryman was not called for cross-examination at the trial because LEA accept the truth of his evidence so far as it goes. But they say it does not go far enough because it contains various ambiguities and inconsistencies. For example, when Mr Merryman says that the Bank “would not retain a copy of the actual letter as sent”, LEA say it is unclear whether this is referring to a soft copy of the letter with the date, address and salutation or a hardcopy of the letter as sent. They invite me to infer that the fact that the Bank cannot produce either a soft copy or a hard copy of a letter with LEA’s name and address on it shows that something went wrong with the system in this case and no letter was ever addressed to LEA or sent. The effect of this LEA contends, is that since the 2006 TOBs were obsolete then there were no terms of business in force at the time the hedging products were entered into and the Bank is not entitled to rely on any of the terms included in either the 2006 TOBs or the MIFID TOBs.

I reject LEA’s criticisms of Mr Merryman’s evidence. His evidence seems to me clear and unambiguous. He understands how the Bank’s computer system works and having seen what the system produces, he is confident that the results means that the letter and the new terms of business were indeed sent. I do not consider that the fact that LEA cannot find a copy of the letter or the new terms on their files casts doubt on Mr Merryman’s evidence. According to his own evidence, Mr Margetson-Rushmore did not pay attention to standard form terms that were sent to him. I find that the MIFID TOBs were sent to LEA and are binding on them.

After the September 2007 meeting until 12 November 2007

Following the September Meeting, Mr Wood sent round a substantial list of follow-up actions for him, Mr Brindley and Ms Pierce. Mr Brindley was tasked with preparing an analysis of the costs and benefits of the hedging solutions discussed. At that stage, LEA wanted to be in a position to arrive at a decision on interest rate hedging by the end of September. Mr Wood followed up other aspects of the discussions including contacting accountants who could advise LEA on the tax implications of the hedging products in combination with the loan repayments; liaising with Ms Pierce to obtain a quote from Lombard’s US lawyers for some contract work; speaking to the Bank’s credit committee to sort out the working capital facility; and speaking to people about possible foreign exchange trades. On 27 September 2007 Mr Wood sent some cost analysis to Mr and Mrs Margetson-Rushmore. This showed, he said, the cost/benefit per month to LEA of paying one basis point higher or lower than base rate, assuming base rate stays constant at 5.75%. The table attached incorporated the amortisation debt profile that had been included in the September Presentation. It showed the cost or benefit of one basis point per month (that is 0.01% of the remaining principal) and then, multiplying that by 7, showed the saving that would be made if LEA had a fixed rate of 5.68% when base rate was 5.75%. There was also a rather mysterious column headed “Base is 5.25%” which one would expect to show a figure which was the monthly cost of one basis point multiplied by 43 (the difference between 5.68 and 5.25 being 43 basis points) but instead seems to be the monthly cost multiplied by 68.

The spreadsheet provided was not what Mr and Mrs Margetson-Rushmore thought they had asked for at the September Meeting. Mr Margetson-Rushmore recalls that he was annoyed because the spreadsheet was static and he was unable to input different figures to produce different results. On 28 September 2007 Mrs Margetson-Rushmore spoke to a colleague of Mr Brindley, Ms Wilson, at the Bank. Mrs Margetson-Rushmore explained that what she wanted was a spreadsheet that showed the costs and benefits of all the different solutions referred to in the September Presentation, at various different prevailing base rates so that, for example, if base rate was 5% she could see what payments LEA would have to make in cash terms under each of the different solutions, and over the life of the product. She also wanted the spreadsheet to be a ‘live’ model in the sense that it should be set up so that she could change the percentage base rate in one cell and that would automatically recalculate all the figures for the different solutions shown in the other cells.

Ms Wilson passed the task on to Mr Brindley, copying in Mr Wood, who responded encouraging them both to provide whatever information Mrs Margetson-Rushmore asked for so that they could “close the deal and celebrate the income”.

On 1 October 2007 Mr Brindley sent Mrs Margetson-Rushmore three revised versions of the spreadsheet with more columns. The left hand side of each spreadsheet brought forward the same amortisation debt profile from the previous spreadsheet and the same cost or benefit (in £) of 1 basis point per month.

Instead of a simple fixed rate of 5.68%, the first version of the spreadsheet showed the results of a callable trade on terms that LEA paid 5.2% when base rate was between 5% and 6.25% and a higher rate of 6.05% when base rate was at or outside that range. The results were shown for three scenarios; base rate being 5.5%, 5.75% (in which scenarios the interest payable by LEA would be at 5.2%) and 6.50% (in which scenario the interest rate payable by LEA would be 6.05%).

The second version of the spreadsheet showed what would happen if the trade were a simple fixed swap at 5.75% and base rate was either 5.5%, 5.75% or 6.5%. Unlike the first sheet, this sheet did therefore illustrate what would happen if the rate payable by LEA was higher than prevailing base rate; the cost to LEA if base rate was 5.5% over the 10 years when the swap was fixed at 5.75% was £202,886.72 whereas the saving if base rate was 6.5% over the 10 years was £608,650.17.

The third version of the spreadsheet showed the results if the trade were on terms that LEA paid 5.4% when base rate was between 5% and 6.25% and a higher rate of 6.05% when base rate was at or outside that range. The results were shown for three scenarios; base rate being 5.5%, 5.75% (in which scenarios the swap rate due from LEA would be 5.4%) and 6.50% (in which scenario the swap rate due from LEA would be 6.05%). This sheet again only therefore showed scenarios where the base rate was higher than the swap rate.

Mr Wood wrote to Mr and Mrs Margetson-Rushmore on 3 October 2007 to check that they now had all the information they wanted to help in their decision making process. He said that if they had any questions or needed further information they should not hesitate to let him know.

On 9 October 2007, Mr Wood emailed Mr Brindley and Ms Pierce recounting a conversation he had had with Mr and Mrs Margetson-Rushmore. Mrs Margetson-Rushmore had told him that the information Mr Brindley had sent was still not quite what she wanted but that she also wanted updates on rates and markets every couple of days by email. He reported:

“I also asked if she was still inclined to fully hedge (SWAP) for 10 years and she said more thinking this was too restrictive and will chat with Patrick - Dom maybe also remind them in email that covers current and new debt given plans to expand fleet and debt”.

At trial, no one could remember what they had understood Mrs Margetson-Rushmore to mean by her comment that a 10 year hedge was “too restrictive”.

On 12 October 2007, Mrs Margetson-Rushmore sent Mr Margetson-Rushmore revised versions of the spreadsheets to use in their internal LEA discussions. She had generated these herself after making the model that Mr Brindley had sent live so that she could put in whatever interest rate scenarios she wanted. She also derived the cost or benefit of one basis point per month from a total debt profile calculated from the amortisation schedule that had been used right from the start.

Armed with these spreadsheets Mrs Margetson-Rushmore had two telephone conversations with Mr Brindley on 12 October 2007, transcripts of which have been produced by the Bank. The content of these calls is important because it was during these discussions that the principal features of the hedging products of which LEA complain were first proposed by Mr Brindley.

The first phone call was at about 12:30 and was between Mr Brindley and Mrs Margetson-Rushmore. Mrs Margetson-Rushmore told Mr Brindley that she was meeting with Mr Margetson-Rushmore shortly to “go through this stuff”. She told Mr Brindley that she had changed the spreadsheet from a hardwired analysis to a ‘live’ spreadsheet. She asked Mr Brindley to send her a copy of the yield curve of the swap forward so that she could see, she said, how inverted it was. She also asked for updated prices for all the solutions that had been discussed at the September Meeting, and not just the three solutions for which Mr Brindley had sent through spreadsheets. They discussed the prices that the Bank was offering for the products, which prices Mrs Margetson-Rushmore understood were expressed both in the fixed rates payable by LEA and in the floor and ceiling of the range outside of which a higher interest rate would be payable. In particular Mrs Margetson-Rushmore said that she did not want the floor of the range to be 5% because she thought that the chances of interest rates going below 5% were “quite high over that period”. She told Mr Brindley that she wanted the floor of the range to be brought down “as close to 4 and a half as you can get” and she wanted to see what effect that would have on the fixed rates the Bank would require. Mr Brindley said that there were a number of ways that they could bring the floor of the range down, but if the bottom of the range moved from 5% to 4.5%, he said, “something else has to give…”.

Mr Brindley clarified with Mrs Margetson-Rushmore that her concerns were with the floor of the range needing to come down “because you think that rates will get to 5% and may be lower is that right?”. Mrs Margetson-Rushmore replied “I think there is a strong, personally I think there is a strong possibility, don’t you?”. Mr Brindley then gave his view as to likely movements in interest rates:

“I would say rates, there is a strong possibility that we see rates at 5.25, 5% I would agree with that, that won’t in my eyes happen, I see 5.50 the back end of well 5, 5.50 the start of this year coming I’m not 100% convinced that rates get cut on November although a lot of people are commenting on that. I then see the next year we will, given various slow downs, still need another rate cut to take us to 5.25. Whether or not long term rates can be sustained below 5% I’m slightly dubious about. I do see that we may get to 5% but it won’t be for a long period of time and I do think that post sort of 2, 3 years the trend for rates will have to be upwards. The reasons for that are that the rest of the global economy will have been through or will be stabilising and moving further forward. And you know I'd cite continued pressure from China and India on raw materials and also prices of goods that are coming out of what are now fairly strong economies. There is the concern that you know the Chinese equity market might blow up and they might have slight concerns if the rest of the world isn’t firing on all cylinders to take that they have geared up for. But I still think that you know there will be, there’s an unbelievable amount of wealth within those countries now and they have started both on a government basis and also on companies in China are actually looking to divest into assets outside of China. That [is] inherent in you know the stakes that have been taken in Blackstones, the stakes that have been taken in Barclays and I just think that, that pricing tension will have a fairly large effect on, on our inflation environment and less about the national picture and more about the global picture I think. But definitely post sort of 2 years we see rates trending upwards again. But I take your concerns Isabel and if that’s you know if that’s what you want to do I’ll certainly…”

So although he did not agree with her views on interest rates falling below 5%, Mr Brindley agreed to have a look at some repricing of the different solutions to enable the Bank to reduce the floor of the range.

Mr Brindley sent through as requested shortly after 2 pm a forward rate yield curve from October 2007 to October 2021, showing a gently downward sloping curve starting at just above 6% moving down to 5%. In the covering email he set out updated prices for the proposed hedging products. He said “We have seen rates push 4-5bps higher today on the basis that USA retail sales figures released show considerable strength vs market forecasts, this in turn has forced UK rates higher”. The four priced proposals he set out in brief in his email were as follows:

Clearly the second version of the enhanced dual rate protection was much better for LEA than the first version because the floor was lower, 4.5% instead of 4.75% as Mrs Margetson-Rushmore had said she wanted, and the interest rates both inside and outside the range were both lower. Mr Brindley explained why the Bank would be prepared to offer this fourth priced solution:

“Given the amortisation schedule of the loan the life of the loan is actually c. 4 years (see forward curve attached) as such if we looked at hedging interest only levels of this loan and future loans then we could achieve greater levels in the trade. For example if we looked at hedging £8.5m bullet for the first 5 years and then stepped this up to £12m (this assumes as per previous conversations that you will take on more debt) then the levels achievable are as follows. NB this allows us to move the lower level to 4.50%.”

This was the first time that Mr Brindley had suggested:

Mr Brindley and Mrs Margetson-Rushmore spoke again at about 3:30 on the afternoon of 12 October 2007. This time Mr Margetson-Rushmore joined them on the call. The first part of the discussion dealt with Mrs Margetson-Rushmore’s questions to Mr Brindley about the forward rate yield curve that he had emailed through, trying to clarify exactly what it was that he had sent. Her understanding was that the interest rate value at any point on the curve represented the market’s best guess of where interest rates will be as at that date and that the October 2007 rate shown was the 3 month LIBOR rate today.

They then moved to discuss the different options that Mr Brindley had priced in his email. Mrs Margetson-Rushmore said that they were considering option three quite seriously. Mr Brindley then checked that she understood the difference between the two versions of the enhanced dual rate protection, namely what he was saying in the paragraph that I have set out above; that if the notional amount amortised over the life of the product then “the rates that are achievable become worse.” However, if LEA agreed to a stable, bullet amount the rates would be better. He justified putting forward a step up of the notional after five years on the basis that “last time that we met you guys ... Patrick certainly mentioned that you were looking to maybe acquire another plane very quickly”. Thus if they took a holistic view that they would definitely have £8.5 million of debt in place for the next five years and that they might add more debt on top of that, then it was possible for the floor to go down to 4.5%. Mr Brindley then proffered some further macro economic analysis of future interest rate movements:

“And I think in terms of, a market view on where we think base rates are going, I think there's a fairly strong consensus that, maybe February next year that we could get a rate cut, all things being considered, but there are very slowly, we've seen the FTSE climb, certainly over the last 3 to 4 days, quite considerably. Data that was out of the US today showed very robust PPI, so raw material pricing and output, factory output prices actually being very robust and stronger than we'd expected, same with their retail sales. Now, given in a time when that economy is supposedly falling to pieces around peoples' homes, that information buoys the economy significantly. I think a lot of the firming up of financial markets, certainly … you know, Northern Rock haven't fallen over and, it's continuing. So I think the more that we get confidence back into the equity side of things, the more that we will see confidence actually return to the high street and consumers in terms of thinking. That all of that kind of flies back in the face of a rate cut, because the rate cutting, I guess, if you were to sort of say, people who are opining for a rate cut say that, you know, the housing market slow down has started because prices have already started to fall, the consumer will stop spending because, you know, housing market ostensibly in the UK is a barometer for people's confidence of how the economy is actually working. I think you'll find that we've actually seen a significant amount of price flexibility from retailers in terms of not being shy of providing discounts and to continue to push revenues. If that continues and they have the ability to keep costs down, then, you might well see that, you know, the expected fall in, in consumer spending won't actually take place. We still have the issue that we've got very lax consumer credit in this country. People can quite easily rack up credit card bills left, right and centre. So to stem consumer spending, you need a lot of scare stories to happen. I think the stabilisation period that we've seen, certainly over the last three weeks, sort of flies in the face of the need for an immediate rate cut. I think the wait and see tactic will prevail and I think that, although previously the MPC {sc. Monetary Policy Committee} have been very much “Let's act on impulse and do something now rather than … rather than let it happen and then we react”, you've only got to take their rate hike that they came across in January, but I think there is a mind set now that any further shocks to financial markets or to the economy in itself by some unexpected moves isn't a good thing. So I think a case for stability over the next few months is certainly one that you could argue, and the official house forecasts is that we see two rate cuts effectively between now and the end of 2008. The timing of those differs between which economists you speak to, but they think that that's what's required to get the, the UK economy back on track.”

Mr Brindley then clarified, in response to a question from Mrs Margetson-Rushmore, that the rate cuts he was referring to as being forecast by RBS were half a percent in total and then he said:

“.. with the view that longer term rates over the next 2 to 3 years would need to go higher and certainly higher from where we are now, almost back to the position we were in 4 months ago where we sort of saw, you know, rates getting up to 6.25%, that is certainly the view and that view is predicated by a much more global picture than anything here in the UK.”

Mrs Margetson-Rushmore then asked why, if that was the prediction, was the 10 year curve for sterling inverted? Mr Brindley acknowledged this was a very good question the answer to which, he said, lay in the fallout from the pensions crisis. In response to his explanation Mrs Margetson-Rushmore said that that would suggest that if one was looking at a macro-economic point of view, interest rates over the next 10 years would not reflect the forward rate but would actually rise, potentially as high as 7% or 8%. That she said would make either option three or option two quite a good solution. Mr Brindley replied:

“what that trade is trying to do is give you absolute protection, but what's trying to do is reward you now for taking a view that you think that UK interest rates over the next 5 years, because that's because it is … you know, with all honesty, you have a view or an understanding or an inclination of where interest rates could be over that period … now in a 10 year period, you know, anything can happen and that's the reason why, you know, that worst case rate protection at 6% … if you were going to take … you know, if you were going to say, what are the likelihood of rates being over and above 6% in, in a 5 year, 7 year time horizon and I think it's actually quite high.”

Mrs Margetson-Rushmore then tried to calculate in her head what the actual cost would be under the second solution, that is without the Bank having a call and hence with higher fixed interest rates. That prompted a discussion about the likely consequences of including callability of the swap, an additional feature which allowed the Bank to reduce the interest rates payable by LEA. Mr Brindley was keen to make clear that the Bank would not automatically cancel the trade just because base rate happened to be above the fixed rate at the time when the call could be made. It was a more complicated calculation by the Bank than that because, as Mrs Margetson-Rushmore interjected, the value of the option to the Bank depends on the potential expected volatility of rate moves rather than simply on the snapshot rate at the date when the call could be made. Mrs Margetson-Rushmore accepted that but said

“But I mean, it’s still likely that Patrick is going to be called at a point when he doesn’t want to be called, potentially”.

Mrs Margetson-Rushmore then was trying to work out what the difference in actual payments would be between the options she was interested in compared to a simple fixed rate swap. This was on the basis she said that interest rates are “not likely to be under 4, 4.5% for the whole of that period I wouldn’t have thought”.

She then asked Mr Brindley to take her through the call option again. Mr Brindley explained it in the following terms:

“Years … year 1-5 you are absolutely guaranteed, so in my eyes the crucial part of what you're trying to do with the business so over the next 5 years, there is no way that we can actually touch this trade, it stays exactly as it is with the levels that are in, in the trade that I've shown you, so you pay 5.30 as an enhanced rate or 6.05 as a protected rate and the range is 6% to 4.75. At year 5, we have the right to call the trade. So effectively the trader will say whether or not we want to call the trade. If we call the trade, you revert to paying floating base rate, now that right effectively we have every quarter thereafter …”

But Mrs Margetson-Rushmore then interrupted to say that was not actually the point she was asking about. There followed a discussion about how the trade worked in terms of working out whether in a particular period base rate had hit the top or bottom of the range. They then reverted to the question of how the Bank would decide whether or not to call the trade after five years. Mr Brindley said:

“Yes, after 5 years. So the first 5 years … let's just take it in chunks. The first 5 years of the trade, the trader has nothing to do because there's no call option for us, so you get a guaranteed … you get the guarantee of paying of paying … you get a guarantee of paying 5.30 as a swap rate so long as UK rates stay between 6 and 4.75. If they go at or outside either of that range in that time period over the 5 years, then you will pay 6.05. So from a budgeting perspective or from your knowledge, you have a worst case cost of the funds at 6.05 guaranteed for the next 5 years. Hopefully that won't happen, hopefully UK interest rates will remain between that range and you will pay the enhanced rate of 5.30. Now, at year 5, we have the right to call the trade and every quarter thereafter. The trade will still perform exactly as I've just explained it there for 10 years until … until the trader says, actually we're going to call this, we've called the trade. Now if the trader calls the trade, we still have the right, between yourselves and I and the … and here in terms of what we can offer to you … of having a further conversation because the trader turns round to me and says, we're actually going to call this trade. I will then say to you, you are now going to revert to paying base rate. If that is something that … you don't want, we can have a further conversation at that point in time about looking at what solutions are available with regard to interest rate management. Just exactly as we're having this conversation now, there are ways of getting an enhancement to where base rate is at that point in time if your trade gets called, there will be a way of doing that. So it's not to say if we call the trade, the trade is called and that might simply be that future rates, you know, might not be that base rate at that point in time and might be that if we call the trade, you're quite comfortable remaining in floating base rate and paying floating base rate, that might well be the situation. But if that situation is different, then we can engage in conversation just as we are now, just as we have over the last few months, to actually look at putting in some sensible management, interest rate management, that you are comfortable with. So it's not a case of we pull the trade away and you're naked in, in, in the middle of a field almost … it's … the trader's taken a decision based on where his book is and the market is, and that trade is no longer there, let's have a conversation around what we can actually do with trades that we can get away at that point in time.”

The discussion then turned back to pricing because Mrs Margetson-Rushmore asked whether the Bank could reduce the floor of the range in return for increasing the fixed interest rate payable within the range to 5.5%. She asked this, she explained, “because I know Patrick would like the bottom of the range to be around 4 and a half ... or even lower”. She recognised that this would be on the assumption that they would have a notional amount of £8.5 million stepping up to £12 million, because as Mr Margetson-Rushmore confirmed that was not an issue.

Mr Brindley paused to start doing the arithmetic and confirmed that any such trade would have to be on the basis that the notional amount was fixed. Again, Mr Margetson-Rushmore confirmed that he did not mind “going fixed” and Mrs Margetson-Rushmore told Mr Brindley “assume that it’s not an amortising because if that gives a better rate, then that makes a difference”.

Mr Brindley then went away from the phone to do his calculations during which there was some further discussion between Mr and Mrs Margetson-Rushmore. Mr Brindley came back to say that he had recalculated solution 2 (that is without the callability for the Bank) on the basis that the notional amount was a bullet amount of £8.5 million going up to £12 million. On that basis the Bank could offer a range with a floor of 4.25% and a ceiling of 6% with an interest rate of 5.45% payable within that range and 6.10% outside that range. Mr Brindley agreed that that solution addressed the earlier concern that Mr and Mrs Margetson-Rushmore had expressed that they “wanted that as far south of 4.5% as you could so you didn’t get penalised almost if rates fell to be knocked into the higher rate”. That would mean that their maximum cost of funds would be guaranteed at 6.10% for 10 years. However if they chose solution 3, with the call, also using the same notional then the range could be 4.25% to 6% but the interest payable would be lower, 5.25% within the range and 6% outside the range. So, the choice for LEA, as Mr Brindley then said was as follows:

“…Now if you were to say you want absolute clarity over your debts for the next 10 years or levels of your debt over the next 10 years, you don't really want us to have a call on, on your ability to pay. Let's say, you know, if that's your mindset, then solution 2 would be a better option. But if you wanted to have clarity for a 5 year window, solution 3 gives you the pick up that you want and also, you know, gives you some certainty, absolute certainly for years … so to year 5. You then have a degree of uncertainty, albeit you know this is in place should we not call it.”

Mr Brindley also said that they could discuss moving to the Bank having yearly call dates rather than quarterly though that would of course have an adverse effect on the rate.

Mrs Margetson-Rushmore then said that she thought they had enough information to make the final decision and Mr Margetson-Rushmore agreed. They then discussed when the first delivery of the aircraft was going to take place and when they would therefore want to draw down on the loan facility. Mrs Margetson-Rushmore said that LEA did not want to enter into the hedging trade unless and until LEA had started to draw down on the loan although Mr Margetson-Rushmore interjected that they had already got £6 million of debt. Mr Brindley pointed out that unless base rates suddenly moved outside the range it would be advantageous for LEA to enter into the hedging product now because the fixed interest rate within the range they were discussing was lower than the then prevailing base rate, meaning that the Bank would be making payments to LEA under the product, being the difference between prevailing rate and the fixed rate on the notional of £8.5 million. But he accepted Mrs Margetson-Rushmore’s point that if interest rates went the wrong way it would cost LEA money because they would be paying out under the hedging product before they had the debt in place. Mr Brindley said:

“ … the risks to you would be minimal because interest rates would need to go in the opposite direction that everybody thinks they are actually going to go in.”

There was a further discussion about interest rates when Mr Brindley said:

“… that process will continue so in my mind and certainly I had this conversation with Neil Parker, our economist, because another client of mine is in the throes of completing a deal of a similar size and quite rightly so he was worried about, you know, timing risk in terms of what happens if his transaction takes another few weeks, what would happen to swap rates. Neil's point of view on it was, the more assured and the more stabilised things become, the more chance we have of actually rates going higher. I think the paragraph that, that Neil actually wrote for the client was, in his view, over the next month, we may see rates on a 10 year/15 year basis rise by as much as 10 or 15 basis points. Now that is certainly something … I wouldn't want to be sitting here in two weeks' time, having … having not done anything, and you guys turning around and saying, “Well actually, Dominic, you know, this wasn't something that was pointed out”. Because the only way that I can guarantee the rates we're talking about is get ourselves in a position and do it. Because ostensibly what we're trying to do it put some very, you know, put some parameters around something that has a lot of moving objects and those moving objects change on a daily basis …”

The discussion concluded with Mrs Margetson-Rushmore saying that Mr Margetson-Rushmore needed to digest the figures and have some internal discussions and that the decision would not be taken that day.

Nothing then happened until Mr Wood wrote a nudging email to Mr Margetson-Rushmore referring to the ‘long chat’ the previous week with Mr Brindley. Mr Wood referred to the uncertainty over a possible delay to the delivery of the jets and that the hedging products now might give them more cover than they need. He reminded Mr Margetson-Rushmore that Mr Brindley’s recommendation was to start the trade now covering current debt with the cover increasing in a few months’ time when LEA would know when the jets were going to be delivered. He also enclosed a note about the tax treatment of derivatives provided by someone else in RBS GB&M. LEA rely on this email as showing that the Bank should have realised that LEA was concerned that the trade should not be entered into before the debt was incurred to pay for the jets. This should have alerted the Bank, LEA say, to LEA’s unwillingness to be overhedged, and hence to the unsuitability of the move to the notional amount which was much greater than the debt which LEA was about to incur.

Internally, the Bank started gearing up to complete the trade. They started to put in place the ISDA documentation that they would need. On 18 October 2007 Mr Brindley emailed Mr and Mrs Margetson-Rushmore giving updated pricing on solutions 2 (without the call) and 3 (with the call) as discussed the previous week and asking whether any progress had been made on the decision whether or not to go ahead. Mr Brindley forwarded his email to his line manager at the Bank saying that the income for the Bank would be £250,000 for either solution and that he hoped that the trade would be concluded in a few days: “Fingers crossed.”

On 19 October 2007 Mrs Margetson-Rushmore replied to Mr Wood’s earlier email which had sent her the note on tax treatment. In her lengthy email she pointed out that the Lombard Loan “fixes the payments due to Lombard with an adjustment either way at the end of the loan period” so they would need to see how this affected the taxation of interest payments. She then asked a series of detailed questions about the interaction of any receipts by LEA from the Bank under the hedging trade and the payments out to Lombard and in particular the tax treatment if the receipts under the hedging products exceeded the payments to Lombard under the loans. She then added:

“Dominic thank you for the pricing update. We would need the swap rate and the forward curve to look at to compare the various options so please could you arrange for that”

Mr Wood spoke to Mrs Margetson-Rushmore who told him that they were about to go on holiday. He reported to his colleagues: “on a positive side Isabel says they will trade but not likely until after 5 Nov unless rates move against them”.

By 23 October 2007, Mr Wood was again cajoling his colleagues to come up with the answers to the various requests that LEA had made about tax treatment and pricing. There was some confusion over discussions about the tax treatment which prompted Mr Wood to ask Ms Pierce for a copy of the Lombard Loans facility documents and terms.

Also on 23 October, Tamryn North from RBS GB&M sent Mr Margetson-Rushmore an email attached to which was a blank ISDA master agreement. The email subject was “London Executive Aviation Limited - ISDA with Natwest” and the email said:

“I understand from my colleagues Dominic Brindley and Adrian Wood that there is an intention for you to enter into derivative transactions with National Westminster Bank plc. As such I am happy now to attach the following documentation.”

The documentation was a copy of the standard form ISDA Master Agreement setting out the general terms and conditions governing trades of this nature and a draft schedule which, Ms North said, “is written to reflect the particular trading relationship with you and makes the necessary elections available under the terms of the Master Agreement.” She closed by saying:

“I should be obliged if you could please review the draft Schedule and either let me know that it is in an acceptable form for execution, or provide your comments. Should you have any queries relating to the documentation please do not hesitate to contact me.”

The blank ISDA Master Agreement attached did not contain any indication as to the future counterparties but the blank Schedule referred to the Master Agreement being “between NATIONAL WESTMINSTER BANK PLC (‘Party A’) and LONDON EXECUTIVE AVIATION LIMITED (‘Party B’). The Bank relies on this ISDA Master Agreement as an indication that the contracting party was indeed NatWest. They also rely on certain terms of the Schedule that seek to define the relationship between the parties. It is common ground however that this document was not signed by either party.

Mr and Mrs Margetson-Rushmore returned from their holiday on 3 November 2007 and they arranged to meet Mr Galanopoulos to discuss hedging. Mrs Margetson-Rushmore asked Mr Brindley again to update the pricing. Mr Brindley in turn asked her to get LEA’s approval of the draft ISDA wording that had been sent through on 23 October. On 5 November as requested Mr Brindley sent through revised pricing to be considered at the internal LEA meeting which he had been told was taking place on that day. All the prices were, he said, based on a bullet notional amount of £8.5 million for the first five years and then stepping up to £12 million for the remaining five years. The prices had improved since the previous quotations:

Mr Brindley also rang Mrs Margetson-Rushmore on 5 November 2007 after he had sent through the new prices to talk her through everything. He clarified that the step up in the notional amount was based on figures Mr Margetson-Rushmore had given about LEA possibly borrowing another £3 or £4 million. There was a general discussion between them about US interest rates and various announcements from the Federal Reserve. Mr Brindley commented that U.S. base rates were now cut by 75 basis points to 4.5% but that the market had reacted badly to that so that swap rates had actually rebounded and gone much higher. By this stage American banks were starting to report very large losses but the UK had shown fairly strong retail sales and the strong oil price provided inflationary pressure. As to what the Monetary Policy Committee might do, Mr Brindley said:

“Yes, so I just think that its possibly going to be one of the most contested rate decisions for a very long period of time because it will pretty much govern how quickly we get to, I mean we see the trough in UK interest rates at the bank now at 5.25, we see that whatever happens if it doesn’t happen now we’ll see a rate cut February, and we see by the back end of sort of 2008 that rates will be at five and half and in 2009 may be going to 5.25 and then subsequently coming back up once the economy has, you know, had the chance to sort of recover from what's been happening. And a period of stabilisation at that point is probably what the market actually needs. Now for all that being said you know it is a case of timing and my sort of gut instinct is that with everything that is going on I think the MPC may well hold off from cutting rates in November unless they because they have foresight as well of the quarterly inflation report and they will be looking at analysing that probably they probably even had a draft copy of it prior to them going into the meeting given how important it is. And if there is something in there that we don’t know about we say they’ve made a market projection for then we may well see rates get cut but as it stands I’m of the mind-set that it remains on hold. I keep convincing myself one way or the other but I think the arguments are sort of very much 50/50…”

Mrs Margetson-Rushmore asked for some further information about what the interest rate curve was showing for various future dates and in particular was it still inverted. Mr Brindley replied that it was, but that the curve had priced in the expected rate cuts although not fully. He said: “what it says to me is that people are not going to hang their hats on interest rate cuts just now because effectively the last month and a half people are saying yes definitely going to get a cut in November and all of a sudden in the last two weeks that thought process has actually eroded. So I think what the curves [are] actually saying is that they fully priced in one interest rate cut between now and a two-year time period.”

There was then some further discussion between them about the significance of the inversion of the forward curve and what this indicated about future interest rates:

“DB Yes its inverting. What I would say is as well is the market doesn’t view that we see rates go higher over the next two to three years it sees rates going lower….”

IR Yes. That was always Patrick's concern.

DB But I think in terms of if you look at the ranges on the solutions in terms of you know if you take both of them they’ve I think as per our conversations before…

IR Yes.

DB What they’re both trying to do is give you absolute protection on the top-side which is again you know your primary concern but I think talking to Patrick Patrick’s worried if you like in terms of whether rates go lower. You know both ranges on there go all the way down to 4.25% now if you were to ask I mean if I was to give you some facts and figures around 4.25 we’ve only seen rates at and below 4.25% for a period of three years in the last 50…

IR Uh huh.

DB So that’s taken as a percentage that’s 5% of the last 50 years so if you wanted to so look at that and think 95% confidence given historic...

IR Yeah.

DB That that range would actually on the bottom side you wouldn’t see that…

IR Yeah.

DB Now will we see 6% - you know that is a point in question.

IR Probably not.

DB Yes – you know where is the - if you ask people where the norm for [UNCLEAR] is given where growth expectations are.

IR Yeah.

DB I think most people would come out with somewhere at and around 5.5% now if that’s the case – if that’s the case because you are always going to have periods where you need to encourage the economy and periods where you need stem the economy from growing too quickly and that will give you the fluctuation in interest rates but if you find that as a medium then both of those trade ideas over the next you know 5 to 10 years would give you a beneficial rate because number 1 the triggers wouldn’t happen and number 2 the rates that you are actually locking into are, are below the where the actual market the underlying market would actually be….

IR Yeah okay fine, alright and I think - I know what all the rates are…

DB Yeah.

IR But I've got to put them into my model.”

Mr Brindley then reminded Mrs Margetson-Rushmore that the choice that LEA had to make was between ‘absolute certainty’ that the hedge would stay in place for 10 years as against if there was a potential call every six months or annually. Mr Brindley agreed to provide a further price for that kind of trade. Mr and Mrs Margetson-Rushmore and Mr Galanopolous met on 5 November to discuss issues relating to currency exchange risk and the hedging products. No decision was made as to the latter.

On 6 November 2007 Mr Brindley emailed Mrs Margetson-Rushmore asking if there was any news. Mrs Margetson-Rushmore responded apologising for not having got back to him and reporting that some progress had been made; the directors of LEA expected to decide on the hedge by the end of the week. Mr Brindley’s reply reassured her that he was not chasing:

“Please don’t worry about not reverting sooner. I had imagined from our conversations that it wasn’t going to be a straightforward conversation. If you require updated pricing at any point then please just shout and I will get it across to you. I was just going to point out that we have the MPC decision on Thursday. We may see some movement around rates at this time”.

Mr Brindley forwarded Mrs Margetson-Rushmore’s email to Mr Wood who replied:

“Great news - I will keep everything crossed - will need a drink to get over this when done.”

On 7 November 2007, Mrs Margetson-Rushmore sent Mr Galanopoulos and Mr Margetson-Rushmore a ‘hedging options calculator’ for them ‘to play with’. This still carried forward the same incorrect total debt profile from all the earlier spreadsheets and showed a rate of 5.1% payable within the range of 4.25% and 6% and a rate of 6% being payable if base rate was outside that range. It showed the results if interest rates were 5.5%, 5.75% or 6.5% but told them that they could change the base rate figure, the range figures and the fixed rates payable to see what the outcome would be. Within LEA, Mr Galanopolous was less enthusiastic about hedging but was prepared to leave the decision to Mr Margetson-Rushmore.

By this time the internal emails between Mr Wood and Mr Brindley were beginning to express their frustration at the failure of LEA to decide one way or the other. They were both keen to nail Mr Margetson-Rushmore to a deal. Mr Wood accepted in evidence that he was annoyed – he felt that this transaction was taking an inordinate amount of time to bring to a close; they were being assured that decisions were imminent but nothing materialised. However, as I have described, none of this impatience was expressed in their emails to LEA or Mrs Margetson-Rushmore.

As promised in the 5 November phone call, Mr Brindley sent the Margetson-Rushmores more up to date revised rates which had improved, he said, “on the back of further scares in the equity markets”. This time solution 3 was priced for the Bank’s right to cancel at five years and every year, rather than every quarter thereafter. His email repeated the information that all the solutions were based on a £8.5 million bullet notional for the first five years, then stepping up to £12 million notional for the remaining 5 years.

On 9 November 2007 Mr Margetson-Rushmore and Mr Galanopolous had a further meeting to discuss whether to buy a hedging product. They looked at the spreadsheets that Mrs Margetson-Rushmore had provided. Mr Margetson-Rushmore’s evidence is that as Ms Pierce had told them that LEA’s decision on hedging would not affect the Lombard Loans they decided not to proceed. He says also that it was clear that neither he nor Mr Galanopolous really understood what the Bank was trying to sell.

LEA did not inform the Bank about their decision. On 12 November 2007 Mr Wood emailed Mr Margetson-Rushmore telling him that the expiry date for the internal credit limit agreed was rapidly approaching. He said:

“Whilst I am more than happy to renew this credit limit with my committee I wondered if you could let me know your plans / timeframes so that I can obtain renewal of the credit limit for an appropriate time.”

He reminded Mr Margetson-Rushmore that the Bank had been told that there would be a decision by 9 November 2007 because Mr Galanopoulos was then going on holiday. He asked whether there had in fact been a decision and asking whether they needed anything more from the Bank.

On 12 November 2007, Mr Margetson-Rushmore sent an email to Mr Wood, copying Mr Brindley:

“A

Thanks for this – yes George and I have looked at this last Friday – I think that in the light of the current press/city new that we feel that there will be 1 to 2 rate cuts in near future – so given this view we will hold off on doing a trade. When we feel it is best to relook we can reprice and ask for credit approval then

Thanks”

From mid November 2007 until the conclusion of the contracts

There is no doubt that Mr Wood and Mr Brindley were very disappointed and annoyed that all the time and effort spent with LEA had come to nothing more than this short email from Mr Margetson-Rushmore. LEA’s case in their Particulars of Claim is that “an obvious reading” of the email was that LEA had “decided to shelve any immediate plans for interest rate hedging for the time being”. Mr Edwards described the email as equivalent to a “Don’t call us, we’ll call you” brush off which meant that negotiations are at an end. But that is not at all what the email said and I do not see that Mr Wood and Mr Brindley can be criticised for taking the email at face value. Mr Wood and Mr Brindley found this frustrating not only because they faced the prospect of yet more work repricing all the different solutions at some point in the future when LEA decided it was ‘best to relook’. They were also frustrated because they thought that the reason given in the email for delaying entering into a hedge was an obviously bad reason. As they tried to explain to LEA over the following days, the expected cuts in interest rates had already been priced into the hedging products quoted to LEA. It was therefore unlikely that swap prices would improve if and when the interest rate cuts actually occurred.

Mr Wood immediately forwarded Mr Margetson-Rushmore’s email to Mr Brindley expressing his mystification at LEA’s position: “Massive risk to take with huge debt coming their way – I cannot understand why they would take this much risk on?”. Mr Wood and Mr Brindley interpreted the email as inviting them to reduce the price.

Mr Wood promptly replied to Mr Margetson-Rushmore’s email expressing in more temperate terms his surprise at the “plan/gamble given the large amount of debt you have and will increase in the short term”. He also explained why a delay in concluding a trade was unlikely to be helpful for LEA. He recognised that LEA’s concern might be with not getting the benefits of any decrease in base rate but referred to possible options that could meet this concern. Mr Brindley followed up with his own lengthy and emollient reply to Mr Margetson-Rushmore during the evening of 12 November attaching a paper he had prepared. The paper specifically addressed the point that holding off from trading because of expected interest rate cuts was unwise because hedging prices may in fact rise steeply during a period of interest rate cuts, if the market believes that rates will ultimately rise. He also pointed out that the £8.5 million notional rising to £12 million in five years was only hedging part of their risk, assuming that they took on debt of £12 million by mid 2008 upon delivery of all the new planes. Mr Margetson-Rushmore’s evidence is that he ignored the covering email and that he would not have read the November 2007 paper nor relied upon it.

The next day Mr Brindley sent Mr Margetson-Rushmore and Mr Galanopoulos some articles from the press about factors likely to drive higher inflation and asking again for an opportunity to discuss this with them.

Mr Wood spoke at length to Mr Margetson-Rushmore on 14 November 2007 as recorded in an email that he then sent to Mr Brindley and Ms Pierce. He reported that Mr Margetson-Rushmore had said he had been “inundated with emails/papers about trading now”. Mr Wood said:

“I told him that hedge was not unconditional but personally I think it is remiss of the bank not to insist on insurance on any debt over £0.5m and 6 months, and that I did not want to have a chat along the lines of ‘I wish we’d locked in’ in 6 months, 1 year et cetera et cetera I know he insures against all relevant intangibles but could not understand why he would not insure against something which could have a detrimental effect on business and cash flow if moves against him.

…

His response was that his cash flow is not impacted for 10 years - his payments are fixed and if base rate goes up it will affect his bullet in year 10 - payments in between then and now will stay the same and pay more interest and less capital rather than fluctuate if base rate increases - TANYA CAN YOU CONFIRM IF THIS IS TRUE

Thus his issue was 10 years away with a [worst-case scenario] bigger bullet against planes they expect to appreciate.”

Mr Wood records that Mr Margetson-Rushmore asked the Bank to send again the information about the tax advice and then:

“I also promised to back off with the info flow until I am back from hols (26^th November) DOM PLEASE NOTE ALBEIT I DID PROMISE IF ANYTHING HAPPENS IN MARKET WE WOULD LET HIM KNOW Dom will leave with you to decide what is important and not in terms of advice.

Dom - seems to me our focus should be on cap and collar perhaps we can work some scenarios and different prices I think he may have an issue with paying a premium …

Dom I know you were pricing £200-£250k on this - I think for all this work we need to work something upward of this

I hope this is all clear - good news is that he is receptive and he is still interested in hedging just now is not a good time

maybe we need to get to see George, Isabel and Patrick on my return with tax expert to kill off any concerns

LETS DO THIS”

It is apparent from that that the effect of the phone call on 14 November 2007 was certainly not to convey to Mr Wood that Mr Margetson-Rushmore’s understanding of how the Lombard Loans worked meant that LEA had no interest in a hedging product. Mr Margetson-Rushmore said in evidence that he had ignored the paper and other information that Mr Brindley sent to him after his email of 12 November and that he told the Bank not to contact him again except in relation to the tax treatment of derivatives. In the Particulars of Claim there are some criticisms of the Bank for failing to send new interest rate forecasts to LEA showing that interest rates were likely to fall but in the light of Mr Margetson-Rushmore’s evidence, that criticism is unfair.

Ms Pierce responded immediately explaining to Mr Wood that the effect of an interest rates rise under the Lombard Loans would be that the balloon payment at the end of the 10 years would increase and that it would decrease should interest rates reduce. However, she pointed out in addition that the Lombard Loans contained a covenant stating that should asset cover fall below a specified percentage then Lombard could call for a lump sum reduction in the principal. Mr Wood asked Ms Pierce to work on some numbers in terms of the risk that LEA faced if they did not hedge, particularly as regards how the asset covenant worked.

Over the weekend of 17/18 November 2007, Mr Wood emailed Mr Brindley having had what he called “a moment of inspiration / clarity” which he wanted to share. By this time, Mr Wood had finally taken on board the fact that the sticking point with LEA was that the company believed that as their repayments under the Lombard Loan were set at about £78,000 per month, they had no short-term interest rate/cash flow risk from base rate rises. However, he believed that in fact they had two cash flow risks. The first was the final balloon payment which would increase significantly if base rates were high over the life of the Lombard Loans or any other loans subject to a variable rate and the second was the risk of being in breach of the asset covenant and so being called upon by the Bank to make a lump sum reduction in the Lombard Loans principal. Mr Wood thought it was important to bring home the seriousness of these risks to LEA as a way of persuading them of the benefits of hedging. He also had understood better the tax concerns that LEA had raised and suggested that they arrange a meeting with some tax advisers to help on this. He reiterated the point that given the amount of work that he and Mr Brindley had had to put in to trying to close the deal, the price charged to LEA should give them ‘top end return’. However Mr Brindley confirmed in his evidence at the trial that he had not in fact altered the price to increase the return to the Bank from the trade after 12 November 2007.

Over the following few days Mr Wood and Mr Brindley designed a new presentation. LEA criticised Mr Wood for putting forward suggestions and draft slides for Mr Brindley to include in the material designed to persuade LEA finally to commit to a trade. I consider that criticism is misplaced. Mr Wood as the long-term relationship manager might be expected to have a better idea as to the kinds of arguments likely to appeal to the customer. In any event Mr Brindley did not use Mr Wood’s ideas in the material ultimately sent to LEA.

One important piece of information that the Bank worked up during December 2007 was to ask Ms Bianca Ruddy, who also worked in RBS GB&M, to produce a figure which they could show LEA to illustrate the possible impact on the size of the balloon payment under the Lombard Loans of a worst case but realistically possible increase in interest rates. On 10 December 2007 Ms Ruddy told Mr Brindley that her calculations showed that the value at risk in a 95% worst case interest rise scenario, was over £1.6 million taking both Lombard Loans together. Mr Brindley told his line manager that he thought this was a ‘very powerful message for us to lead with’ because it disproved ‘in a big way’ Mr Margetson-Rushmore’s thought that there were no cash flow implications for LEA from base rate rises over the life of the Lombard Loans. Mr Brindley incorporated this information into one of the slides he was preparing to present to LEA which showed:

“£10.38m Loan maturing January 2018

•

Based on current forward rates, the principal balance outstanding in January 2018 is estimated to be £4.74m

•

The worst case outstanding balance at a 95% confidence level is £6.22m

•

This represents an outstanding principal at-risk amount of £1.49m

£2.5m Loan maturing December 2012

•

Based on current forward rates, the principal balance outstanding in December 2012 is estimated to be £1.14m

•

The worst case outstanding balance at a 95% confidence level is £1.27m

•

This represents an outstanding principal at-risk amount of £134k”

On 11 December 2017 Ms Ruddy wrote to Mr Brindley with some queries about how the Lombard Loans worked. She said “For hedging I was thinking of a Libor accumulator which would pay out on last scheduled payment date of the loans.”. She later gave Mr Brindley an example of a Libor accumulator swap which could be structured so that the payout under a 95^th percentile worst case increase in interest rates would offset the increase in the loan balance above the expected amount. She offered to price this but Mr Brindley did not take this suggestion forward. At trial, Mr Brindley could not remember why he did not, although in an email to Mr Wood on 19 December 2007 he referred to the “time value of money” as being an argument that they should be putting to Mr Margetson-Rushmore: “i.e having to pay cheaper debt costs now or receiving funds now is much better than receiving funds in 10 years’ time as the time delay of money will erode values”. I take this to mean that he appreciated that the advantage of the structures he was proposing to LEA was that if interest rates rose, LEA would be receiving periodic payments from the Bank through the life of the hedging product rather than simply the hope of a lump sum payment in 10 years’ time.

Despite Mr Wood’s efforts to try and push things forward in the run-up to Christmas 2007, matters were only picked up again in mid-January 2008. At that point the second loan facility of £10.38 million to finance five new Mustang jets was concluded between LEA and Lombard.

LEA placed great emphasis on internal emails from Mr Wood from 12 November 2007 forward in which he expressed the need for the Bank to bring home to LEA in emphatic terms the risks that the company faced in order to scare them into hedging their risk. It is alleged that this attitude was “improper” and that it reflected Mr Wood’s recognition that in the absence of misleading or exaggerated or unbalanced statements, LEA was unlikely to enter into products of the kind that he and Mr Brindley wanted to sell. This is said all to be part of a ‘scheme’, in which Mr Brindley acquiesced, to get a deal done ‘come what may’, even if it involved giving misleading explanations and acting in breach of their professional obligations. I reject that as a possible reading of the contemporaneous documents. I am sure that Mr Wood’s and Mr Brindley’s conduct throughout these events was motivated not by personal greed or anxiety about their careers but by a real concern that LEA – still quite a small company - was not acting responsibly if it failed to hedge the very substantial amount of debt that it was taking on at a time when interest rates were very unstable. Mr Wood was also concerned that his clients might turn round and blame him if three years into the life of the Lombard Loans, interest rates were up to 7% or 8% and looked set to remain high.

I also reject Mr Margetson-Rushmore’s evidence that he felt pressurised over this period into changing his mind. Although the internal Bank emails are expressed in strong terms, the emails that went to LEA could not possibly be described as pushy or incessant. This is an instance where Mr Margetson-Rushmore’s recollection of what he felt at the time has been influenced by reading emails that he only saw much later. In fact Mr Margetson-Rushmore had no difficulty in ignoring the emails from Mr Brindley and in refusing to take his calls when Mr Brindley tried to speak to him. He told Mr Wood to stop contacting him and Mr Wood passed this message on to Mr Brindley. There was very little communication with LEA about hedging between the end of November 2007 and the meeting in February 2008.

On 31 January 2008 LEA held a spectacular party at Farnborough Airport to celebrate the delivery of LEA’s first Mustang jet. Mr Brindley and Mr Wood were both invited. At some point at or after the party, Mr Brindley was invited to attend the review meeting that Mr Wood routinely held with LEA each year to discuss generally the state of the business and LEA’s likely future banking needs.

That meeting was scheduled for 8 February 2008 and it was at that meeting that LEA agreed to enter into the hedging products. Attending the meeting were Mr Brindley, Mr Wood, Mr Galanopoulos and Mr and Mrs Margetson-Rushmore. Unfortunately, there is very little evidence about what happened at this crucial February meeting. Mr Margetson-Rushmore’s evidence was that when he went into the meeting he did not expect that he was going to change his mind about not wishing to hedge. At the meeting, he said he felt subject to persuasion or pressure from the Bank telling him that LEA was taking a risk with the balloon payment that it should not be taking. Mr Galanopoulos’ evidence is that he was the only person in the room without any financial knowledge and he was relying on Mr Brindley and Mr Wood but also on Mr and Mrs Margetson-Rushmore to decide whether they should enter into the hedging products or not. Neither Mr Wood nor Mr Brindley can remember what was said at the February Meeting.

Mr Brindley did produce a further presentation which he had not managed to circulate before the meeting (‘the February Presentation’). The February Presentation contained the following information:

The February Presentation did not in fact include the slide that Mr Brindley had prepared earlier showing Ms Ruddy’s estimate of the almost worst-case increase in the balloon payment. However, Mr Brindley accepts that he did tell LEA about this calculation and mentioned the figure of £1.5 million during the February Meeting.

Following the February Meeting, Mr Wood emailed Mr Brindley to congratulate him on his “brilliant work” and said that they hoped to trade on Monday following which he would organise “a few beers”. Mr Brindley emailed Mr and Mrs Margetson-Rushmore soon after the meeting to say that he had obtained approval from the Bank to conclude a trade ahead of an ISDA agreement being completed so long as that agreement was in place within one month of trading. The Bank was therefore in a position to provide LEA with live pricing on the following Monday. He confirmed that LEA’s agreement was to split the hedge in half with half the notional amount (that is now £4 million stepping up to £6 million) being an extendable value collar and the other half of the notional being a callable dual rate swap.

On Monday, 11 February 2008, Mr Brindley asked the risk management team at the Bank for a credit calculation on the two trades. The answer came back that they would need a credit line or CLU of about £1.6 million. Mr Wood replied: “Small increase!!!”. This figure is a key part of LEA’s claim in misrepresentation because they allege that once Mr Brindley became aware that the credit line utilisation was so high, he came under an obligation to correct the impression that he had given at February Meeting when he told LEA about Ms Ruddy’s calculation of the risk of an increase in the balloon payment.

On the evening of 11 February 2008, Mr Brindley gave Mr and Mrs Margetson-Rushmore the up-to-date prices for the trades. He encouraged them to agree the trade early the next morning to pre-empt the release by the Government of inflation data which might push rates higher.

In that email, Mr Brindley reiterated that they would need to settle an ISDA agreement within one month of the trade and he said he would forward separately an example of a draft ISDA agreement for their reference. He said:

“This is a market standard document we ask all entities with more than 1 trade in place to sign into. The document simply lets both parties know exactly how they will be treated in the event that LEA goes bankrupt and the trade still remain in place”.

Mr Brindley then sent the draft ISDA Master Agreement to them. The attached document did not name either counterparty but the attached Schedule named the Royal Bank of Scotland plc above the empty signature box.

At 6:30 am on 12 February 2008 Mrs Margetson-Rushmore emailed Mr Brindley to say they were up and ready to take calls. The telephone conversation in which the contracts for the hedging products were concluded (‘the Trade Call’) was primarily between Mr Brindley and Mrs Margetson-Rushmore with Mr Margetson-Rushmore able to hear his wife’s half of the conversation but not what Mr Brindley said for much of the time. Mr Brindley and Mrs Margetson-Rushmore discussed the prices quoted with Mrs Margetson-Rushmore asking for details of the rates for five-year and 10 year LIBOR swaps for comparison. Mr Brindley referred to the expected higher inflation figures due to be released within a few minutes of the phone call and the fluctuations in interest rates over the previous two days. Mrs Margetson-Rushmore cut in to say that the main driver of the difference in rates for the products on offer was the callability of the trade. She repeated her concern that the trade would not still be in place after five years if rates went up even though that “is the time you want it in place”. Mr Brindley said that if interest rates were starting to rise and it looked like the Bank was actually going to exercise its call right, they could have a discussion about a possible revision of the deal.

Mr and Mrs Margetson-Rushmore were still keen to push for a reduction in the prices quoted. Mr Brindley was speaking to a trader on another phone at the same time as holding the conversation with Mrs Margetson-Rushmore. He was able to improve the rate within the range of the dual rate swap from 4.71% to 4.69%. For the extendible value collar, he could reduce the knock in rate from 5.51% to 5.49%. Mrs Margetson-Rushmore was happy with that but she put Mr Margetson-Rushmore on the phone to Mr Brindley so that Mr Brindley could explain the trades to him. The point that Mr Brindley then discussed with Mr Margetson-Rushmore was whether both trades would start that day. Again Mr Brindley referred to the ISDA agreement that the Bank required LEA to sign saying:

“All that the ISDA document does is allows us to clearly define what happens if you were to go bankrupt and the netting of derivative positions across two derivatives. So, that’s really all that ISDA document actually does. It’s a market standard document”.

Mr Brindley confirmed the rates that the trader was prepared to offer and then summarised the terms of the trades. He described the trades in the following terms:

“DB The first… the first trade will be it's a ten year trade, the first five years of that trade will be on £4 million on a bullet basis as agreed stepping up to £6 million for years six to ten. That will roll quarterly out of… out of today, which is 12 February 2008 and that will… it's a five year plus five year extendable value collar. So, the first five years of the trade is guaranteed to be in place. At year five RBS have the one time right to actually extend the trade on exactly the same basis for a further five years. The levels within that trade are base rate cap at 5.75%. So, your cost of funds will never be greater than 5.75% plus your lending margin.

You pay floating from 5.75 between … all the way down to the floor, which is at 3.75%. So as we stand at the moment at 5.25% you would pay effectively 5.25% and nothing would happen under the transaction. If interest rates were to rise let’s just say 6% you would receive the difference between 5.75 and 6, so 0.25% as a payment on the outstanding balance at that point in time. Should you get interest rates or average base rate trade at or below 3.75% for a period of three months or longer, you will effectively be knocked into paying 5.49% for that period. So, should you get interest rates, get to let's just say 3.50, you would pay 5.5% effectively, or 5.49% underneath that transaction. Now…

.. so should interest rates move back into the range you would just continue to pay floating interest rates. So, that's the first trade that we're going to look at… look to put in place. So, I can get your okay to go ahead and put that trade in place, Patrick?

PMR Yep, you can. Do you want me to repeat it?

DB No, no, no, it's fine. It's just that we just need your okay to go ahead and put that in place.

PMR Yeah… that's fine. On what you've just said, that's fine.

DB Perfect, excellent, thank you. The second trade we're looking to put in place again is in the name of London Executive Aviation Limited and on the same basis as the first trade, it will be on a notional amount out of today the 12 February 2008 on £4 million starting for the first five years and that will be on a bullet basis rolling quarterly.

They will then step up to £6 million from year six to ten and that is a ten year trade again with the first five years of the trade being guaranteed to be in place and RBS having the right to cancel the trade at year five and every quarter thereafter through to maturity. Um, LEA will pay a fixed rate of 4.69% so long as UK base rates remain between the range 6.25% and 4%.

So, effectively what happens is, you pay 4.69% as of today plus your lending margin on £4 million of your debt. UK interest rates would need to trade at or outside of that range before you pay the higher fixed rate or protected fixed rate of 5.35% as per our previous conversations. So, should UK interest rates move to 6.25% you would then revert… you would then pay 5.35% and again just as we talked about before, if the… if UK interest rates move back within that range, so if interest rates fell to 6% you would revert to paying the 4.69% plus the lending margin. Just one final thing before I get your OK to go ahead to put that in place, should you wish to terminate the trades, Patrick, ahead of maturity, there may or may not be a breakage cost attributable to that trade and that can only be determined by the prevailing market at that point in time.

So again, if you're comfortable with all of those details that I've just said for that trade, can I get your okay to go ahead and put that in place?

PMR - Yeah, and the breakage relates just to the second trade or both trades?

DB Both trades. Effectively, because… we're agreeing the trades for a ten year… for a ten year period and if you were to wish… if we exercised that right to cancel the trade you'd just revert to paying floating base rates for nothing. So… but, given the profile of the business and what we discussed in terms of we're only looking to hedge 8 million of your initial £12 million worth of debt, um and then, you know, subsequent to the increases in debt that you envisage by purchasing further aircraft, you know, that will… you know, that's the reasons why you're stepping that into 6 million. Is that okay?

You’re happy comfortable with that. Okay… Patrick, all of that's done then so the trader will put that in place and that will start today so what you will receive is a confirmation. So, two emails confirmations… if you can just check the details of them, make sure you're happy with it, sign it and fax that back to the relevant number on the… on the confirmations. What will follow in eight to ten working days is a more long form confirmation again just detailing exactly what the trade is. If you could just satisfy yourself that that's exactly what we agreed sign that and send that back then that's everything done from the formalities and just one final thing, Patrick, as per the start of the conversation, both of the trades will be governed by the ISDA document that I talked about from the bank's perspective.

What I will do is I'll get our legal guys to actually send out a copy of that document for you and we need to put that in place within a month's period of time just from the… from credit perspective. So, that… we can start that process. But, that's all done for you. And uh as I said, you'll receive a confirmation and maybe as and when you're back I can… I can take yourself and Isabel and Adrian out for some dinner maybe or some drinks in town if you're… if you so like.”

LEA allege in the Particulars of Claim that the contents of the Trade Call should have alerted Mr Brindley to the fact that Mrs Margetson-Rushmore did not understand “the implications of the proposed swap products in the event that interest rates should fall, rather than rise.” I do not agree. It is and was obvious what would happen if interest rates fell either within or below the range; this was explained extremely clearly by Mr Brindley in the phone call and there was nothing said in the conversation to suggest that either Mr or Mrs Margetson-Rushmore had failed to grasp this.

The conversation closed after a short discussion about fuel costs.

The terms of the hedging products finally agreed were therefore as follows. The dual rate swap lasted for ten years until 12 February 2018. The notional amount was £4 million for the first five years and £6 million for the second five years. The upper fixed rate is 5.35% and the lower fixed rate is 4.69%. The ceiling of the range is 6.25% and the floor of the range is 4%. The swap was cancellable by the Bank on 12 February 2013 and quarterly thereafter.

The extendable value collar was in place also from the effective date of 12 February 2008 until the termination date of 12 February 2018. The notional amounts were the same as for the dual rate swap, that is £4 million for the first five years and £6 million for the second five years. The collar was cancellable by the Bank at one time only, on 12 February 2013. When the Base Rate is between 3.75% and 5.75%, neither LEA nor the Bank has to make a payment. If Base Rate exceeds 5.75% in the quarter then the Bank has to pay the difference between the floating rate and 5.75% to LEA. If the Base Rate is 3.75% or lower in the quarter, then LEA has to pay the Bank the difference between the floating rate and 5.49%.

Events after the hedging products were concluded

Mr Brindley and Mr Wood were pleased and relieved that they had managed in the end to conclude the hedging products contracts with LEA. The internal Bank news flash summed up Mr Brindley’s view:

“This has been a long time in the making but through persistence, continually having “risk” conversations with the client and some great teamwork to present a united front from RBS (Lombard, Commercial Banking and GBM) this deal has been allowed to happen by those that have been involved-none more so than by RM Adrian Wood who has been instrumental in driving the process throughout. Congratulations on the 2 deals Adrian and I think this puts you into the 600 club so well done on that front as well”.

Other colleagues emailed their congratulations and praise to “Woody and Dom”, one referring to the amount of work that had been done resulting in “a delighted customer and £242,000 of GBM income”.

On 15 February 2008, the written confirmations for the two trades were sent to LEA (‘the Confirmations’). The Bank rely on the terms of these Confirmations which state that the transactions have been entered into between National Westminster Bank plc and LEA. They also rely on the terms and conditions included in the Confirmations. The Confirmation for the dual rate swap was signed and returned by LEA but the Confirmation for the value collar was not. Mr Margetson-Rushmore’s evidence is that he cannot recall reading them but that it is likely he would “have skim read the papers as one does with most bank documents which one knows will not be altered”.

Soon after the conclusion of the hedging products, base rates fell dramatically. The weighted average base rate for both hedging products was:

LEA has thus been paying the higher rate under both hedging products, that is 5.35% on the notional under the dual rate swap and 5.49% under the value collar. Unfortunately, the economic crisis also had an adverse effect on the private aircraft chartering business as both senior and middle ranking executives no longer felt justified in incurring the expense of chartering a private jet for their business travel. There were discussions between Mrs Margetson-Rushmore and Mr Brindley about possible break costs and whether the Bank would be willing to restructure the products. Some restructuring of payments under the Lombard Loans took place but the hedging products have remained in force.

The regulatory background

LEA contend that it is important for a number of reasons to see this case in the context of the regulatory framework that governs the provision of investment advice. Some of the applicable rules imposed by the FSA were pleaded in the Particulars of Claim and referred to by LEA in its submissions. Broadly, giving advice on investments is a regulated activity within the meaning of the Financial Services and Markets Act 2000 (‘FSMA’) so that it is a criminal offence to give investment advice without being an authorised person. Section 138 of FSMA gives the FSA power to make rules applying to authorised persons to protect the interests of consumers. The FSA may also make rules relating to the provision of ancillary services which are not regulated activities but include “investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments”. The FSA also has power to issue guidance. Some of the rules and guidance issued by the FSA can be found in the Conduct of Business Sourcebook (‘COB’ or, as revised after MIFID, ‘COBS’), in the Perimeter Guidance Manual (‘PERG’) and in the Supervision Manual.

Section 138D FSMA (originally section 150) provides that a contravention of a rule by an authorised person is actionable at the suit of a private person who suffers loss as a result of the contravention. LEA is not a private person for this purpose and so has no cause of action under FSMA.

Mr Edwards also referred me to material from the FSA describing its investigation into widescale mis-selling of hedging products to small companies in the past. In June 2012, the FSA announced that it had found “serious failings” in the sale of interest rate hedging products to small and medium sized businesses by a number of banks including the Defendant. The sale of structured collars was particularly criticised. In response to the investigation, the banks undertook to set up a redress scheme whereby they contacted unsophisticated customers who had bought collars and swaps up to a notional of £10 million. They also agreed to stop marketing these products to retail clients. LEA did not qualify for the redress scheme because its turnover was too high and the notional amount of the hedging products was above the maximum size of trade covered by the investigation. Although Mr Edwards stressed that this is important background, I consider that this case, as with other cases, must be assessed on its own facts. It would not be right to assume, because there had been widespread mis-selling of hedging products in the sector, that Mr Brindley or Mr Wood had behaved improperly in this case.

The court’s approach to negligent mis-selling claims

Both parties referred me to the substantial body of previous decisions, particularly in the aftermath of the financial crash in Autumn 2008, in which claimants who entered into hedging products before the crisis have alleged that they were negligently advised by their bank to buy products which turned out to be very onerous. Certain principles emerge from the cases which it is useful to highlight here.

First, in all the cases the courts have carefully examined the emails, phone call transcripts, slide presentations and contractual documents generated during the often lengthy dealings between the parties to ascertain whether the bank not only sold the products to the customer but also advised the customer to buy its products to an extent that engages a legal responsibility on the part of the defendant bank to ensure that such advice was not negligent. The court has often stressed that these cases are fact sensitive. For example Hamblen J said in Standard Chartered v Ceylon Petroleum [2011] EWHC 1785 (Comm)at paragraph 478 that attention should be concentrated on "the detailed circumstances of the particular case and the particular relationship between the parties in the context of their legal and factual situation as a whole" citing Lord Bingham in Commissioners of Customs & Excise v Barclays Bank [2007] 1 AC 181.

Secondly, in many of the cases, as here, the claimant faces the hurdle that the binding contractual terms explicitly state that the relationship between them is not an advisory one; that the customer acknowledges that the bank is not advising him and that he has not relied on any advice or recommendation given by the bank. This may prove fatal to the claimant’s case. A strong example is the decision in Crestsign Ltd v National Westminster Bank & The Royal Bank of Scotland plc [2014] EWHC 3043 (Ch) (‘Crestsign’). Tim Kerr QC (sitting as a Deputy High Court Judge) found that the bank’s employee Mr Gillard had given advice and not just information to the claimant Mr Parker about the hedging product sold. He held further that Mr Gillard knew that Mr Parker looked to him for expert assessment of the available products, the claimant having professed his ignorance of them in the first telephone conversation between them, and Mr Gillard having been brought in specifically in the role of an expert on those products, with the task of explaining them. The judge therefore held that if he left out of account the bank's documents which sought to exclude a duty of care, he would have found that the relationship between the bank and the claimant there did satisfy the requirements set out in Lord Morris' speech in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. However, he went on to hold:

“114.

In the present case, I find myself unable to resist the conclusion that the banks successfully disclaimed responsibility for any advice that Mr Gillard might give and (as I have found) did give. The Risk Management Paper and the two sets of terms of business were unequivocal; they defined the relationship as one in which advice was not being given. They were clearly drawn to Mr Parker's attention before the swap contract was concluded. He rightly understood (…) that they were not empty words but were intended to have legal effect as part of any contract.

115.

Although Crestsign was a retail client and not a large and sophisticated commercial party, it was not in a position akin to the buyer of a second hand car. I do not accept Mr Edwards' submission that it would be rewriting history or parting company with reality (in Clarke J's phrases in Raffeisen) to define the relationship as one in which advice is not given, even though I have found that, in substance, it was. The line that separates provision of information from giving advice may be a fine one, as where advice is conveyed by presenting information selectively. It is not always easy for a salesman such as Mr Gillard to know where one ends and the other begins. Reasonable people could disagree about whether the line is crossed in a particular case.

116.

It is considerations such as these that lead parties in this type of arrangement legitimately to define their relationship and avoid disputes afterwards. No violence is done to history or reality by construing the documents as meaning what they say, even though the first document in time – the Risk Management Paper – postdated the meeting on 28 May 2008, and even though what Mr Gillard said at that meeting (and subsequently) in my judgment crossed the line and would have amounted to advice coupled with an assumption of responsibility, were it not for the disclaiming effect of the documents.

117.

The end result is that by the time the swap contract was entered into, what Mr Gillard was saying in effect was: "although I recommend one of these products as suitable, the banks do not take responsibility for my recommendation; you cannot rely on it and must make up your own mind." I do not see anything unrealistic about that, nor does it mean the documents must be exemption clauses not basis clauses. As correctly submitted by [counsel for the bank], the disclaimers in the Risk Management Paper, the two sets of terms of business, the written acknowledgment of the transaction, and the formal written swap contract, are all basis clauses.”

Thirdly, and following from the second point, the courts have taken a pragmatic and commercially sensible approach to analysing the dealings between a bank’s representative and the customer. The material that passes between the bank and the customer over weeks or months usually contains a large amount of information and comment on what is happening in the financial markets or more generally in the business world or in macro-economic terms. There are often several descriptions of different products and explanations of potential additional product features in response to questions from the customer and information gleaned about the customer’s business. In such circumstances, I agree with the warning of Eady J in Wilson & another v MF Global UK Ltd & another [2011] EWHC 138 (QB) about the dangers of dissecting phone calls and email correspondence to extract advice or opinions or personal recommendations from a relationship which the parties have not expressly characterised as a relationship of advisor and client. He said:

“94 Against this background, it is inappropriate to go through the hundreds of conversations that took place between Mr Wilson and Mr Gainsley, or even the relatively few that are available, with a view to classifying everything that fell from Mr Gainsley's lips according to a rigorous analysis into separate categories of "information", "opinion", "advice" and "recommendations". That is simply not the way the conversations were conducted. Obligations of that sort could not be imported without express written amendment to the terms of business governing relations between the parties.

…

96 It is clear from the conversations that there was a good deal of banter and light-hearted badinage and, from having seen the transcripts and listened to a few samples from the audio tapes, it is clear to me that what was happening can best be characterised as exchanging information and "bouncing ideas" off each other or swapping hunches about the market. Much of it was spontaneous and off the cuff. It would be unfair and unrealistic to pick upon certain passages in Mr Gainsley's observations, with six or seven years of hindsight, and to conclude that he had suddenly changed into "advice mode" and was undertaking an obligation, on his own initiative, to give advice on behalf of his employers to an "intermediate customer". If such conversations were to be subjected regularly to analysis of that kind with a view to changing the express terms of the parties' relationship, brokers would not be able to operate and communications would soon be drastically curtailed.”

The importance of arriving at a commercially sensible balance between the bank and its customer is also expressed by the distinction that the courts have drawn in many cases between what is said by an advisor and what is said by a salesman. As Tomlinson LJ put it in Green & Rowley v Royal Bank of Scotland plc [2013] EWCA Civ 1197 (‘Green & Rowley’), the question in each case is whether the bank crosses the line which separates, on the one hand, the activity of giving information about and selling a product and, on the other hand, the activity of giving advice (see paragraph 23). Thus in Thornbridge Ltd v Barclays Bank plc [2015] EWHC 3430 (QB) (‘Thornbridge’) HHJ Moulder (sitting as a High Court Judge) cited passages from the judgment of Gloster J in J. P Morgan Chase Bank v Springwell Navigation Corp [2008] EWHC 1186 (Comm) (‘Springwell’) to the effect that the court must decide whether the advice given went beyond the normal recommendations or "advice" given in the daily interactions between an institution's salesforce and a purchaser of its products, because the expressing of opinions and giving of advice is "part and parcel of everyday life of a salesman in emerging markets”. HHJ Moulder in Thornbridge rejected the claimant’s case that the bank’s salesman, Mr Burgess, had recommended the product to the claimant, Mr Harrison, in a way that attracted liability if that recommendation was negligent:

“70.

Mr Burgess is a salesman. His job is to sell derivatives and he makes his money by selling derivatives. He does not make money by providing advice in return for a fee. It is an integral part of the sales process in my view that he should have a dialogue with the customer and in the course of that dialogue may express opinions to the customer but those expressions of opinion have to be viewed in the context of the entire dealing. This expression of opinion is in my view the expression of a salesman selling his product not an adviser providing advice.

71.

In my view this is not a conversation in which Mr Harrison is being advised as to what to do. It is clear from the exchange on rates in which Mr Harrison rejects the lower rates that a longer term would provide, that Mr Harrison understands the options that he is being offered and decides on the one which he feels is appropriate for him.”

Fourthly, an analysis of the judgments in Springwell and Thornbridge showsthat although the factual question whether advice was given and the legal question whether the bank assumed responsibility for that advice if it was negligent are conceptually separate, they are closely linked. In some cases the court has concluded that no advice was given; in some cases the court has concluded that even if advice was given, it was not of a kind to attract a duty of care on the part of the bank. This was explained by Gloster J in Springwell when she said at paragraph 452 of her judgment that:

“Although [the bank’s witnesses] were reluctant to accept that such recommendations could be characterised as "investment advice", the real point, in my judgment, is not the semantic one as to whether such recommendations are "advice", or "investment advice", in a loose or a strict sense, but rather whether the giving of such advice, on a regular basis, by a salesperson in such capacity, attracts the obligations and duties of care of an investment advisor in respect of the views actually expressed, or indeed, a positive duty to give advice on a wider basis as to the structure, or concentration, of the portfolio within the asset class of emerging markets securities, or as to wider diversification into other asset classes.”

The analysis required in these cases defies tidy compartmentalisation. Although it might be convenient to draw a bright line between a situation where the bank acknowledges that it takes on a full advisory role vis a vis the client on the one hand and a situation where the bank’s liability is limited to a liability for misrepresentations on the other, that is not where the authorities end up.

Fifthly the courts are cautious about importing concepts from the regulatory rules and guidance into the discussion of the scope of the common law duty of care or the circumstances in which it arises. Mr Edwards criticised many of the earlier judgments because the judges failed to give adequate weight to regulatory definitions of ‘advice’ or to reflect in the common law duties the obligations imposed on authorised persons to ensure that products sold are suitable for the client’s needs and objectives. It is true that some of the common law duty of care cases refer to definitions of advice that were given in cases in which the cause of action was directly for breach of duty imposed by the FSMA regulatory framework. For example in Thornbridge, HHJ Moulder cited the definition of advice from Rubenstein v HSBC Bank plc [2011] EWHC 2304 (QB) which was a breach of statutory duty case. But the authorities are also alive to the need to keep the two causes of action separate. This is illustrated by the judgment of the Court of Appeal in Green & Rowley where the claimants had conceded, probably incorrectly, that they had no statutory claim for breach of FSA rules and proceeded only on the basis of a common law claim. The case discussed the relationship between the content of the common law, Hedley Byrne duty of care and the content of the FSA rules and also the relationship between the circumstances in which a statutory duty is owed and the circumstances in which the common law duty of care arises.

As regards the content of the respective duties, Tomlinson LJ, with whom Stephen Richards and Hallett LJJ agreed, said: (my emphasis)

“17.

The judge also assumed, uncontroversially, that the Bank owed to Messrs Green and Rowley a duty to take care when making statements in relation to which it knew or ought to have known that Messrs Green and Rowley would rely upon its skill and judgment – the duty discussed in Hedley Byrne and Co Ltd v Heller and Partners Ltd [1964] AC 465. This was in relation to what was called at trial the “Information Claim”. So far as concerned the suggestion by the Appellants that the COB Rules informed the content of this duty the judge observed, rightly in my view, although I paraphrase his language, that the Hedley Byrne duty does not comprise a duty to give information unless without it a relevant statement made within the context of the assumption of responsibility is misleading. Thus insofar as COB Rule 2.1.3 refers to a duty to take reasonable steps not to mislead, this is comprised within the common law duty, but insofar as it refers to a duty to take reasonable steps to communicate clearly or fairly, this introduces notions going beyond the accuracy of what is said which is the touchstone of the Hedley Byrne duty. The duty imposed by COB Rule 5.4.3 to take reasonable steps to ensure that the counterparty to a transaction understands its nature the judge regarded, again rightly in my view, as well outside any notion of a duty not to mis-state, as he characterised the Hedley Byrne duty to be. Accordingly, the judge did not regard the content of the Bank’s common law duty in relation to the accuracy of its statements as in any relevant manner informed by the content of the COB Rules.

18.

By contrast, the judge was prepared to recognise that had the Bank undertaken an advisory duty, the content of that duty would have been in part informed by the content of COB Rules 2.1.3 and 5.4.3. …”

As regards when the respective duties arise, Tomlinson LJ rejected the submission for the appellant that existence of the COB Rules gave rise to a co-extensive duty of care at common law where the bank was undertaking a regulated activity:

“30.

I therefore reject the suggestion that the Bank here owed to Messrs Green and Rowley a common law duty of care which involved taking reasonable care to ensure that they understood the nature of the risks involved in entering into the swap transaction. The existence of the action for breach of statutory duty consequent upon contravention of a rule does not compel the finding of such a duty – indeed for the reasons I have already given it rather tells against it. Mr Berkley’s further argument that such a cause of action would afford protection to those who, not being a “private person” cannot avail themselves of a cause of action for breach of statutory duty, is an invitation to the court to drive a coach and horses through the intention of Parliament to confer a private law cause of action upon a limited class.”

The Particulars of Claim in the present proceedings set out many COBS rules as part of the regulatory background. LEA referred me to the definition of advice given in the statutory instrument which defines advising on investments for the purposes of the FSA’s regulatory regime, to the FSA Handbook and to COBS 9.2.1R. More specifically:

LEA also rely on Mr Brindley’s description of his role during his cross-examination where he said: “We were effectively trying to understand what people were trying to achieve from the objectives and then show them some solutions”. Mr Edwards submitted that an execution-only salesman would not be concerned to understand what people were trying to achieve, or to assess the customer’s requirements and views in order to select a range of options for the client to choose from based on that assessment. That, he submits, is the role of an investment advisor. LEA also points to the opening wording of the September Presentation where the Bank says that “The first stage in this process is to understand as much as possible about your business objectives and the parameters affecting your exposures”.

In my view, the authorities do not support taking the wide definition of advice used in the regulatory context and then plucking out of the conversations and emails between the parties any statements that could aptly be described as a “personal recommendation” or any instance where it could be said that the bank’s representative has based his decision as to which products to present to the client on a consideration of the circumstances of that person. That does not respect the distinction I referred to earlier between an adviser and a salesman. I do not agree, therefore, with LEA’s contention, for example, that when Mr Brindley suggested the change to the notional amount by email on 12 October 2007 to meet the LEA’s objective of lowering the floor rates that amounted to investment advice because it was aimed at “meeting LEA’s objectives” – another phrase taken from the FSA rule book.

There are many examples in the authorities where the courts have held that a bank has negotiated the terms of a bespoke hedging product with a customer without crossing the line. LEA is wrong to submit in effect that any interaction between the bank and the client by which the bank tries to understand what the client is trying to achieve or to help the client select from a range of available products steps over the line into being advice. I also reject the contention that simply by using a flow chart to explain the different options available must mean that the bank has crossed the line because the FSA’s Perimeter Guidance refers to flow charts amounting to advice.

Did Mr Brindley give advice to LEA for which the Bank must take responsibility?

Statements alleged in the Particulars of Claim to amount to advice

LEA’s case is that Mr Brindley was “in advice mode” from the first meeting in July 2007 right up until the critical meeting on 8 February 2008. This aspect of the claim is said to be based on the very well-known and well-established proposition that although banks do not generally owe any duty to advise on the merits of investments their customers may be proposing to make, if they choose to do so in the course of business they owe a duty to advise with reasonable skill and care.

Mr Sinclair complained at trial that it remained unclear throughout the proceedings precisely what advice it is alleged Mr Brindley gave LEA. The Bank say that LEA’s pleaded case contains a large number of disparate allegations of advice and advising. Few of them were put to the Bank’s witnesses in cross-examination but none of them appears to have been formally abandoned. Mr Sinclair submits that a striking feature of this case is that LEA are unable to point to a single instance of Mr Brindley or Mr Wood using advisory language. Mr Edwards’ response was that the court must take a holistic approach and that the general thrust of Mr Brindley’s presentation and his discussions with Mr and Mrs Margetson-Rushmore was plainly calculated to convince LEA of the merits of the hedging products and to recommend that the company enter into them. For example, as regards the first presentation made to LEA in July 2007, it is alleged in the Particulars of Claim that the natural inference is that the presentation was designed “to induce in LEA and its directors a sense of anxiety concerning the prospect of interest rate rises” and to make them receptive to the hedging products. Later emails are quoted at length in the Particulars of Claim, followed by an averment that the obvious inference is that the emails were aimed at encouraging LEA to have misgivings about its ability to service the debt it had taken on. It is also alleged that the email sent by Mr Brindley in the evening of 12 November 2007 in response to Mr Margetson-Rushmore’s email declining to trade was intended to erode the confidence of LEA in its decision not to hedge and thereby to encourage LEA to change its position and that this email therefore “constituted advice”.

In my judgment, although background and context are important in construing the actual words said to constitute advice, they cannot be a substitute for being able to identify actual words of advice. It must be possible for the claimant to point to some written or oral statement which the claimant can prove the defendant made and that he can show that he read or heard and which properly construed amounts to advice, applying the test described in the case law. The holistic approach adopted by LEA makes the test for liability too subjective and dependent on the impression that a mass of material was said to create in the mind of the claimant. It makes the claim almost impossible for a defendant to contest. In the following paragraphs I have considered the instances of advice pleaded in the Particulars of Claim that seem to me to have the most potential to count as advice.

As regards the September Meeting, it is alleged at paragraph 26 of the Particulars of Claim that Mr Brindley was wrong to tell Mr and Mrs Margetson-Rushmore that there was no advantage in a straight vanilla swap and thereby that he encouraged LEA to enter into the more complicated hedging products. The evidence does not show that Mr Brindley tried to move LEA away from a straightforward interest rate swap in favour of a more complicated product. Mr Brindley’s pricing emails and presentations always included a straight fixed rate swap as an option or as a comparator. It was always open to LEA to choose that solution if the company wanted something straightforward. LEA chose not to enter into a straightforward swap because Mr and Mrs Margetson-Rushmore thought it likely that interest rates would fall and they wanted a solution that allowed LEA to take advantage of lower prevailing rates. They made it clear that they did not want to pay a premium which ruled out the straightforward collar. There is no evidence to suggest that this choice was the result of anything that Mr Brindley said to them at any stage.

It is alleged at paragraph 37A of the Particulars of Claim that Mr Wood’s statement in his early morning email to Mr Margetson-Rushmore on 12 November 2007 that the Bank’s internal credit line that had been put in place was about to expire was false because the credit line was in place until 1 February 2008. It was alleged that this was intended to put pressure on LEA to enter into the hedging products. In fact the evidence does not support any such allegation. First, Mr Wood said that it was true that the credit line was going to expire and would need to be renewed:

“Q. So instead you wrote to him saying that the credit limit that was in place for the trade, that had been put in place for the trade, was about to expire?

A. Mm-hm.

Q. That wasn’t true, was it?

A. Yes, it was. Yes. When we agree facilities the liability goes on our books and there is a period of three months that they are available … - in the expectation that the deal is concluded within a three-month period, because 99% of transactions were concluded in that time frame. If a transaction had not been concluded -- it is still the same now, we have to effectively go back to our credit committee to either refresh the deal and say this is the reason it is not drawn, there could be a hold up in this, that or the other but we expect it to happen, or do you know what, it is not going to happen, we need to take it off our books.

Q. So why was the credit limit put in place until 1 February 2008?

A. So we have, as well as those -- so effectively you have a review date when the entire connection is due for review and for LEA it was in February, the year - I don’t know why it was February, probably an anniversary of when we originally opened the accounts because you usually roll facilities for 12 months. But anything agreed in the interim period or at any point with our credit function remains live for three months until you can actually physically mark the limits if the transaction is done, or if you need to go back to your credit committee to say, “Sorry this isn’t going to happen we need to cancel this.” Or “Can we please refresh it and extend it for another three months?”

Q. If that was the point, if that was all this was about, you would have done it already wouldn’t you, because the credit limit was agreed by -- was put in place on 8 August?

A. Let me do the maths. Yes, 8 November 8 November? Yes. So I was probably late, wasn’t I? Yes.

Q. Yes, so you would have done it already if that was all you were talking about?

A. If I was on top of my game, I should have done, but obviously I had overlooked it and had been sent a reminder that, this is three months out of date, is it going stale? That is the expression we would use, or are we looking to refresh it. So I needed to clarify with the client actually what their mindset was, if I could obtain that, so I could go back to my credit and ask them to please either refresh it or just say it is not going to happen can we lapse it.

...

Q. The reality is you were simply using this as a pretext for pressing Mr Margetson-Rushmore for a decision, weren’t you?

A. That is not correct. If you want to check with the Bank’s policy you will see that our facilities when agreed stay viable for a period of three months and if they are not finalised within that time frame we have to go back to our credit committee to tell them what has occurred, what is going on, and what we need to do with that limit. It is bank policy, it has been since I started working in the bank and still is”.

Secondly, the terms of the email could not possibly be construed as putting pressure on LEA to trade. On the contrary, Mr Wood wrote that he was “more than happy to renew this credit limit” and merely wanted to know their plans so that he could renew it for an appropriate length of time. In any event, since Mr Margetson-Rushmore that day wrote back declining to trade, it is difficult to see how this supposed advice can be relevant.

In paragraphs 47, 47A and 48 of the Particulars of Claim, LEA quote extracts from the paper that Mr Brindley sent Mr Margetson-Rushmore shortly after he received the 12 November 2007 email declining to trade. LEA highlight a number of statements in the paper, including that “interest rates markets are forward indicators i.e. they anticipate and will price in the future path of interest rates.” It is alleged that this statement amounts to advice and that it is false because interest rate markets do not price the future price of interest rates. This allegation was not pursued at trial, perhaps because the evidence is clear that neither Mr nor Mrs Margetson-Rushmore read the November paper either at the time it was sent or in February 2008 when discussions about hedging resumed. LEA’s decision to enter into the trades cannot possibly have been influenced by the allegedly false statement.

It is alleged in paragraph 52 of the Particulars of Claim that there was no proper basis for the statement in one of the slides used in the February Presentation that UK longer dated swap rates had been pushing higher and that the Bank thought that they had “reached a threshold and will eventually push higher by between 20-30 basis points from 7 years out”. Again, this point was not pursued in cross-examination with Mr Brindley and no evidence was led by LEA to show that the view expressed was unreasonable or was not a generally held view at the time.

It is alleged in paragraph 57A of the Particulars of Claim that during the course of the Trade Call on 12 February 2008, Mr Brindley “encouraged and advised” LEA to enter into the hedging products on the grounds that:

Certainly there was a discussion during the Trade Call about the volatility of interest rates and a range of prices for different products was offered by Mr Brindley in response to requests from Mr and Mrs Margetson-Rushmore. The three points referred to here were all matters that were entirely obvious. Mr and Mrs Margetson-Rushmore were well aware that there was a risk that interest rates would move adversely if they delayed. The fact that Mrs Margetson-Rushmore had asked Mr Brindley to refresh the prices being quoted every few days showed that she was aware that prices for the products changed frequently to reflect changing market perceptions. The Margetson-Rushmores were aware that the phone call was being held early in the morning before an announcement about inflation figures which might cause prices to move again. No evidence was presented by LEA to show that the prices for the hedging products would in fact have been cheaper if LEA had delayed for a few days or weeks or that the Bank knew or ought to have known that.

It was obvious from all the price quotations that Mr Brindley had sent over several months that prices for more complex products were cheaper than a straight interest rate swap. Mr and Mrs Margetson-Rushmore were well aware, without having to be advised again by Mr Brindley, that the quid pro quo for the lower prices (in terms of both a lower floor of the range and lower interest rates payable inside and outside the range) were the other features that favoured the Bank’s position.

As regards the position if the Bank exercised its power to call the trades after five years, I am sure that the Bank would have been prepared to discuss with a long standing customer if there was another product it could provide at that point. Mr Brindley did not give any details about what such a product might be. He did not suggest that it would be offered on terms more favourable to LEA than the then prevailing market conditions dictated.

What is clear from the Trade Call and from the earlier conversations was that Mr Brindley clearly explained the features of the different products they were discussing. In my judgment, nothing that was said in the earlier material or in the Trade Call crossed the line into advice for the purposes of these proceedings.

Advice about interest rates

Although this was not the focus of the pleaded case, in the written evidence and in the oral evidence at trial, LEA’s allegations focused more specifically on advice Mr Brindley was alleged to have given about the likely future course of interest rates. Both Mr and Mrs Margetson-Rushmore accepted that they were aware that in theory interest rates might fall as well as rise. But they both said that they were convinced by Mr Brindley’s comments at the meetings and in telephone conversations that after a couple of imminent interest rate cuts, generally base rate was going to go up. It is for this reason that I set out at some length those passages from the phone call transcripts in which Mr Brindley discussed interest rates with Mr and Mrs Margetson-Rushmore. Mr Margetson-Rushmore’s written evidence was that he went into the February Meeting not intending to change his mind about hedging and that the only reason why he changed his mind was that Mr Brindley persuaded him that interest rates were going to rise and that by entering into the hedging products, LEA would receive an immediate cashflow benefit.

Mr Sinclair objects that if LEA had pleaded that Mr Brindley had advised that interest rates would go up and/or that they would not drop below a certain percent, and that that advice had been negligent or fraudulent then the parties could have called evidence about what market expectations had been at the time. Moreover, Mr Sinclair points out that Mr Brindley was not challenged in the witness box as to the basis of his views about likely interest movements. It was not put to him that he did not genuinely hold the views he expressed and he was not asked about the basis for those views. I consider there is much force in Mr Sinclair’s objections to this part of the case. But since the point did appear at the trial to form a significant part of Mr and Mrs Margetson-Rushmore’s complaint about the Bank’s conduct I will examine the evidence about interest rate predictions.

Mrs Margetson-Rushmore describes her understanding from Mr Brindley as being that “the risk of significant drops in interest rate any significant length of time was … a technicality.” Mr Margetson-Rushmore said that the Bank was in a more expert position than him to be able to predict movements in interest rates and Mr Brindley persuaded him that this was something he should be worried about. Although in his witness statement (paragraph 69) he said that nothing was said about the position if interest rates fell, he agreed at trial that he realised that this would make it expensive for LEA and that he would have understood that there was a potential risk.

Mrs Margetson-Rushmore accepts that the pages of the various presentations clearly explain the mechanics of the product and show what would happen if interest rates fell below the floor set. But her recollection is that the emphasis at the meeting was on rising interest rates. At the meetings Mr Brindley showed them the graph of historic rates over several decades and said that interest rates had not fallen to 3% for a long time.

However, when Mr and Mrs Margetson-Rushmore were pressed by Mr Sinclair on what Mr Brindley actually said their evidence was vague. Mr Margetson-Rushmore agreed that Mr Brindley might only have said that there was a risk that interest rates would rise in future. In her witness statement, Mrs Margetson-Rushmore variously described the level below which she thought there was only a theoretical risk of interest rates falling as anything between 3% and 5%. She accepted in cross examination that Mr Brindley did not make any absolute statement about what interest rates would do over the next 10 years. What he did was describe circumstances which led them to believe that interest rates would rise and that LEA was therefore at risk under the Lombard Loans.

I have considered the actual evidence of what Mr Brindley said about interest rates and the hedging products at various stages of the negotiations.

In the July and September Presentations, Mr Brindley included the graph showing the dramatic moves in interest rates over the previous decades. The graph shows peaks and troughs in reaction to world events over the period, such as Argentina invading the Falkland Islands in 1982, the United Kingdom joining and then leaving the ERM and Brazil floating the real in January 1999. These are events of a kind that no one can hope to predict but which clearly disrupt the market - even before 2008 it was well known that interest rates were affected by a large number of macro-economic factors.

I have described what Mr Brindley said about interest rates during the phone calls. He was not professing any particular insight for example into how the Chinese economy was going to develop over the next ten years or what was going to happen to oil prices. What he said was what any financially literate person could pick up from the financial press. No reasonable person would interpret what he said as indicating that he had some special ability to predict the future such that he could give reliable advice about the future path of interest rates.

Mr Brindley was cross-examined about why he had used a 50 year time scale for his graph. The choice of that period allowed him to say in the September Presentation that interest rates had not fallen below 3.5% in that time. Similarly, one of the slides in the February Presentation said that UK Base Rate has only been at and below 3.75% once in the past 50 years and only for a period of 6 months. It was put to Mr Brindley that if he had chosen a period of 75 years rather than 50 years, it would have shown that between June 1932 and November 1951 base rate remained at 2% for all but two months. I do not accept that this is a credible criticism of what Mr Brindley said about past interest rates or that it was unfair or negligent to choose a period of 50 years. The movement of interest rates during that earlier period does not provide any useful indication of how they are going to move over the lifetime of the hedging products. There was no expectation in 2007 of the kind of cataclysm that affected the economy during the Great Depression and the Second World War. I reject any suggestion that Mr Brindley chose the 50 year period because it was particularly favourable to the Bank’s arguments to persuade LEA to buy the hedging products.

Mr Margetson-Rushmore’s evidence was that nothing in the presentations or that Mr Brindley said at the meetings referred to what would happen if interest rates fell. I do not regard that as a fair criticism of the presentations. The solutions presented are complicated but they do not seem to me more complicated than the terms of the Lombard Loans that Mr Margetson-Rushmore was capable of negotiating with Ms Pierce. Each solution page conveys the same information in three formats, a diagram, a table and narrative bullet points which avoid technical terms, to cater for the different ways in which different people prefer to absorb information. The consequences of interest rates falling are given equal prominence to the consequences of interest rates rising.

LEA allege in the Particulars of Claim that the February Presentation identified the benefits and advantages of the two products if interest rates rose but failed to identify any risks associated with interest rates falling. Mr Edwards pointed out that although previous presentations had shown “considerations” (that is to say, disadvantages) for the different options, these were left out of the February Presentation. Mr Brindley could not remember why he had left these out. It is said that the presentation was wholly lacking in balance and calculated to exaggerate the advantages while simultaneously suppressing important contingent risks and their possible dimension. I find that that is not a fair description of the presentation. For example, the diagram and accompanying text explaining the callable dual rate protection contract showed:

This makes it very clear that there are plenty of scenarios in which LEA will pay more than the base rate and that it will pay interest at the rate of 5.35% if base rate falls below 4%. It is not fair to say that this graph emphasises what will happen if interest rates rise over what will happen if interest rates fall.

In the February Presentation Mr Brindley included a slide showing publicly available forecasts of interest rate movements drawn from a Reuters poll showing interest rates dropping and then rising slightly.

It also quoted a statement from Neil Parker “A huge push lower in UK swap rates has virtually exhausted the downside for rates in our view.” Again, the accuracy of the graph reproduced there and the reasonableness of Mr Parker’s view at the time was not challenged by LEA. None of this information seems to me to be skewed towards a forecast of rising interest rates. It certainly does not point to a conclusion that one could discount the possibility of a drop of interest rates to below 4% as being very unlikely.

LEA criticised Mr Brindley for the fact that the initial cost/benefit spreadsheets that he sent Mrs Margetson-Rushmore on 1 October 2007 all showed calculations based on interest rates remaining at what now seems a high level of 5.5% and above: see paragraphs 68, onwards above. This was particularly so given that Mr Wood in an internal email discussing what precisely it was that Mrs Margetson-Rushmore wanted had suggested to Mr Brindley that he should use scenarios where interest rates were 4.75% and 6.75%. However, one of the spreadsheets did show the result in a scenario where prevailing base rate was lower than the interest rate that LEA would have to pay under a trade on those terms. Further, it is clear that Mr Brindley’s choice of scenarios did not affect LEA’s consideration of the choices on offer. Mrs Margetson-Rushmore could and did manipulate the spreadsheet to make it ‘live’ as she and Mr Margetson-Rushmore wanted. She was thus able to model whatever prevailing base rates LEA wanted to posit. The spreadsheets she provided to Mr Margetson-Rushmore and Mr Galanopolous for their discussions showed the effect of the trades if prevailing base rate was 4% or 4.5% as well as at higher rates. They showed, in particular that the cost to LEA in some of the scenarios modelled could be very substantial indeed.

The use that Mrs Margetson-Rushmore made of the live spreadsheets and the course of her negotiations with the Bank over the terms of the hedging products show more generally in my judgment that Mr Margetson-Rushmore’s evidence that he was convinced by Mr Brindley that interest rates were bound to go up is not an accurate reflection of LEA’s thoughts at the time. At several points in the phone conversations Mr and Mrs Margetson-Rushmore expressed the firm wish to bring the floor of the range for the hedging product down below the floor that Mr Brindley was suggesting. For example in the first conversation on 12 October 2007, Mr Brindley and Mrs Margetson-Rushmore were discussing the spreadsheets Mr Brindley had sent through based on base rate scenarios of 5% at the lowest. Mrs Margetson-Rushmore said she wanted the floor of the range in the trades to be lowered because she thought there was a “quite high” possibility of interest rates falling below 5%. She asked Mr Brindley whether he agreed. He made it clear he did not agree; he did not see interest rates dropping below 5% but he was nevertheless prepared to adjust the prices offered to reflect her view. Far from accepting Mr Brindley’s analysis, LEA continued to negotiate on the basis that interest rates might drop below 5%. Mr and Mrs Margetson-Rushmore were prepared to agree to significant changes to the size of the notional amount and to the ability of the Bank to call the trades in order to achieve the lowering of the floor.

There is very little evidence of what was actually said at the February Meeting at which Mr and Mrs Margetson-Rushmore and Mr Galanopolous changed their minds and decided that LEA should enter into the hedging products. I find that in reconstructing events in their minds, they have fixed on interest rate predictions as a possible reason why they changed their minds. But this is not supported by the contemporaneous evidence. If the reason why they changed their minds was that Mr Brindley had assured them at the February Meeting that interest rates were bound to go up, that would be reflected in the content of the Trade Call a few days later. In that call Mr Brindley was still being asked to push down the floor of the range of the dual rate swap outside which the knock in rate was triggered from 4.71% to 4.69% as well as slightly reducing the knock-in rate itself. For the value collar the floor was still 3.75%. If Mr and Mrs Margetson-Rushmore had been convinced by what Mr Brindley had told them at the February Meeting that interest rates could only move higher, there would have been no logic in them giving the Bank the valuable call rights in order to keep the floor of the ranges that low.

My conclusion is that Mr Brindley did not give advice that suggested that interest rates were bound to go up. He was able to discuss in an intelligent fashion the factors that affect interest rates and to recite the views that other people publicly expressed. Not all those views pointed in the direction of higher interest rates. When Mr or Mrs Margetson-Rushmore said that they wanted him to reprice the trades on the basis of a lower floor of the range he responded with suggestions as to how the trades could be altered to achieve that – he did not dismiss their concerns about rates dropping as ill-informed or improbable.

Was there a duty to advise?

In case I am wrong in my finding that nothing that Mr Brindley said crossed the line into advice, I will consider briefly whether the Bank became subject to an obligation to take reasonable care to ensure that any advice that Mr Brindley gave was not negligently given. LEA accept that a bank is generally under no duty to advise its clients on investments but submit that if a bank chooses to give investment advice then, in the absence of an enforceable disclaimer, the bank will incur liability if it does so negligently. LEA’s case therefore is that if Mr Brindley did cross the line into giving advice about the hedging products, then the Bank owes a duty under basic Hedley Byrne principles to take reasonable care that the recommended investments are suitable and that the investment adviser complies with the applicable regulatory obligations. Thus Mr Edwards submits that in considering the scope of the common law duty which arose once Mr Brindley gave advice, the court should have regard to the various COBS rules including the client’s best interests rule (COBS 2.1.1R), the assessing suitability rule (COBS 9.2R) and the various COBS rules relating to the provision of information in particular COBS 4.2R and 4.5R.

The Bank contends that LEA’s analysis of the case misses out an important step. One cannot jump straight from a finding that advice, properly so called, was given to a conclusion that the Bank incurs liability if that advice was negligently given. I agree with Mr Sinclair’s submission that it is not enough for LEA simply to show that something said by Mr Brindley could be regarded as advice or a recommendation; it must also show that there is a relationship of proximity between the parties giving rise to a duty of care on the part of the Bank. As Hamblen J said in Standard Chartered v Ceylon Petroleum [2011] EWHC 1785 (Comm) at paragraph 508 (citing what Gloster J had said in Springwell) the mere giving of advice, even specific investment advice, is not sufficient to establish a duty of care. This is the case even where the investment advice is relied upon by a customer. Reliance on its own, even if established, does not necessarily give rise to an advisory relationship, with consequential duties of care.

The authorities highlight various factors that the court should take into account when considering whether a duty of care arises between a bank and its customer. I consider in the following paragraphs the factors most relevant to the present case.

The sophistication of LEA

The first factor is the level of sophistication of the client. In the present case that level must be assessed by having regard to the person whom LEA chose to put forward to the Bank as the main negotiator for the terms of the trades. That was clearly Mrs Margetson-Rushmore. From the transcripts of the phone calls between Mrs Margetson-Rushmore and Mr Brindley it is clear to me not only that she was knowledgeable about how hedging products worked but also that she was keen to convey to Mr Brindley the message that he was dealing with someone who was able to form her own views and could drive a hard bargain. For example, she expressed her dissatisfaction with the spreadsheets that she had been sent because she wanted to be able to change the figures. She showed Mr Brindley that she could change the spreadsheets so that they became ‘live’ and then help LEA to use them to stress test the proposals to calculate the financial consequences of different interest rates or different contractual parameters. Similarly, there cannot be many small company executives who know enough to ask their bank to provide them with various forward curves for different interest or swaps rates over different periods and then discuss at length the significance of the fact that the curve is inverted. I read these exchanges as Mrs Margetson-Rushmore signalling to Mr Wood and Mr Brindley that she could negotiate with them as an equal and that she was not someone who could have the wool pulled over her eyes if Mr Brindley or Mr Wood had otherwise been minded to try.

Mr Edwards submitted that although Mrs Margetson-Rushmore had been very involved in discussions in the autumn of 2007, those discussions came to nothing. The Trade Call took place more than four months previously and transcripts of those calls were not available to anyone at the time. It is wholly unrealistic, he submitted, for the Bank to rely on the record of those calls as explanations of the risks involved in the hedging products. What was really important was what happened at the meeting in February 2008 and at that time, Mrs Margetson-Rushmore was no more prominent in the discussions than Mr Margetson-Rushmore.

I do not accept that one can make a clean break between what happened in autumn 2007 and what happened in February 2008. Indeed, one of LEA’s other complaints is that the products that Mr Brindley was offering in February 2008 were broadly the same as those that had been discussed the previous year and had not changed to reflect Mr Wood’s realisation that the interest rate risk was focused on the Lombard Loans balloon payment and asset ratio covenants rather than on the risk of variable monthly instalments. Further, the Trade Call was not simply a confirmation of what had been discussed and agreed at the February Meeting. It involved more discussion about the features of the trades for example the effect of the callability on the price of the trades. Mrs Margetson-Rushmore led that discussion on behalf of LEA, only handing the discussion over to Mr Margetson-Rushmore once the terms had been settled so that Mr Margetson-Rushmore could listen more directly to Mr Brindley’s explanation of the final terms.

Further, if Mr Margetson-Rushmore had forgotten everything that had been discussed in the earlier phone calls as to the way the hedging products worked, he could have asked Mr Brindley to explain them to him or invited Mrs Margetson-Rushmore to have further discussions with Mr Brindley about the proposed terms so that they were once again clear in his mind. Mr and Mrs Margetson-Rushmore accepted that whenever they had asked the Bank for information, that information had been provided. They had taken their time to consider detailed proposals in the autumn of 2007 and demonstrated in November 2007 that they could refuse to enter into a transaction if they did not want to. If Mr Galanopoulos did not understand what was going on he could ask Mr Brindley to explain it or ask Mrs Margetson-Rushmore. These company directors are experienced business people and not timid or unworldly consumers. They must take some responsibility for making sure they understand the implications of the transactions to which they are committing their business.

LEA’s case is in part that the hedging products contain features that make them entirely unsuitable for LEA’s business. They say that the very fact that LEA agreed to enter into such unsuitable products must mean that they were not sophisticated enough to assess the appropriateness of the products, even if they did understand the mechanics of how they worked. I consider the different aspects of the hedging products of which LEA complains later. My conclusion is that once one analyses the course of the negotiations, it is clear how each of the features came to be included in the trades as finally agreed. Each element was offered by Mr Brindley in response to LEA’s desire to reduce the floor of the range in each of the trades to as low a level as possible.

Absence of a written advisory agreement

The second relevant factor here is the absence of any written agreement between LEA and the Bank in which the Bank expressly takes on the role of advising LEA about what investments to make or what products to buy. LEA through Mrs Margetson-Rushmore made frequent requests for refreshed prices, sought information about the market’s forward curves for swaps, expected the Bank to use its contacts to provide tax advice about the treatment of receipts under the hedging products in conjunction with the payments under the Lombard Loans and so forth. In the absence of a separate fee paid by a customer for advice, both parties realise that the Bank will be remunerated for the time and effort put into attending meetings, making phone calls, producing presentations and devising products only if the customer in fact buys something at the end of the day. Both parties should realise then that the Bank is keen to persuade the customer to make a purchase. That incentive means that its interests to some extent diverge from those of the customer.

Availability of advice from other sources

A third factor that is relevant is the availability to LEA of advice from sources other than Mr Brindley. Mr Edwards submitted that at this time there was very little advice available in the market about hedging products, particularly for SMEs like LEA. He cross-examined Mr Brindley as to his knowledge of other advisers in the market and then submitted that Mr Brindley’s suggestions that LEA could have obtained advice from JC Rathbone Associates Ltd or from their own accountants was incorrect. JC Rathbone were only authorised to give advice to “eligible counterparties” or professional clients and LEA did not fall within either of those categories. The extent to which LEA’s accountants could rely on an exemption in Part 20 of FSMA to provide investment advice even though they were not authorised, is very limited. They could not in practice have done anything more than comment on advice given by an authorised person.

Mr Sinclair objected that the Bank had not been given sufficient notice of this line of argument to be able to prepare a proper rebuttal. In the Defence, the Bank had pleaded that LEA ought to have sought such independent advice as it considered necessary, and nothing had been said in Reply to suggest that such independent advice was not available to LEA. If LEA had really wished to rely on the complete absence of any other advice, they should have pleaded that in the Reply and expert evidence might have been necessary to inform the court as to the true position in 2007 – 2008.

Even if Mr Brindley had realised that LEA had no opportunity to seek independent advice, it is difficult to see how he could have acted differently from how he acted or what additional information an independent person could have provided. There is no doubt that there was a risk that interest rates would rise significantly – no one foresaw what in fact happened to interest rates. Mr Margetson-Rushmore knew the terms of the Lombard Loans as well as anyone could because he had just negotiated them with Lombard and they were a key element in the progress of the company’s business. He knew that LEA paid fixed monthly instalments under the existing Lombard Loans, he knew that the balloon payment might be bigger or smaller than expected depending on whether base rate moved from 5.75% and in which direction it moved. He also knew that LEA planned to take on more debt to buy additional jets over the next few years. LEA’s case now is that it did not need a hedging product at all because jet planes appreciate in value and if the balloon payment had turned out to be more than the business could afford to pay as a lump sum in 2018, they could simply have refinanced the balloon payment with Lombard or with a new lender, secured on their valuable assets. But all that information was apparent to LEA in Autumn 2007 and February 2008. In fact it was more particularly within the company’s knowledge than it was within the Bank’s knowledge because Mr Wood and Mr Brindley did not seem to appreciate the significance of this before Mr Wood’s lightbulb moment in November 2007. Yet at no point did anyone from LEA indicate clearly and firmly to the Bank that these facts meant that it was not interested in a hedging product. Even in November 2007 when Mr Margetson-Rushmore told the Bank about LEA’s decision not to enter into the hedging product, he did not give those reasons for his refusal. The contemporaneous documents do not indicate that there were any hard selling tactics brought to bear by Mr Wood or Mr Brindley which an independent adviser might have been able to counteract. I regard this therefore as a neutral factor.

Indicia of an advisory relationship

Fourthly I have considered what Gloster J in Springwell referred to as the presence or absence of indicia of an advisory relationship. What I note in this regard is the absence in any of the emails or phone conversations of instances in which Mr or Mrs Margetson-Rushmore asked Mr Brindley what he thought LEA should do. They asked for a great deal of information and they asked on occasion what he thought about likely trends in the market. But they did not ask him what was the best thing for LEA to do or which of the solutions he was offering would be best for their business. On the contrary, as I have described, Mrs Margetson-Rushmore put forward her own views as to likely market developments, she probed Mr Brindley’s explanations of the different features of the trades and made clear that LEA was able to make up its own mind. Mr Brindley was not invited to attend the meeting on 9 November 2007 when LEA was discussing whether to hedge or not. He attended the February Meeting but not to advise on hedging because LEA did not expect to take a decision on hedging at that meeting. There is no objective evidence that LEA treated Mr Brindley as someone who was advising them on whether or not they should enter into the hedging products.

Having considered all the evidence and the factors on which LEA relies, I find that the evidence falls far short of establishing that there was any advisory relationship here.

LEA’s complaints about various features of the hedging products

LEA’s main complaint in these proceedings was that there were certain features of the hedging products which meant that they were unsuitable or unduly onerous for LEA. I have not accepted the line of reasoning by which the claimant asserts that the unsuitability of the trades confers on them a cause of action against the Bank. There is no statutory cause of action arising from any alleged breach of FSA rules; there is no co-extensive common law duty of care to ensure that products sold are suitable; the Bank did not take on an advisory role to advise whether the products sold are suitable or not and Mr Brindley did not at any stage advise LEA that the products were suitable. Nonetheless since these complaints seem to me to be in truth at the heart of LEA’s grievance against the Bank, it is right that I consider them and record my conclusions. I bear in mind that Mr Edwards referred me to the case of Saville v Central Capital [2014] CTLC 97 which he relied on for the proposition that, at least in a claim based on breach of statutory duty, the fact that LEA understood how the products work does not mean that the products were suitable.

The inconsistency between the hedging products and the Lombard Loans

LEA’s first complaint is that the structure of the hedging products took no account of the fixed payment feature of the Lombard Loans. LEA’s interest was in gaining certainty in its cash flow. It already had that certainty with the fixed monthly payments under the Lombard Loans. By entering into the hedging products, LEA was in fact gaining less certainty because it might have to make unpredictable additional payments each month in addition to the fixed monthly payments to Lombard. Mr Margetson-Rushmore’s evidence is that at the time he was not concerned about the risk of a higher balloon payment because that was 10 years away.

This seems to me an over-simplistic analysis of situation. I am satisfied that Mr Margetson-Rushmore’s evidence now is affected by hindsight from a position where in fact there was no additional balloon payment needed when the Lombard Loans matured. Given the highly leveraged nature of LEA’s business, the risk of a very substantially increased balloon payment being required at a point when it was hard to predict how the fortunes of the company would be faring, was not something which a responsible company could simply have ignored on the basis that it was only a problem for the future and the business’s assets were valuable. Mr Wood’s puzzlement, once the penny had dropped as to how the Lombard Loans worked, as to why LEA did not want to hedge against the prospect of a very large balloon payment falling due 10 years down the line was I find genuine and understandable. He and Mr Brindley would expect LEA to recognise that the company might want to take steps now to protect against the possibility that in 10 years’ time a very substantial lump payment would need to be funded by the business. There was also the point about the asset ratio covenant in the Lombard Loans which meant that the problem might manifest itself before the Lombard Loans expired. The fact that aircraft may retain or even increase their value over time is not a complete answer to this problem.

The divergence between the notional amount of the hedging products and the principal of the Lombard Loans

Between the two telephone conversations on 12 October 2007 between Mrs Margetson-Rushmore and Mr Brindley, a significant change was made to the terms of the trades, namely changing the notional amount from something that was supposed to reflect the amortising principal owed under the Lombard Loans to a bullet amount of £8.5 million growing to £12 million after five years. The difference between the notional amount hedged and the balance of the Lombard Loans meant that the hedging products over hedged LEA’s existing loan facilities. LEA argue that hedging future loans in this way was a bad idea. Mr Brindley should have realised that LEA did not want to over hedge the loans because Mr Margetson-Rushmore had been anxious to ensure that the hedging products did not come into effect before the delivery of the aircraft and the draw down on the loans.

Mr Margetson-Rushmore says in his witness statement that Mr Brindley did not explain at any stage that the step up in the notional amount was a risk. The step up has, he said, cost LEA an additional £200,000 per year, from £400,000 to £600,000 a year from February 2013. I cannot see, however, what further explanation was needed. It was clear from all the descriptions of the products from the start that the interest rates that were being negotiated were percentages to be applied to the notional amount so that if the notional amount is higher, then the absolute value of the payments, once the percentage has been applied, will be inevitably be higher.

The evidence shows why LEA was prepared to agree to this. First it was the trade-off for reducing the floor to a level (4.5%) at which it was thought at the time it was most unlikely that the knock in rate would ever be triggered. Lowering the floor rate made it much less likely, therefore, that the Bank would ever be in the money. For the Bank to agree to that, there had to be some countervailing revision. The one suggested by Mr Brindley and accepted by LEA was that the notional amount should remain a bullet and become detached from the outstanding Lombard Loans.

Secondly, this was agreed in the context that both parties expected that further loan facilities with Lombard or another lender would be agreed on similar terms during the currency of the hedging products. This was a point that was mentioned by Mr Wood on 9 October 2007 when he referred to Mr Margetson-Rushmore’s plans to expand the fleet and LEA’s debt. Mr Brindley mentioned it in the email on 12 October 2007 when he first raised the possibility of a bullet notional amount, referring to previous conversations in which LEA said it would take on more debt. Mr Margetson-Rushmore now says that he did not realise at the time that LEA would be speculating on the level of debt LEA would have in the future. But nothing he said in the conversations gave any hint that he did not understand what he was being told or that he disagreed with the assumption that LEA’s debt would increase with the purchase of new aircraft over the duration of the hedging products. Mr Brindley would expect Mr Margetson-Rushmore to have a better idea of the company’s expansion plans than the Bank has. In the second conversation on that day, Mr Margetson-Rushmore confirmed that he wanted “to go fixed” in return for the better rates; in fact the floor rate on offer was lowered to 4.25% when the prices were refreshed during the course of that conversation. In the Trade Call on 12 February 2008 when Mr Brindley was explaining the terms of the trades agreed to Mr Margetson-Rushmore he again asked Mr Margetson-Rushmore to confirm that he understood that:

“given the profile of the business and what we discussed in terms of we're only looking to hedge 8 million of your initial £12 million worth of debt, and then, you know, subsequent to the increases in debt that you envisage by purchasing further aircraft, you know, that will… you know, that's the reasons why you're stepping that into 6 million. Is that okay?”

Mr Margetson-Rushmore agreed. Again, with hindsight it is clear that the financial crisis seriously affected the expansion plans that LEA had in early 2008. The additional debt for additional planes was not needed and the notional amounts covered by the hedging products were greatly in excess of the amounts owed by LEA under its loan facilities. But there is a logic to the discussion that took place in the course of the two October calls. Both Mr and Mrs Margetson-Rushmore understood that the interest payments under the hedges would be calculated on the basis of the notional amount. They were prepared to agree to that because they wanted the cheaper price that was on offer and because they expected that the notional amounts would in fact be in line with the loans they would owe in future and on which they would be liable to pay interest at a variable base rate. I do not accept that it would or should have been clear at the time to Mr Brindley that decoupling the notional amount from the principal of the existing Lombard Loans made the terms of the trade entirely unsuited to LEA’s business needs and expectations.

The callability of the hedging products

LEA submits that the ability of the Bank to call the hedging products after five years meant that they could not be relied on as part of any hedging strategy for future loans. The option to cancel the structure quarterly during the final five years for the dual rate swap or at the five year point for the value collar meant that the protection would disappear if rates rose, even though that would be when the protection was most needed.

The risks inherent in the callability of the trades were discussed at length in the phone calls between Mrs Margetson-Rushmore and Mr Brindley. She pressed him as to how the Bank was likely to react if it was out of the money once the right to call came into effect. Mr Brindley explained that the Bank’s decision whether to exercise the call would be based on a more complicated analysis than simply whether the interest rate at the date when the call could be exercised was high or low. It was not put to him that his description of how the Bank decides whether to exercise call options was inaccurate.

Mr Brindley continued to offer prices for the same trades without the call feature. The effect of the call was explained by Mr Brindley in the second phone conversation on 12 October 2007 and was referred to again in the conversation of 5 November 2007. In the Trade Call Mr Brindley referred to the trades as lasting for five years, extendable by five years. The February Presentation made it clear in the last step of the thought bubble diagrams that the impact of the call feature was that it allowed the floor of the range to be reduced to a level where LEA could be confident that it was unlikely that the knock in rate would ever be payable. Thus the callability of the trade was introduced as a response to the thought bubble on the part of the customer:

“I like the flexibility of the dual rate protection as it allows me to benefit from my view (that base may head to 5.0% or slightly lower) and also retain protection at no worse than 5.75%. However, if the range was wider and the enhanced rate lower I would feel more comfortable.”

The final diagram showing the terms of a callable trade said:

“Introducing the right for RBS to call the trade at year 5 and every quarter thereafter allows us to give you the following; So long as UK Base Rate trades between the range 6.25% to 4.0% LEA will pay the enhanced rate of 4.70%. If rates trade at or outside the range then you are fully protected at 5.35%.”

Mr Margetson-Rushmore says in his witness statement that he did not understand what Mr Brindley was saying during the 12 October phone calls when he explained the call option “other than that I did not need to consider the call option as a risk”. I do not accept that a reasonable person would understand from what Mr Brindley said that the Bank would never exercise the call option even if, having carried out this more complicated analysis, it concluded that it was in the Bank’s interests (and hence contrary to LEA’s interest) for the Bank to cancel. It is true that the call option for the Bank did make the hedging products less favourable for LEA. But the advantage it gained by agreeing to that was a lowering of the knock in rate and the floor. If interest rates had fallen gradually over 2008 – 2010 rather than plummeting in a very short space of time, these revisions could have delayed the point at which the knock in rate became payable and enabled LEA to take advantage of lower interest rates for that period. It is only because of the unprecedented and rapid reduction in interest rates that the revisions that LEA got as the price for agreeing to the call proved valueless.

The inflexibility of the hedging products

LEA say that the Hedging Products were extremely inflexible and unresponsive to changes in LEA’s future plans. I do not accept that that was the case. Of course, the terms were fixed for the next 10 years (unless the Bank exercised the call option). But the history of dealings between the parties shows that Mr Wood was open to revisiting the range of existing arrangements between LEA to respond to changes in his client’s business, for example the Lombard Loans replaced earlier facilities that had been concluded between LEA and Lombard. The fact that the Bank refused LEA’s later requests to cancel the hedging products free of charge once base rates had moved adversely to LEA does not show that the Bank would have refused to modify the terms to meet other demands of LEA’s business. If interest rates had risen dramatically in 2008 and had been maintained at a higher level than envisaged in the Lombard Loans, LEA would have benefited from the fact that the Bank was bound to comply with the terms of the hedging products over their lifetime.

The breakage costs

LEA argue that the hedging products were unsuitable because they exposed LEA to a greater risk than it would have been exposed to without them. This is demonstrated by the difference between Ms Ruddy’s figure for the potential 95% worst-case increase in the balloon payment and the CLU figure. I consider this point further below in relation to the misrepresentation claim.

Conclusion on the Advice Claim

I therefore conclude that the claim that the Bank negligently advised LEA about any aspects of the hedging products fails. Mr Brindley did not advise LEA to enter into the hedging products. He only sold them hedging products the terms of which were negotiated between him and LEA according to the priorities that LEA had decided were important to it.

In the light of my findings I do not need to consider whether, if the facts were different, the Bank would be able to rely on the contractual terms that I have set out in the narrative section of this judgment as a defence to the advice claims.

The claim under this head is that the Bank was negligent in providing information about the hedging products because the information provided was inadequate to enable LEA to make an informed decision. This aspect of the claim is based on the proposition that a bank which undertakes to explain the nature and effect of a transaction, even if what is said falls short of a recommendation or advice on the merits of entering into it, owes a duty to take reasonable care to do so as fully and properly as the circumstances demand. LEA submits that the existence of this duty is authoritatively established by the decision of the Court of Appeal in Cornish v Midland Bank [1985] 3 All ER 513 and by the judgment in Wani LLP v Royal Bank of Scotland plc [2015] EWHC 1181 (Ch).

The existence and scope of such a duty was discussed by Asplin J (as she then was) in her important judgment in Property Alliance Group v Royal Bank of Scotland [2016] EWHC 3342 (Ch), paragraphs 175 onwards under the heading “Swaps Misstatement Claim”. Asplin J examined in detail the earlier authorities and her conclusion, with which I respectfully agree, was expressed in paragraph 196 of her judgment. The potential duty of care under consideration is wider than a duty not to misstate, is fact dependent and is a duty “falling on the advisory spectrum”. She rejected a formulation of the duty which suggests that once information is provided by a bank, a salesman is always under a duty to explain fully the products he wishes to sell even where no broader advisory relationship has arisen. I agree with Asplin J’s comment that to take such an approach is to blur the line between a salesman and an advisor.

Mr Edwards also referred to regulatory rules such as COBS 4.2.1R which provides that a firm must ensure that a communication is fair, clear and not misleading; and COBS 4.5.2R which stipulates that information provided to retail clients must be accurate and in particular must ‘not emphasise any potential benefits of relevant business or a relevant investment without also giving a fair and prominent indication of any relevant risks’. Information provided must not ‘disguise, diminish or obscure important items, statements or warnings’ and must be presented in a way which is likely to be understood by the person to whom it is directed. I do not accept that one can transfer these standards across from the regulatory context to enhance the common law duties owed by a bank to its client. Again, that risks undermining the distinction that Parliament has drawn between clients to whom statutory duties are owed and those to whom they are not owed.

I therefore turn to what it is alleged in the pleaded case that Mr Brindley failed to explain to LEA and why it is said that he failed to give a balanced presentation of the products.

Failure to explain what would happen if interest rates fell

In the Particulars of Claim (paragraph 57C) LEA alleges that Mr Brindley failed to explain what would happen if interest rates fell and the Bank chose not to exercise the call option that was granted in both the hedging products. This point lacks substance in my view since it is common sense that if the hedging products are not cancelled then they continue until they expire after 10 years. It is also common sense that if the Bank decides not to cancel the hedging products, that it likely to be because it is in the money and expects to remain in the money, even if not for the whole of the remaining life of the trades. That is particularly relevant for the value collar where there was a one off opportunity to cancel at the 5 year point. Mr Margetson-Rushmore accepted in evidence that he realised that if interest rates fell, the hedging products would become expensive for LEA. The spreadsheets showing the costs and benefits of the products in various situations that Mr Brindley initially provided to Mrs Margetson-Rushmore at the start of October 2007 and which she adapted and provided to Mr Margetson-Rushmore and Mr Galanopolous all showed the products running the full ten years and calculated the losses and benefits on that basis.

Further, in the several emails that Mr Brindley sent setting out the pricing of the different solutions in which LEA was interested, he always quoted prices for solution 2 which was without the call and the slightly cheaper solution 3 with the call. I do not see that at any time he pushed LEA towards one rather than the other. Both Mr and Mrs Margetson-Rushmore were well aware that the reason why solution 3 was cheaper was that the ability to call was valuable to the Bank. Mr Brindley was prepared to price products with a single call date, or the ability to call annually after five years, or with six monthly call dates to enable LEA to compare the prices. It was obvious from these prices that the greater the Bank’s ability to call, the cheaper the hedging products were. LEA chose to pay a cheaper interest rate in return for the risk that the hedging products would be called. They were well aware that their borrowing might last for ten years and that they may be exposed after five years. But they knowingly accepted that risk in return for better prices.

I do not see that Mr Brindley said anything inaccurate or unfair in his discussions with Mrs Margetson-Rushmore about the circumstances in which the Bank would or would not exercise its right to cancel. He was correct in saying that the calculation that the Bank makes in order to decide whether to exercise its call right is more complicated than just looking at the interest rate on the day of the call to see if the Bank is in or out of the money. He may well have been right in saying that the Bank rarely calls trades; he was not challenged at the trial on the accuracy of that statement. The same applies as regards the allegation that Mr Brindley’s statement that if the trades were called, it would be open to LEA negotiate some further arrangement at that point was both disingenuous and misleading. There is nothing to show that the Bank would not have been prepared to negotiate some further protection if it decided to call the trades. Of course, the cost of any such product would depend on what people thought was the likely direction of interest rate movements from that five year point onwards. There is no evidence to support the allegation that the statement was misleading or that it failed to give the full picture to enable LEA to understand the risk it was taking by agreeing to the call.

Failure to explain the full terms of the ISDA agreement

In the Particulars of Claim, it is alleged that the description in Mr Brindley’s email of 11 February 2008 of the ISDA agreement, a draft of which he sent LEA, constituted a serious and wholly misleading misrepresentation as to the nature, purpose and effect of the ISDA terms and was wrong. It is alleged that the statement was made with the intention that it be relied upon by LEA in entering into the hedging products and it was so relied on. Mr Brindley said that the ISDA agreement “simply lets both parties know exactly how they will be treated in the event that LEA goes bankrupt and the trade still remain in place”. This mis-description was repeated in the Trade Call on 12 February 2008.

I accept that it was wrong of Mr Brindley to describe the ISDA agreement in these terms. But this had no effect on LEA’s decision whether to enter into the hedging products or not. Mrs Margetson-Rushmore was familiar with ISDA contracts from her time as a banker so she could not have been misled. Mr Brindley sent the terms of the ISDA agreement to LEA shortly after he sent this email in February 2008. Mr Margetson-Rushmore had plenty of opportunity to read the terms before he received the Confirmations in February 2008. Further, LEA had been sent a copy of the ISDA draft by Tamryn North the previous October and Mr Margetson-Rushmore could have read them then even if he was not able immediately to read the document on his Blackberry when it was sent. There is no evidence that he or anyone else was influenced by what Mr Brindley said. Indeed, contrary to the case pleaded in the Particulars of Claim, Mr Margetson-Rushmore said in evidence that he did not rely on the description given by Mr Brindley because he regarded the ISDA agreement as just part of the paperwork that needed to be completed.

Failure to disclose the CLU or otherwise explain potential breakage costs and other risks

LEA note that among the poor sales practices that were identified by the FSA in its 2012 investigation into mis-selling of hedging products was a failure to provide customers with an adequate indication of the potential magnitude of breakage costs. One way in which the Bank could have done this would have been to disclose the CLU. The experts in this case are agreed that it was not the practice at the time for banks to disclose the CLU to customers. But there are other ways in which Mr Brindley could have explained the potential magnitude of breakage costs. Further, the Bank’s CLU for the earlier foreign exchange transaction had been disclosed to LEA by Paul Samuels: see paragraph 34, above. LEA contend that Mr Brindley should have warned LEA about all of the risks involved in the hedging products including the risk of over hedging, the effect of the cancellation options for the Bank, and the risk of increased monthly payments in a low interest rate environment.

The answer to this allegation is that Mr Brindley did explain all these matters in the meetings and telephone conversations and Mr and Mrs Margetson-Rushmore understood these risks. In the September Presentation, the slide which described the hedging products said:

“If the transaction needs to be amended in any way after it has been put in place, e.g. by amending its size, maturity date, reference exchange rates or cancelling, then there may be a cost to you to do so, credit parameters permitting;

The potential cost will depend upon a number of factors including, but not limited to, the prevailing market rate compared to the transaction rate, the length of time to original maturity and the current volatility of the market.

These factors may generate a cost to amend the trade even where the transaction rate compared to the prevailing market rate would indicate a favourable position;

Should you decide to terminate any structure ahead of maturity, you may have to pay market-related breakage costs (these could be benefits however). These costs are not pre-determinable, depending on prevailing market conditions at the time of breakage;”

For each of the solutions, one of the “considerations” was that there may be a cost to terminate the structure early, depending on the prevailing market conditions.

The Notes attached to the September Presentation also drew attention to the risks involved in OTC derivatives. These include the risk of adverse or unanticipated market, financial or political developments. In the event that such risks arise, substantial costs and/or losses may be incurred. Further, the Notes said:

“If 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.”

The Notes also said:

“Over-the-counter derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. … In general, all OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore the Recipient should ensure that, before entering into any OTC derivative transaction, the potential risks and return thereof is fully understood and the Recipient should also determine whether the OTC transaction is appropriate for the Recipient given its objectives, experience, financial and operational resources, and other relevant circumstances.”

The same notes were included in the February Presentation.

In the February Trade Call, Mr Brindley referred to breakage costs again:

“DM Just one final thing before I get your OK to go ahead to put that in place, should you wish to terminate the trades, Patrick, ahead of maturity, there may or may not be a breakage cost attributable to that trade and that can only be determined by the prevailing market at that point in time.

So again, if you're comfortable with all of those details that I've just said for that trade, can I get your okay to go ahead and put that in place?

PMR - Yeah, and the breakage relates just to the second trade or both trades?

DM Both trades. ….”

Mr Edwards points to Mr Margetson-Rushmore’s question there as indicating that he did not really understand what breakage costs are. If he had understood, he could not possibly have thought that they would apply to one trade but not to the other. I do not accept that one can read that into Mr Margetson-Rushmore’s question. Although the calculation of breakage costs is a complex process, the idea that one party may have to pay the other party some compensation in order to get out of a contract part way through its term is not complicated or surprising. Nor is it surprising that the size of that payment is likely to be greater if the reason the customer wants to get out of the contract early is because the deal has become onerous for the company and correspondingly profitable for the bank.

LEA also alleges in paragraph 57CA (d) of the Particulars of Claim that if LEA had known that the CLU for the hedging products was calculated by the Bank as £1.65 million – a risk greater than the risk of the increased balloon payment as calculated by Ms Ruddy - it would not have agreed to the trades. This part of the case is put very high, it being alleged that Mr Brindley knew that if LEA had been informed of that fact, it would as a matter of commercial and common sense have had a material bearing on its decision to trade and that it was dishonest and misleading on his part to fail to identify the risks.

I do not accept that an appreciation of either the value of the CLU or more generally of the potential breakage costs would have made any difference. Mrs Margetson-Rushmore knew from her use of the spreadsheets for the internal discussions within LEA in autumn 2007 that depending on the interest rates and ranges agreed and on prevailing base rate there was a risk of a very substantial cost to LEA. One of her own calculations resulted in a deficit of £1.7 million (see paragraph 75, above). That did not bring the discussions about hedging products between LEA and the Bank to a halt. In any event, I do not believe that even if Mr Brindley had laboured the point about breakage costs, it would have affected LEA’s decision. At this point LEA was not contemplating that it would want to break the contracts before their maturity. It was in a business which required substantial, long term debt financing over the life of the hedging products and beyond. The business was growing healthily and at that stage no one foresaw the downturn in business that resulted from the financial crisis.

More generally as regards risk, one point that Mr Margetson-Rushmore said he did recall was that Mr Brindley told him at the February Meeting that the hedging products were a ‘win win situation’ for LEA and the Bank. It was not clear however what was meant by this, if indeed it was said. In evidence at trial, Mr Margetson-Rushmore said that he thought that this referred to the double benefit that LEA received from the hedging products, namely that they both hedged LEA’s exposure to the higher balloon payment and could also result in the Bank making regular payments to LEA under the dual rate swap if interest rates rose. Another possible explanation was that this referred to the fact that the Bank will have entered into matching hedges to lay off its risk under the trades with a third party in the market so that the Bank did not stand to lose itself if interest rates moved in favour of LEA. Mr Margetson-Rushmore’s written evidence is that he was convinced by Mr Brindley at the February Meeting that there would be no cost to LEA by entering into the hedging products, no real or observable risk to LEA and “no obvious downside at all”. I do not agree that that message could reasonably be drawn from anything that Mr Brindley presented to LEA or said during the several phone calls. I do not accept that Mr Margetson-Rushmore really failed to understand everything that Mrs Margetson-Rushmore and Mr Brindley had explained in detail on several occasions and all the information he had been provided with about the contracts to which LEA was committing.

As regards the other risks referred to by LEA, I have already described what was explained about the callability of the hedging products, the reasons why the Lombard Loans were over-hedged because of the higher bullet notional amount covered and the way the presentations explained what would happen if interest rates fell. I find that there was no breach of the so-called mezzanine duty in this case.

The ingredients of the tort of deceit were stated by Jackson LJ in ECO3 Capital Ltd and Others v Ludsin Overseas Ltd [2013] EWCA Civ 413 at paragraph 77:

In the alternative to their deceit claim, LEA allege negligent misrepresentation and in the further alternative make a claim under the Misrepresentation Act 1967. In Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd [2011] EWHC 484 (Comm) Hamblen J set out the principles on which a misrepresentation claim is based: see paragraphs 215 onwards of his judgment. These can be summarised, so far as relevant to the present case, as follows:

In his closing submissions, Mr Edwards stated that the ‘core allegation’ under this head is that Mr Brindley misrepresented the benefits of entering into the hedging products. The most important aspect of this is the allegation relating to the CLU. This was the allegation that was introduced into the Particulars of Claim by amendment after the adjournment of the trial in June 2017. What is said is that Mr Brindley told LEA at the February Meeting that Ms Ruddy had calculated that the balloon payments under the Lombard Loans might be £1.6 million higher than was expected if interest rates stayed steady at the 5.75% rate which was assumed by the terms of the Lombard Loans. Mr Margetson-Rushmore did not actually recall Mr Brindley giving them this figure at the meeting and it was not included in the February Presentation. But it is common ground that it is likely that Mr Brindley did.

Unfortunately, it is not at all clear (to me at least) precisely how Ms Ruddy arrived at that figure. Ms Ruddy has not provided any evidence in these proceedings and I assume that is because she cannot now remember how she arrived at the figures. Mr Savage for the Bank described what he understands Ms Ruddy did. She used a system called Frontier to simulate interest rates over the life of the Lombard Loans and combined that with her own analysis to work out LEA’s potential exposure to an increased balloon payment. Frontier is, Mr Savage explains, used to simulate market parameters such as interest rates, inflation and foreign exchange data based on market data. Using that plus information about the terms of the Lombard Loans, Ms Ruddy would then have arrived at the potential increase in the size of the balloon payment, arriving at a figure of £6.22 million (compared with the expected £4.74 million) for the larger loan and £1.27 million (compared with £1.14 million) for the smaller loan.

It was not alleged by LEA that there was anything unfair or improper in the way the figure was calculated by Ms Ruddy or that it was not in fact an accurate indication of the risk that LEA faced based on a realistic prediction of 95% worst case increases in base rate over ten years. What is said, rather, is that although that figure was accurate at the time it was given to LEA by Mr Brindley and remained accurate, Mr Brindley became aware shortly after the meeting that the CLU for the Bank was £1.6 million and he would have known that this was calculated on a similar basis to Ms Ruddy’s figure. By failing to inform LEA that by entering into the hedging products, it faced a potential liability of £1.6 million which it did not face if it remained unhedged, the statement about the risk of the higher balloon payment was seriously one sided and misleading. LEA contend that the hedging products were presented as a means of avoiding a contingent exposure to an additional £1.6 million but that this was not balanced by telling LEA that the hedging products themselves created a contingent exposure which the Bank had quantified as £1.6 million. The whole basis of that presentation at the meeting was, LEA contends, falsified by the discovery of the amount of the credit line the hedging products would require within the Bank. The case is pleaded on the basis that Mr Brindley acted dishonestly and deceitfully in failing to tell LEA about the CLU, alternatively that he was negligent on ordinary Hedley Byrne principles or in the further alternative the case is put under the Misrepresentation Act 1967.

The difficulty here is in identifying precisely what misrepresentation is alleged to have been made, given that it is not alleged that Ms Ruddy’s calculation of the risk of an increased balloon payment is wrong, let alone that Mr Brindley knew it was wrong. The only implied representation that would avail LEA would be something along the lines that Mr Brindley should be taken to have told LEA that if interest rates went up very substantially, it was at risk under the Lombard Loans of having to pay £1.6 million more than it might be expecting to pay and that that is more than it might ever have to pay under the hedging products if interest rates went down very substantially.

Given that it is not alleged that Mr Brindley actually said something along the lines of the second half of that sentence, the question is whether there was an implied representation that the second half of the sentence was true arising from the statement of the first half of the sentence? If so, should Mr Brindley have realised when he received the CLU figure from the Bank’s credit team that the second half of that sentence was not in fact true?

In my judgment this implied misrepresentation falls at both hurdles set by the principles enumerated by Hamblen J. No reasonable person would have inferred from what Mr Brindley said about the risk of a higher balloon payment if interest rates went up that he was also implicitly saying anything about the size of breakage costs that LEA might have to pay if it decided for whatever reason to break the contract in a situation where interest rates had fallen. The balloon payment under the Lombard Loans was a liability that LEA was tied into – if interest rates went up to the degree that Ms Ruddy’s calculation posited, LEA would have to pay the lump sum or find some other way of meeting that liability in a prevailing market where interest rates were high. But a lump sum to cover breakage costs was not something that LEA was bound to have to pay under the hedging contract and it was not, at that time, contemplating that it might need or want to break the contracts before their maturity.

Further, LEA has not shown that either Mr Margetson-Rushmore or Mr Galanopolous in fact understood Mr Brindley to be saying anything about the size of the risk if interest rates went up as compared with the risk if interest rates went down. Mr Margetson-Rushmore’s evidence was in effect that if he had been told about the CLU he would have misunderstood what he had been told and that he would not have entered into the hedging products. His evidence was as follows:

“Q. And if the bank had told you that its internal credit line for these products was £1.65 million, that would not have affected your decision to go ahead, because you already knew the downside was potentially £1.7 million, and you nevertheless went ahead.

A. I didn’t know, my Lady, that the downside was £1.7 million. That was the starting point on a sheet which didn’t put in all the variables, point 1. If I had thought that £1.7 million was the potential downside, I would have run a mile from those products. If I had been told that the potential downside was £1.65 million, in my personal view, I would be saying: I have got a potential liability the Bank is telling me that might occur on my balloon payment at £1.5 million so it would go up from 5 -- let’s say it was 5 million, 5 to £6.5 million, and against that, to protect against that possibility, I would then take on an unknown uncertainty, and if it was 1.65 and that was an ongoing risk on a regular basis, to me, I think it is fairly obvious that one would just say no to the products.

Q. But that is too simplistic, isn’t it? You realised didn’t you, that in a situation where the balloon payment was very high at £1.65 million, for example then by entering into the swaps, you would receive huge payments from the bank that would counteract that. Conversely, in a scenario where the pain under the swaps was very high, your balloon payment would be that much lower. So the entire point of entering into the swaps was to smooth out those risks, wasn’t it?

A. Maybe I am a very simple person, then, because the explanation that I gave my Lady is how I would have approached it.”

I consider this evidence is affected by hindsight. Mr Margetson-Rushmore must have appreciated from the spreadsheets provided by Mrs Margetson-Rushmore in October 2007 that there was a risk of a substantial cost to LEA if interest rates went down. Mrs Margetson-Rushmore provided those sheets to him to ‘play around with’ during their discussions and she must have believed that he was capable of understanding the basics of what they showed. Secondly, he was wrong, in the evidence I have quoted above, to say that he would have understood the CLU as representing an ‘ongoing risk on a regular basis’ that LEA would have to pay £1.65 million. That is not what the CLU is at all. If the CLU or a similar figure had been mentioned, Mr Brindley would have explained what it was, just as Mr Samuels had explained it in 2006. Mr Margetson-Rushmore would have realised that his simplistic reaction that the two figures, being about the same, cancelled each other out, was wrong.

Mr Galanopoulos’ evidence was:

“Q If the bank had told you at the February meeting that its internal credit line for these products would be £1.6 million, you would still have gone ahead with the transactions, wouldn’t you?

A. The first thing I would have asked is what credit line is, because as I said I’m not familiar with terms like this. If it was explained to me that this is the risk the bank assesses at that point of time that our loans have, I would have taken into consideration. If I was given the risk at the same time what the products have, I would clearly assess once against the other. Common sense, I think.

Q. But if -- you were told, I think, at the meeting that there was a risk on the loan agreements that if interest rates went unusually high the balloon payment could be, say, 1.5, £1.6 million higher; do you remember being told that?

A.

I do not remember this being raised at the meeting. That is why it is not in my witness statement. However, I do understand that was brought up from disclosure later on, and on the basis of that I did my second witness statement which assumed that if Mr Wood or Mr Brindley, I can’t remember, used that, it would have made some difference. Yes, I didn’t care about the balloon, but if someone is telling me, “Well, we assess that your loan has £1.5 million risk and you know what, I will take the risk away from you”, I said, ”Yes, that makes sense”.”

Again, this evidence moves very far from the pleaded case which, as Mr Sinclair pointed out in closing, did not allege that Mr Brindley said at the February Meeting that the hedging products removed any risk from LEA.

In fact none of the LEA witnesses said that they thought Mr Brindley had said anything about the size of the risks of the hedging products either at all or as compared with Ms Ruddy’s calculation.

LEA also argue that a statement which is true when made but which ceases to be true to the knowledge of the representor before the contract is concluded is treated as a misrepresentation unless the representor informs the representee of the change in circumstances: With v O’Flanagan [1936] Ch 575. I do not consider that is the situation that has arisen here. The calculation of the CLU is not a change in circumstances because it was known from the start that the nature of the hedging products meant that if LEA defaulted on its obligations at a point when interest rates had moved strongly in the Bank’s favour they would face a very high breakage cost. That is inherent in any hedging transaction. The fact that it was calculated as a particular amount in February 2008 is not a change in circumstances.

In the light of the lack of evidence that any of the LEA witnesses did in fact understand Mr Brindley to be saying something to the effect that the risk they faced under the Lombard Loans was much greater than the risk they faced under the hedging products, this implied misrepresentation claim cannot succeed.

As to whether the size of the CLU does in fact mean that the alleged implied misrepresentation was not true, that depends on how comparable the figures are: whether they are in fact different sides of the same coin. This was the issue to which the expert evidence was largely directed although it seems that the experts’ task was hampered by a lack of evidence about how Ms Ruddy’s figure and the CLU were computed. Mr Savage provided a witness statement for the Bank explaining the nature and purpose of the CLU more generally in the Bank’s credit control function. The purpose of the CLU is to measure the Bank’s potential exposure to the customer if market conditions move adversely to that customer and the customer defaulted and was unable to meet its repayment obligations. To measure the risk, the Bank calculates the exposure it would face at the 95^th percentile exposure amount by simulating the credit exposure at all future points in time so as to obtain an ‘exposure profile’ which is a graph plotting the mark to market values for the product at each future point in time and taking the 95^th percentile value from the graph. Mr Savage says that the CLU was calculated based on hypothetical future market movements in interest rates over the life of the hedging products.

What emerged from this was that there are important differences. Some arise from the differences between the Lombard Loans and the hedging products, for example that:

I accept that there are many differences in the way in which the two figures were calculated. There remains the question whether, if Mr Brindley had indeed told LEA that the hedging products were “low risk” or if he had expressly told LEA at the February meeting that the risk of having to pay £1.6 million more as a balloon payment under the Lombard Loans was greater than the risk that they faced under the hedging products, he came under a duty to revise this statement once he found out that the CLU was of the same order as the figure he had given them – whether by disclosing and explaining the CLU or by some other explanation. I have held that there was no such representation made by Mr Brindley either expressly or impliedly. In those circumstances I prefer to leave open the question of what would have been the Bank’s duty if that finding had been different.

A number of other misrepresentations were alleged in the Particulars of Claim. I have already considered the most significant ones as they arose in the negligent advice or mezzanine claims. For example it is alleged that Mr Wood’s statement in November 2007 that the credit limit for the trades was about to expire was false: see paragraph 177, above; that the statement that interest rate markets are forwards indicators was false: see paragraph 179 above; and that his description of the terms of the ISDA agreement was wrong, grossly inadequate and seriously misleading: see paragraph 242, above. It is also alleged that Mr Brindley’s statement that if the Bank exercised the call option in the hedging products, LEA would be able to enter into another risk management product at that time was disingenuous and misleading. In the event it was not put to Mr Brindley in cross-examination that this was untrue and Mr Margetson-Rushmore accepted in his evidence that any alternative product bought at that future point was likely to be more expensive for LEA. I have considered all the allegations of misrepresentation which were helpfully set out by Mr Sinclair in an Annex to the Bank’s written closing submissions. In respect of each of them I have concluded that the evidence does not establish that the statement was false and/or that there is no evidence that the statement had any effect on LEA’s decision to enter into the hedging products.

In any event, since Mr Brindley has been accused of deliberately misleading LEA by the way he prepared his slide presentations and by what he said during the various phone calls, I should make it clear that I reject any suggestion that he behaved dishonestly or that he misled LEA at any point during the negotiations.

The sole Defendant to this claim is the Royal Bank of Scotland plc. The Defendant submits that the counterparty to the two contracts for the hedging products was not the Defendant but NatWest. The Defendant was not springing this point upon LEA at trial by way of ambush. The Defendant’s solicitors had drawn LEA’s attention to what they regard as LEA’s mistake early in the pre-action correspondence, giving LEA the opportunity to add NatWest or the parent company Royal Bank of Scotland Group plc as a defendant. LEA submits that the counterparty is indeed the Defendant and that the point is a bad one.

The parties also disagree about the effect on the claim if the Defendant is actually not the counterparty to the hedging products. LEA submit that the identity of the Defendant would have only a limited effect on the claim. Damages under the Misrepresentation Act 1967 and rescission would only be available if the court finds that the Defendant and not NatWest is party to the hedging products. However, damages for deceit and/or negligent misrepresentation are available against the Defendant in any event as it was the Defendant, through its employee Mr Brindley, that made the misrepresentations. They also say that the advice claim and the mezzanine duty claim are unaffected, again because Mr Brindley is employed by the Defendant and gave or failed to give whatever advice or descriptions of the products he did as one of the Defendant’s employees. The Defendant is liable for Mr Brindley’s conduct even if that conduct ultimately led to LEA entering into the hedging products with NatWest.

Mr Sinclair submitted by contrast that if the correct counterparty is in fact NatWest, the effect is to bring the whole claim to an end. Although Mr Brindley was an employee of the Defendant, he must be regarded as acting on behalf of NatWest in all his pre-contractual dealings with LEA because it was NatWest that ultimately entered into the hedging products with LEA. NatWest is therefore solely liable for any negligent advice or mis-description of the trades and for any misrepresentation.

I examine first the question of which company was in fact the counterparty to the hedging products with LEA and then consider the effect of my findings on the claim.

The test to be applied in identifying the counterparty to the contract

Both parties agree that the court must apply an objective test when ascertaining the party to a contract. The test was summarised by Teare J in Navig8 Inc v South Vigour Shipping Inc [2015] 1 Lloyd’s Rep 436 at paragraph 94. The manner in which the court should go about ascertaining who the parties are was described by Lord Millet in The Starsin [2004] 1 AC 715:

“175.

The identity of the parties to a contract is fundamental. It is not simply a term or condition of the contract. It goes to the very existence of the contract itself. If it is uncertain, there is no contract. Like the nature and amount of the consideration and the intention to create legal relations it is a question of fact and may be established by evidence. Such evidence is admissible even where the contract is in writing, at least so long as it does not contradict its express terms, and possibly even where it does: see Young v Schuler (1883) 11 QBD 651, Chitty on Contracts 28th ed. p 633. ….

176.

Where a contract is contained in a signed and written document, the process of ascertaining the identity of the parties and the capacity in which they entered into the contract must begin with the signatures and any accompanying statement which describes the capacity in which the persons who appended their signatures did so. This may require interpretation, and to this extent the process may without inaccuracy be described as a process of construction. But it is not of the same order as the process of construing the detailed terms and conditions of the contract. These describe the incidents of the contract and the nature and extent of the parties' obligations to each other. But the identity of the parties themselves is not an incident of the contract. Where a signature is accompanied by a description of the capacity in which the signatory has appended his signature the description is not a term or condition of the contract. It is part of the signature and so part of the factual evidence of the identity of the party which is undertaking contractual liabilities under the contract.”

The factual indicators

The primary contractual documents are the Confirmations sent by the Bank to LEA after the Trade Call. This is clear from the terms of business sent by the Bank to LEA. As I have found earlier, the MIFID TOBs were the terms governing these transactions. They provide in clause 13 that the contents of the Confirmations are deemed conclusive and binding unless LEA objects in writing.

The two Confirmations sent to LEA on 15 February 2008 setting out the terms of the dual rate swap and the extendable value collar refer in the opening paragraph to them being transactions “entered into between National Westminster Bank plc (the Bank) and yourselves (the Counterparty) on the Trade Date specified below”. That letter showed the initials and logo of the Royal Bank of Scotland in the top right-hand corner but the company registration details given at the bottom were those of National Westminster bank plc. For both letters the signatory for the bank was Adam Lawler who signed “For and on behalf of National Westminster Bank plc”. The dual rate swap confirmation was signed by LEA. In the light of the terms of business, LEA rightly accepted that the fact that they failed to sign and return the value collar confirmation cannot affect this issue.

There are other indications in the earlier documents that the contracting party was going to be NatWest. On 23 October 2007 Tamryn North from GBM Documentation – Derivatives sent an email to Mr Margetson-Rushmore to say that she understood from her colleagues Mr Brindley and Mr Wood that LEA intended “to enter into derivative transactions with National Westminster bank plc”. She sent a copy of the standard form ISDA Master Agreement setting out the general terms and conditions governing trades of this nature which she said could “be used to govern any subsequent trades between our institutions including swaps, currency options and foreign exchange”. Also attached was a draft Schedule to the Master Agreement which was written “to reflect the particular trading relationship with you.” She asked for Mr Margetson-Rushmore’s comments on the draft Schedule. Although the blank Master Agreement did not show who the parties were, the Schedule was clearly stated on its front page to be between National Westminster Bank plc and LEA.

There are indications going in the other direction. The presentations given by Mr Brindley at the July 2007, September 2007 and February 2008 meetings were prominently badged with the letters ‘RBS’, they referred to ‘RBS’ as the counterparty throughout the diagrams and descriptions of the different solutions presented. The RBS logo:

Mr Brindley also referred to “RBS” and not NatWest throughout the various phone calls that I have described earlier. However, as the Defendant points out, the terms of business sent to LEA stated that that references to RBS were to be read as being shorthand for references to RBS Global Banking and Markets and that that Division worked on behalf of both RBS and NatWest. The opening paragraph of the 2006 TOBs says:

“1.1

These Terms of Business apply to all designated investment business carried on by the Royal Bank of Scotland plc and National Westminster Bank plc together or, as the context may require, each being referred to as The Royal Bank of Scotland Financial Markets (“RBSFM”) with or on behalf of you”.

The MIFID TOBs say something similar: (emphasis in the original)

“1.1

These Terms of Business (the “Terms”) apply to all designated investment business carried on by the Royal Bank of Scotland plc and National Westminster Bank plc together or, as the context may require, (“The Royal Bank of Scotland Corporate Markets”, “we” or “us”), with you”.

LEA rely on the second version of the draft ISDA Master Agreement which was sent to them by Mr Brindley attached to an email of 11 February 2008. That attachment was called “ISDA UK Corp Draft (Not for Execution).pdf”. The copy attached did not contain the name of the parties in the title part at the top of the front page. Nor did the Schedule to the draft agreement contain the names of the parties. However, the signature page of the Schedule, showed the signature for the bank to be placed under the wording “The Royal Bank of Scotland plc”. At some stage Mr Margetson-Rushmore and Mr Galanopoulos both signed this schedule but it was never signed by anyone on behalf of the Defendant.

LEA rely primarily on the fact that Mr Brindley is employed by the Defendant and that the RBS Global Banking & Markets division is a division of the Defendant company and not of RBS Group plc. This means, LEA submits, that he remains the Defendant’s responsibility.

Mr Margetson-Rushmore’s evidence was that he knew that LEA’s day-to-day banking relationship from about 2000 was with NatWest and he was aware that NatWest was part of the RBS Group, as was Lombard. He realised that Mr Wood was an employee of NatWest but at the time he did not know the structure of the RBS group other than that NatWest and Lombard were part of the group. He says that he thought Mr Brindley worked for RBS and so was selling RBS products. In his written statement he says that he did not understand at the time that the hedging products were entered into with NatWest because he dealt exclusively with RBS staff. At the trial he accepted that at the time he did not think about what the legal entity was in relation to the swaps. Mr Galanopoulos did not give any evidence as to what he thought on this matter.

The Defendant put its case in two ways. It accepts that the binding contract is formed during the Trade Call and not only once the Confirmations have been sent or received. However, the Bank says that at the point that LEA entered into the hedging products during the Trade Call, it entered into them with NatWest. This was then reflected in the Confirmations. Alternatively, if on the date of the Trade Call the contracts were not entered into with NatWest, then LEA’s acceptance of the Confirmations constituted a novation of the contracts to NatWest.

It is apparent from the evidence that there was no discussion during the negotiations about which company within the RBS group was going to be the contracting party if and when the hedging products were concluded. Although the presentations were branded with the RBS brand, the 2006 TOBs and the MIFID TOBs say in the first paragraph that the terms apply to all investment business carried on by the Defendant or NatWest either together or “as the context may require”. The Royal Bank of Scotland Financial Markets referred to in the 2006 TOBs later became RBS GB&M. I take that to mean that references to “RBS” or “RBS GB&M” in the documents and in any discussions are to be taken as referring to whichever of RBS or NatWest is ultimately the contracting party, not as indicating that the Defendant will be the contracting party.

In my judgment, an objective observer would realise that different entities within the banking group specialise in different financial products. A customer may end up contracting with a variety of legal entities depending on their particular needs. It is only when the formal contractual documentation is drawn up and signed that it becomes clear who the actual counterparty is. I therefore find that the identity of the counterparty is as described in the Confirmations and that the counterparty to the hedging products was NatWest and not the Defendant.

I therefore turn to the second question which is whether that means not only that LEA’s claim for rescission would fail but also that its claim for negligence and misrepresentation would fail. That depends on whether Mr Brindley is to be regarded as acting on behalf of his employer, the Defendant, when discussing products with LEA or whether he (or the Defendant) is to be treated as acting on behalf of NatWest when it is NatWest which ultimately enters into the contract.

I do not consider that the mere fact that Mr Brindley is employed by the Defendant automatically means that he was acting on their behalf in his dealings with LEA. Mr Brindley was authorised by the FSA to give investment advice both on behalf of the Defendant and on behalf of NatWest, indicating that the Bank and the FSA regard it as possible that Mr Brindley can give advice on behalf of someone other than his employer. The MIFID TOBs include terms that:

“1.2

Our affiliates may act as agents for us and we may act as agent for one or more of our affiliates. This will be disclosed at or before the time of executing a transaction. It will also be recorded on the confirmation. These Terms shall apply unless our affiliate expressly requires otherwise.”

I asked Mr Edwards in the course of his closing submissions whether his argument would mean that if LEA had sued NatWest rather than the Defendant, NatWest would have been able to disclaim liability on the basis that any advice given by Mr Brindley or misrepresentations made by him had been given by or on behalf only of the Defendant and not by or on behalf of the contracting counterparty. This may be less of an issue for the misrepresentation claim because there are cases where a contracting party, A, can seek relief against its counterparty B, on the basis of misrepresentations made by a third party C, provided that A knew about the misrepresentations that C had made: see Chitty on Contracts, 32^nd edn, paragraphs 7-024 – 7-025. But the negligent advice claim would create more of a difficulty if LEA had sued NatWest as the correct counterparty to be met with the defence that because the individual they had dealt with was in fact employed by another entity in the group, they must pursue that other entity for damages.

I lean to the view that Mr Brindley (or the Defendant) is to be regarded as acting for NatWest in the pre-contractual discussions with LEA because the contract was ultimately concluded with NatWest. But I have found this a difficult point. The claim was not pleaded or argued on the basis of a tri-partite or agency relationship and given the large number of other issues it is not surprising that counsel were not entirely focused on it. There may be an important point of principle here, namely in a situation where negotiations with a client are conducted by an employee of one entity within a banking group and the counterparty to the final contract is a different entity within the group, is the employee to be treated as giving advice or making any misstatements or misrepresentations on behalf of his employer (acting on its own behalf) or on behalf of the counterparty? As I have found that the claim fails on the facts, I will leave the point to be decided in a future case where it may affect the outcome.

In the light of my findings set out above, these claims are dismissed.