Kays Hotels Ltd (Trading As Claydon Country House Hotel) v Barclays Bank Plc

This is an application by the defendant for summary judgment on the claim in its favour under CPR 24.2 and/or to strike out the Claim Form under CPR 3.4(2) on the grounds that the claim is indisputably time-barred and therefore should be summarily dismissed.

The claimant is a private limited company engaged in the hotel and hospitality business which operated a hotel in Suffolk called The Claydon Country House Hotel. At the material time, Mr Khuraam Saeed and his father were directors and owners of the claimant. The defendant is a bank, regulated at the material time by the FSA. In March 2005 the defendant offered the claimant a loan of £1.34 million repayable over 20 years at an interest rate of 1.5 per cent above the defendant’s base rate. The claimant accepted that offer on 30 March 2005, but there was apparently no draw down until later on.

There were meetings and discussions between Mr Saeed and Mr Challis of the defendant which, according to the Particulars of Claim, took place over a period between November 2004 and August 2005, and there was a particular meeting in August 2005 at which there were discussions about the interest rate hedging product which is the focus of the present litigation. That product was one which Mr Saeed says he was told that the claimant had to enter into if there was to be any draw down under the loan. The nature of the product was that it was an interest rate hedging product with a collar. The terms of the collar were these: there was a ten-year term with a notional amount of £1 million amortising; if the Bank of England base rate increased above 5.5 per cent, the defendant would pay the difference between the base rate and 5.5 per cent; if the Bank of England base rate fell below 4 per cent, the position was reversed so the claimant would pay the defendant interest at 4 per cent, plus the difference between the 4 per cent and the weighted average base rate for each relevant calculation period, subject to a maximum rate of 5 per cent if the base rate fell to 3 per cent or below (the “double floor”); if the Bank of England base rate was between 4 per cent and 5.5 per cent, neither party made payments to the other.

Between 1 December 2005 and 5 July 2007, the Bank of England base rate remained within the 4 to 5.5. per cent range and so there were no payments under the collar in either direction. Between 5 July and 6 December 2007, the base rate rose to 5.75 per cent and so payments were made to the claimant totalling just over £1,000. Between 6 December 2007 and 6 November 2008, the base rate returned to the 4 to 5.5 per cent range so there were no payments in either direction. On 6 November 2008, the Bank of England cut the base rate from 4.5 per cent to 3 per cent and thereafter there were various cuts, with the result that between the period 1 December 2008 to 2 November 2009 payments of some £36,000 would have been required to be made from the claimant to the bank, and during the latter half of that period the rates had gone down to 0.5 per cent.

In June 2012 the FSA announced an agreement with various banks including the defendant to review sales of interest rate hedging products to non-sophisticated customers. On 8 November 2012 the claimant issued this claim against the defendant alleging the collar had been mis-sold to it. The defendant took the position from the outset that the claims were time-barred and made an application to strike out the claim on 19 April 2013. This claim was, however, stayed while the claimant’s application for redress under the Past Business Review in relation to interest rate hedging products (which had been put in place by the defendant on direction of the FSA) was processed. Under that process, to date the defendant has paid some £166,000 to the claimant by way of redress representing net payments under the collar. There is also an outstanding application for redress in respect of alleged consequential losses. To date, that application has been rejected by the defendant but a revised claim has been put forward by the claimant which is currently under review. However, the stay originally agreed or ordered has expired and the defendant has now restored its application for a strike out.

The causes of action asserted in the Particulars of Claim were for breach of contract, breach of statutory duty and breach of a common law duty of care at law. It is accepted by the claimant that the breach of contract and breach of statutory duty claims are time-barred. The issue, on the present application, relates to the duty of care at law. In this regard the claimant relies on Section 14A of the Limitation Act 1980 which states as follows:

The claimant contends that this section applies with the consequence that there has been a three-year extension of time allowed for the purpose of bringing proceedings. In relation to that issue and the question of knowledge, what needs to be focused on is the knowledge of the claimant up until 8 November 2009, being three years before these proceedings were commenced.

The nature of the claim is set out in the Particulars of Claim and I refer in particular to the following paragraphs:

Before the court there has been evidence from Mr Woodd-Walker of the defendant’s solicitors, a statement from Mr Mather of the claimant’s solicitors, and two statements from Mr Khuraam Saeed together with various exhibits.

In relation to the issue of knowledge under Section 14A, what Mr Saeed says in his statement is mainly set out at paragraphs 21 to 26:

I deny that I had any such realisation. Had I known that such a claim was possible, I would have contacted the bank or sought advice immediately. In fact, I did not focus on the Barclays loan/collar transaction on a regular basis after entering into the transaction. My immediate concern was building the extension to the hotel and then developing the business further. Indeed, in the summer of 2007 we moved to Natwest in order to obtain finance to purchase an additional hotel, the Gatehouse Hotel.

The account at Natwest linked to the loan/collar transaction was Kay Hotel’s main business account. The account generally operated (we had a £30,000 overdraft at the time), and monies were coming in and out of the account all of the time. My recollection is that we had about 20 or so standing orders/debits on that account. Loan payments were also coming out of that account at a rate of about £4000 per month. I did not pay that much attention to every payment out, and would have been that alarmed by payment of a few thousand pounds leaving the account each month.

More importantly, there was nothing in the payments out to alert me to the fact I had been sold a product that I should not have been sold. Barclays did not sell me a product on the basis that I would never have to pay monies. They sold me a product which they said I had to take, which would protect me against rate rises, and which was held out to be suitable.

My expectation was also that the product would prove itself to my advantage over its entire life (indeed, I had already received some payments under the collar), and that the limited payments that I might have to make in the short term would be balanced by greater advantage later down the line.

There was also nothing in the payments out to alert me to the fact that Barclays should have advised me on a range of matters, including that we did not need to enter into the transaction, on the risks associated with the transaction, on alternative transactions, on the effect of the transaction on our credit rating, and on commission and termination payments under the transaction, or that Barclays should have used information appropriate to our level of sophistication to explain the transaction and any alternatives. The payments out, therefore, to my mind, were a result of short term extreme interest rate drops, which had nothing to do with my advice that Barclays (who were not even my current bankers) had given us.”

The principles to be applied in relation to Section 14A have been considered in a number of cases. I have been referred by the defendant to the decision of Sir Thomas Bingham MR (as he then was) in Spencer-Ward v Humberts [1995] 1 EGLR 123 and in particular what is said at page 125 L to M and page 126 M. In those passages the Master of the Rolls refers to the need for the claimant to be alerted to the factual rudiments of the claim and to know the facts needed to know how to take advice and to mount proceedings if so advised. He also refers to the importance of approaching the matter in a broad common sense way and not being too particular or clever.

I was also referred to the leading case of Haward v Fawcetts [2006] 1 WLR 682. The decision in that case is summarised in the headnote as follows:

The defendant submits that the legal position is helpfully summarised in Simpson: Professional Negligence and Liability as follows at 3.141.5:

It is apparent from the judgments in Haward v Fawcetts that it is important to seek to identify the essence of the act or omission to which the damage is attributable. One needs to identify, as it was put by Lord Scott, “the essence of the complaint of negligence”. A helpful summary of the approach to be adopted can be found in Hoffman LJ’s judgment in Broadley v Guy Clapham and Co [1994] All ER 439 at 449 where he said the section was designed:

In this case the defendant says that from the authorities one can derive the following: firstly that the claimant must have actual or constructive knowledge that he suffered some damage; secondly he must have actual or constructive knowledge that that damage was suffered as a result of relying upon advice given by the defendant; thirdly he must have actual or constructive knowledge sufficient to cause him to investigate whether there was some flaw or inadequacy in the advice given; fourthly he must have actual or constructive knowledge of the flaw or the inadequacy to a high level of generality - he must know of the essence of the claim, not all its particulars; fifthly, he does not need to know that the advice was negligent or in breach of duty or that he has a cause of action. That summary is given in the context of a claim for negligent advice, which is how the defendant characterises the claim in this case.

I turn then to consider the essence of the complaint in this case. The defendant says that the essence of the complaint is that the claimant (1) was told that interest rates would rise throughout the life of the product and (2) was given no or no adequate warning about the nature of the floor and the risk of payment liabilities. The claimant says that the essence of these matters were plainly known, or at least ought to have been known, to the claimant from the fact that for the period of about a year payments were being made by the claimant under the collar. It is pointed out that there are references in the Reply and to Mr Saeed’s statement to his actual knowledge of these payments but that on any view he ought to have been aware of these payments which were substantial in amount and which were paid over a considerable period of time. The fact of those payments, the defendant says, meant that the claimant knew or ought to have known that interest rates were not going to rise and had not risen throughout the life of the product and that not only was there a risk of payment liabilities, but actual payment liabilities. That, he said, was sufficient for him to investigate into the advice he was given.

The claimant, by contrast, summarises the essence of the complaint in a very different way. The claimant says that the essence of the complaint is that (1) he was not told of the risks of the product as a whole and that included issues as to payment on termination and the risk over the whole life of the product rather than particular periods within it; (2) he was not told that it was an unsuitable product for a person such as the claimant who was not a professional or sophisticated investor; (3) he was told that he was required to take out the product if there was to be a loan or draw down under the loan, and (4) he was not told particulars as to what would happen if the interest rate dropped and in particular how the floor worked rather than the mere fact that he might have to make payments.

If one seeks to analyse the essence of the complaint, I consider that it is one for mis-selling and the fact that the product was allegedly unsuitable for this claimant, and particularly so in the light of the advice which he says he was given.

Focusing on the Particulars of Claim, at paragraph 9 it is said:

That is clearly putting the case of suitability in fairly broad terms and it is not focusing on the fact that there might be some interest rate loss. It is acknowledging that there might be. The point being made is that the claimant was not meant to be exposed to “excessive” risk; that connotes some loss, but not excessive loss. So the mere fact that the claimant may have suffered some loss would not lead him to know that there was a lack of suitability as there described.

The Particulars of Claim in paragraph 14 also makes a number of assertions relating to suitability, in particular that the defendant:

Those complaints relate in essence to whether this was a suitable product to sell to the claimant and that suitability is by no means limited to the risk of having to make interest rate payments. The focus of the complaint is and is going to be suitability.

This is borne out by various documents to which I have been referred and upon which the claimant places reliance. These include a disclaimer which the claimant says he was not provided with, although the defendant says otherwise. It is to be noted that the disclaimer says:

Reliance is also placed on a note of conversations between the claimant and the review director for the defendant in which the review director is noted as saying:

That summarises the essence of the complaint being made in these proceedings. It is not a complaint which focuses simply on advice; still less is it a complaint which focuses on one aspect of that advice, namely interest rate loss. Furthermore, even if one was focusing on interest rate loss, one would be looking at an interest rate loss over the entire life of the product, which is some ten years, and the mere fact that there may be a period of interest rate loss would not necessarily indicate that there was excessive loss or excessive risk inherent in the product.

The defendant’s approach is far too narrow and does not correctly identify the essence of the complaint being made against it. If the complaint had simply been that the claimant had been advised that he would incur no interest rate loss, then one could understand that as soon as it became apparent that the claimant was having to pay interest rate losses, he would or should have known the facts necessary to investigate into such a claim. However, that is simply one facet of a much more complex claim; a claim which is not simply based on interest rates but which focuses on questions of suitability. In my judgment the mere fact that it was known that some interest payments were being made for a period of about a year does not give rise to an unanswerable case that the claimant knew or ought to have known sufficient facts to make the requisite investigation for the purpose of Section 14A.

For all those reasons I am satisfied that the claimant does have a real prospect of establishing that he is entitled to rely on Section 14A. In any event, one has to have regard for the fact this is a summary application and therefore not the type of application that should be determined if there are likely to be facts which need to be investigated at trial and which cannot be dealt with simply on the basis of witness statement evidence. This is a case where the facts will be important. It is quite right to point out, as the defendant does, that one is not just concerned with actual knowledge; constructive knowledge is sufficient under Section 14A(10). However, that section requires one to enquire into the knowledge which a person:

That is an objective test but it is a test that has to be considered in the context of the circumstances applicable to the person in question. In the present case that involves looking into the degree of Mr Saeed’s sophistication, what he had been told or not told, what his general state of knowledge was in 2008/2009 and what the more general state of knowledge was at that time, for example in relation to the anticipated future trend of interest rates. These are all matters that depend on a full factual picture and mean that the issue is not appropriate for summary determination.

For all those reasons, I conclude that this application must be dismissed.