Bailey & Anor v Barclays Bank Plc

This is my judgment upon two distinct but related applications: first, the defendant’s application, by application notice dated 21 March 2014, for an order to strike out parts of the particulars of claim or, in the alternative, for summary judgment; second, the claimants’ application, by application notice dated 6 June 2014, for permission to amend the particulars of claim.

Before discussing the issues that arise on the applications, I shall describe briefly the background to the proceedings and something of the procedural history of the case. In doing so, I shall refer to the parties as follows: the first claimant, as Mr Bailey; the second claimant, as the Company; the defendant, as the Bank. As I shall explain later in this judgment, it is expected that the parties will shortly file a proposed consent order for the disposal of Mr Bailey’s claim; the parties invite me to consider the two applications only as they concern the Bank and the Company, and I shall do so.

Mr Bailey is a businessman. Over the years he has conducted his business by means of several limited companies, one of which is the Company. Mr Bailey and the companies were customers of the Bank, with which they had borrowings. For several years the Bank’s Relationship Manager with responsibility for the accounts held by Mr Bailey and his companies was Mr Mark Standley. I shall summarise the main parts of the factual case put forward by the claimants; not all of it is accepted and some of it is disputed.

Mr Bailey and Mr Standley enjoyed a good social as well as professional relationship and were friends. In 2006 Mr Bailey began to discuss with Mr Standley the possibility of borrowing money from the Bank for the purpose of funding the purchase of premises at which one of his companies carried on business. At the same time Mr Bailey was expressing concern about the costs, in interest and charges, of the business overdraft on one of the companies’ accounts. In that context, in late 2006 and early 2007 Mr Standley did several relevant things on behalf of the Bank. He agreed in principle to lend Mr Bailey £1.26 million for the purchase of the business premises. He suggested that the existing overdraft borrowings be converted into a loan to Mr Bailey for a fixed term at a lower rate of interest. He warned Mr Bailey that interest rates would rise sharply: they were “going to go through the roof”. And he recommended to Mr Bailey that he protect himself against future rises of interest rates by entering into a rate swap agreement. Mr Bailey was not familiar with such hedging products, but after Mr Standley had given him some explanation he understood that the proposed swap agreement would be a kind of insurance policy against future rises in the interest rate.

On 1 February 2007 Mr Standley visited Mr Bailey at his office, bringing with him a “Customer Agreement”, which at his request Mr Bailey signed “to get the ball rolling with the Swap Agreement”. Also on that occasion, Mr Bailey spoke by telephone for the first time to another employee of the Bank, Mr Paul Shaftoe. Mr Shaftoe was an investment adviser approved by the Financial Services Authority under Part III of the Financial Services and Markets Act 2000 (FSMA) for the purpose of the specified controlled function of giving investment advice. Mr Standley was not so approved. After the telephone conversation, Mr Shaftoe sent to Mr Bailey a document (“the February 2007 Presentation”), which described three products relating to interest rate management: an interest rate swap; a cancellable interest rate swap; and an interest rate cap.

In April 2007 Mr Bailey took a Treasury Loan from the Bank for £1.26 million at a marginal rate of 1.1% over base rate, repayable over ten years. The loan agreement gave Mr Bailey the right to request the Bank to quote a fixed interest rate for a fixed period. Also in April, the Bank sent to Mr Bailey an offer, addressed to the Company, for an overdraft facility of £650,000 at a marginal rate of 1.75% over base rate. When Mr Bailey queried why the offer was made to the Company and not to him, and why it was for an overdraft and not for a loan as had been discussed, Mr Standley told him that the Bank would make him a personal loan of £650,000, provided he entered into an interest rate swap agreement for a notional figure of £2 million, which would cover both the Treasury Loan and the further loan. Mr Standley repeated his earlier advice that interest rates were going to rise and assured him that the swap agreement would provide protection against such rises.

Accordingly on 1 May 2007 a meeting took place between Mr Bailey, Mr Standley and Mr Shaftoe. Mr Standley repeated the advice and recommendations he had given previously. Mr Shaftoe did not dissent from anything that Mr Standley said; he positively agreed with his prediction regarding rises of the interest rate and predicted that there would be a long period of sustained increases in interest rates. He specifically recommended that Mr Bailey take the first of the three products mentioned in the February 2007 Presentation, namely, the interest rate swap. On 4 May 2007 Mr Bailey entered into the Swap: it was for a notional amount of £2 million, non-amortising, at a fixed rate of 5.64% for a fixed term of 10 years.

Mr Bailey makes a number of complaints about the suitability of the Swap and the manner in which he was sold it; I refer to some of these more specifically below. Here I may mention two specific points. First, he says that it was disastrous, because it tied him into the transaction at a time when, far from “going through the roof”, interest rates were reducing to historically low levels, with the result that he was paying large amounts of money each month to the Bank. The tie-in was achieved by the provision in the Swap agreement of liability for payment of breakage charges if the agreement were terminated prematurely. Second, the notional amount for the purpose of the Swap was far in excess of his actual borrowings—he was, in effect, paying interest on non-existent debts—because the loan for £650,000 was not made to him until January 2009. (I ought to mention that the Bank’s case is that discussions about a loan for £650,000 did not commence until late 2008 and that the notional figure in the Swap was selected at the specific request of Mr Bailey.) It is Mr Bailey’s case that from 2009 onwards he made “one complaint after another”, first to Mr Standley and then to his successor, Mr McHale, concerning the high cost to him of the Swap agreement.

In 2010 Mr Bailey took advice from Deloitte LLP in connection with the proposed restructuring of his borrowings for tax-management purposes, which was to involve the transfer of properties from his personal portfolio to the Company. In January 2011 representatives of the Bank met with Mr Bailey and representatives of Deloitte. In his witness statement dated 4 March 2014 Mr Bailey says this concerning that meeting:

“Mr McHale pointed out that the Agreement with the Bank for the loan had to be with the same borrower under the Rate Swap Agreement, and so made it clear that the Bank could not transfer the loan to the Company unless the Company also took over the Rate Swap Agreement. The only alternative, he said, was for me to break the Swap Agreement, but that this would involve me in paying a large breakage fee. I certainly did not want the Rate Swap Agreement to be transferred to [the Company], and I did not ask for this to be done. I wanted to end it altogether.”

Under cover of a letter dated 17 March 2011, which was headed “Classification as a Retail Client and Terms of Business—Response Required”, the Bank provided to the Company its Terms of Business for Retail Clients (“Retail Client Agreement”), to which I shall refer below. On 4 April 2011 “the Swap was novated by being transferred from [Mr Bailey] to [the Company] in order to avoid substantial break costs, which would otherwise have arisen from early termination of the Swap” (particulars of claim, paragraph 65). On 12 April 2011 the Bank issued two documents: a Rate Swap Confirmation, and a Novation Confirmation. Mr Bailey signed both of those documents, on his own behalf and on behalf of the Company, on 14 April 2011. Thereafter the Company has been subject to the Swap on terms identical to those to which Mr Bailey was formerly subject.

Against that general background, I may summarise in broad terms the case that is advanced in the particulars of claim in their present form.

The Bank’s application is for the summary determination, by strike-out or Part 24 judgment, of certain parts of the proceedings: (1) the entire claim of the Company; (2) paragraphs 52 and 53 of the particulars of claim, with the corresponding parts of the prayer—that is, the claim based on breach of fiduciary duty; (3) the claims for a declaration of unenforceability under section 27 of FSMA, and rescission of the Swap. The result would be to leave extant only a claim for compensation by Mr Bailey for breaches of statutory, contractual and common law duties.

The application for permission to amend the particulars of claim may fairly be seen as an attempt to address matters arising on the Bank’s application. It relates solely to the addition of an entirely new basis of claim on behalf of the Company, extending to some forty-seven new paragraphs and eighteen pages of text. The proposed amendments may be summarised as follows.

I need to say something about Mr Bailey’s position in these proceedings. On 29 June 2012 the Bank agreed with the Financial Services Authority, whose relevant functions have since been taken over by the Financial Conduct Authority, to carry out a review of its past sales of interest rate hedging products to those small businesses which were classified as “non-sophisticated”. Mr Bailey was a non-sophisticated customer for the purposes of the review and he chose to participate in it; for that reason these proceedings were stayed for a period earlier this year. Having reviewed the sale of the swap to Mr Bailey in 2007, on 14 April 2014 the Bank’s Interest Rate Hedging Resolution Team wrote to him with an offer of redress. The letter stated that the review had determined “that the Bank did not meet the necessary standards and principles at the point of sale [and] that the Bank should terminate the [swap] with effect from the date of the original sale.” The letter also contained an offer of monetary compensation.

Shortly before the hearing of these applications, Mr Bailey wrote in acceptance of the redress offer. It will give to him substantially all of the relief that he sought to achieve in these proceedings. Although his claim has not yet been formally discontinued, it is expected that a consent order setting out terms of discontinuance will be filed very soon. For this reason, the issues before me on both applications relate only to the claim as it is advanced or proposed to be advanced by the Company.

The first basis of the Bank’s application is r. 3.4(2)(a), which gives to the court power to strike out a statement of case if it appears to the court that the statement of case discloses no reasonable grounds for bringing the claim. Insofar as it relies on this basis, the Bank says that, on the basis of the facts alleged in the particulars of claim, the case brought against it is unwinnable as a matter of law.

The second basis of the Bank’s application is r. 24.2, which gives to the court power to give summary judgment against a claimant on the whole of a claim or on a particular issue if (a) it considers that the claimant has no real prospect of succeeding on the claim or issue and (b) there is no other compelling reason why the case or issue should be disposed of at trial. In deciding this question, the court does not conduct a mini-trial. The test is not whether or not the claim will probably fail at trial; it is whether or not the claim has a more than merely fanciful chance of succeeding. “The criterion which the judge has to apply under CPR Pt 24 is not one of probability; it is absence of reality”: Three Rivers D.C. v Bank of England (No.3) [2001] UKHL 16, [2001] 2 All E.R. 513, per Lord Hobhouse of Woodborough at [158]. However, if the prospects of success of the claim turn on a point of law, the court should decide that point of law, if it is satisfied that it has before it all the evidence necessary for that purpose and that the parties have had sufficient opportunity to deal with the point in argument. On the other hand, where the case raises an issue of law in a developing area, it is likely to be preferable to leave the matter for determination at trial; the development of the law is on the whole better accomplished in the context of actual rather than hypothetical facts.

As for the claimants’ application, the court has a power to give permission for the amendment of the particulars of claim. The power, like any discretion under the Civil Procedure Rules 1998, must be exercised in accordance with the overriding objective in Part 1 of the CPR. The present application does not raise considerations of prejudice or of efficient case management. Rather it turns mainly on the principle that the court should not give permission for an amendment unless it is satisfied that the case put forward by the amendment has a real prospect of success.

I shall discuss the Company’s application for permission to amend and then turn to consider the Bank’s application.

It is convenient to begin with the Company’s claims based on alleged breaches of the COBS Rules. These claims raise two broad questions: first, whether the Bank was in breach of any of the COBS Rules; second, whether any such breaches give the Company a cause of action.

For the purposes of this judgment, it is unnecessary to set out at length the regulatory framework relating to the provision of financial services. Some context will however assist a consideration of the documents and the arguments. A key provision, to which I shall refer again below, is section 19 of FSMA:

“(1)

No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is—

(a)

an authorised person; or

(b)

an exempt person.

(2)

The prohibition is referred to in this Act as the general prohibition.”

One of the major ways of regulating the conduct of business of authorised persons was by means of the Conduct of Business rules (“COB”). COB was introduced to implement the Investment Services Directive 93/22/EEC. With effect from 1 November 2007, these rules were replaced by the Conduct of Business Sourcebook (“COBS”), which was introduced by way of implementation of the Markets in Financial Instruments Directive 2004/39/EC (MiFID). Accordingly it was the new version that applied at the date of the “novation” of the Swap to the Company. An important feature of MiFID is the importance it attaches to the investment firm’s duties to take steps to ascertain the level of its clients’ knowledge and experience in the relevant investment field. This is reflected in chapter 3 of COBS, which classifies clients in three categories, requiring in turn increasing levels of protection: professional clients; eligible counterparties; and retail clients. Retail clients, those requiring the highest level of protection, are those who are neither professional clients nor eligible counterparties. A firm may choose to classify a client as a retail client on its own initiative; there is nothing to prevent a firm from treating a client as requiring the highest level of protection. As the Bank stated in its letter of 17 March 2011, it classified the Company as a retail client; therefore it provided the Company with the Retail Client Agreement: see paragraph 10 above.

The Retail Client Agreement stated that, together with any supplemental agreement that might be entered into, it comprised the terms of the contracts between the Company and the Bank. Clause 1.1 stated that the Bank was authorised and regulated by the FSA. Clause 1.2 stated that the Bank would treat the Company as a retail client for the purposes of the FSA Rules. (Those Rules would include the COBS Rules.) Some further relevant provisions of the Retail Client Agreement were as follows.

“1.4

Subject to Applicable Regulations: This Agreement and all Transactions are subject to Applicable Regulations. If there is any conflict between this Agreement and any Applicable Regulations, the latter will prevail. Further, if there is any conflict between this Agreement and the terms of any Transaction, the latter will prevail.”

“Applicable Regulations” were defined in clause 12 to mean the rules of the FSA or any other relevant regulatory authority and the Rules of the relevant Market and all other applicable laws, rules and regulations. They therefore included the COBS Rules. “Transaction” was defined widely and therefore clearly included the “novation”.

“2.1

Non-advised services: Except as set out in clause 2.2 below, we will not provide any advice to you in relation to a Transaction. You confirm that the information that you have provided and provide from time to time to allow us to assess the appropriateness of the activities and services we are providing to you is accurate and complete.

2.2

Advice: Notwithstanding clause 2.1 above, we may provide you with advice in relation to Transactions, where we have notified you in writing that we will do so. If we do give such advice, you confirm that the information that you have provided and provide from time to time to allow us to assess the suitability of the activities and services we are providing to you is accurate and complete.”

“9.9

Limitation of Liability: We shall not be liable to you for any partial or non-performance of our obligations hereunder by reason of any cause beyond our reasonable control … Nothing in this Agreement will exclude or restrict any duty or liability we may have to you under the regulatory system (as defined in the FSA Rules), which may not be excluded or restricted thereunder.”

Reference should also be made to the letter of 17 March 2011, under cover of which the Retail Client Agreement was sent to the Company. Under the heading “Regulatory Matters” there were the following passages:

“1.

Non-advisory service

Please treat this Letter as written notice that Barclays Capital will be providing this service to your Business on a non-advisory basis. Barclays Capital will not provide you with any personal recommendations. Barclays Capital will not assess whether the relevant product or services meets the investment objectives of your Business.

As a result, Barclays Capital is not required to assess the suitability of the product or the service provided or offered to you. Consequently, in the event you are unhappy with a product that you have entered into with Barclays Capital, you will not benefit from the FSA rules on assessing suitability.

This means that you must determine on your own behalf or through independent financial advice the merits, terms, conditions and risks of the risk management product or the service provided or offered to you, and the potential impact on your Business. You may also wish to seek independent legal, accounting or tax advice on the product or service provided or offered to you.

…

2.

Notice of Categorisation

In order to comply with FSA regulatory requirements, Barclays Capital is required to notify you of your client categorisation prior to providing any risk management products or services to you.

Based on the information available to Barclays Capital, Barclays Capital has categorised you as a Retail Client.”

The first breach of the COBS Rules alleged in the proposed amended particulars of claim is a breach of COBS 2.1.1R, which provides:

“(1)

A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client’s best interests rule).

(2)

This rule applies in relation to designated investment business carried on: (a) for a retail client; and (b) in relation to MiFID or equivalent third country business, for any other client.”

The alleged breach of this rule is as follows:

“[T]he Defendant failed to act fairly in requiring the novated swap agreement, in that it could not be fair to require such a transaction on such disadvantageous terms and in circumstances where breakage fees were not applicable on a novation between the First and Second Defendant and in any event could have been waived.”

As to the allegedly disadvantageous terms of the Swap for the Company, the allegation depends entirely on ignoring reality. The “novation” did not take place because Mr Bailey or (which is the same thing for practical purposes) the Company believed that the terms of the Swap were advantageous for them, far less because of any advice to that effect given by the Bank to the Company. On the claimants’ own case, it took place in circumstances where Mr Bailey regarded the Swap as a bad thing, was complaining about it regularly to the Bank, and wanted to extricate himself from it. Similarly, to say that the Bank “required” the Swap to be novated to the Company is untrue in any relevant sense. Mr Bailey wanted to transfer the loan to the Company, and the Bank simply told him that they required the loan and the Swap to remain together. It was a matter for Mr Bailey whether to transfer the loan to the Company. He had his own reasons for doing so; but, if he did so, the Bank required that either he pay the breakage charges or the Company take on the Swap. The statements in the Retail Client Agreement and in the letter of 17 March 2011 making it clear that the Bank was acting on a non-advisory basis were not only clear but precisely in accord with reality.

The second allegation, that the Bank wrongly stated that breakage charges would be payable if Mr Bailey broke the Swap, cannot succeed for at least three reasons.

The third allegation, that the Bank acted unfairly because it could have waived the breakage charges is unarguable for at least two reasons.

The second COBS Rule alleged to have been breached is COBS 9.2.1R:

“(1)

A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client.”

The alleged breach, as set out in paragraph 65M and paragraph 65FF, is that:

“[T]he Defendant failed to take reasonable steps to ensure that the decision to trade was suitable, in that it could not be suitable for the Second Claimant to enter into a derivative transaction on such disadvantageous terms and effects.”

The third COBS Rule alleged to have been breached is COBS 10.2.1R:

“(1)

When providing a service to which this chapter applies, a firm must ask the client to provide information regarding his knowledge and experience in the investment field relevant to the specific type of product or service offered or demanded so as to enable the firm to assess whether the service or product envisaged is appropriate for the client.

(2)

When assessing appropriateness, a firm:

(a)

must determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or service offered or demanded;

(b)

may assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client.”

The alleged breach is set out as follows:

“[T]he Defendant failed to take reasonable steps to ensure that the transaction was appropriate, in that it could not be appropriate for the Second Claimant to enter into a derivative transaction on such disadvantageous terms and effects.”

For the Bank, Mr Hanke points out that the proposed amended particulars of claim seek to use COBS 10.2.1R as an alternative equivalent to COBS 9.2.1R, that is, as directed to the merits of the Swap transaction for the Company. In fact, however, the application and focus of the two rules are quite different. Chapter 9 of COBS applies in cases of personal recommendation, and COBS 9.2.1R is concerned with the merits of the personal recommendation. Chapter 10, by contrast, has a different application:

“10.1.1R This chapter applies to a firm which provides investment services in the course of MiFID or equivalent third country business other than making a personal recommendation and managing investments.

10.1.2R This chapter applies to a firm which arranges or deals in relation to a non-readily realisable security, derivative or a warrant with or for a retail client and the firm is aware, or ought reasonably to be aware, that the application or order is in response to a direct offer financial promotion.

10.1.3R This chapter applies to a firm which assesses appropriateness on behalf of another MiFID investment firm so that the other firm may rely on the assessment under COBS 2.4.4.R (Reliance on other investment firms: MiFID and equivalent business).”

In his oral submissions, Mr Berkley acknowledged that COBS 10.2.1R related to questions of knowledge and understanding. He also accepted that the Company, through Mr Bailey, understood what was involved in the Swap and knew the risks in respect both of low interest rates and of breakage charges. He submitted, however, that the real question was “whether the Company got what it actually wanted” and that, although the state of Mr Bailey’s knowledge might be relevant to issues of loss and causation, it did not affect questions of liability in the light of the mandatory terms of the rule.

I reject that ambitious submission. The mind of the Company was Mr Bailey, who had been privy to the Swap for several years and was well aware—on his case, painfully aware—of the risks attendant upon it. The Company’s case seeks to ignore this obvious fact and to rely on the mandatory nature of the rule. There are at least two compelling objections to that case.

The fourth COBS Rule alleged to have been breached is COBS 11.2.1R:

“A firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors.”

The “execution factors” are defined in the glossary to mean: “price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order”. The alleged breach of this rule is as follows:

“[T]he Defendant failed to take reasonable steps to achieve the best possible result when taking into account the execution factors. In particular, similar products were available at the time of the transaction on far better terms and rates.

This allegation is misguided and rests on a misunderstanding of the Rule. It is directed not to the merits of the transaction or the decision to enter into it but to the way in which the decision to enter into the transaction is implemented. As Blair J said in Första AP-fonden v Bank of New York Mellon SA/NV [2013] EWHC 3127 (Comm) at [274]:

“The duty of best execution has to do with the mechanics of acquiring or selling securities, not the merits or otherwise of the trade. … As [the defendant] says, the duty of best execution is a duty that, by definition, applies only on the execution of a client order. It has nothing to do with the underlying investment decision.”

For these reasons, the proposed allegations of breach of the COBS Rules would have no realistic prospect of success. For that reason alone they ought not to be allowed. Although it is strictly unnecessary to proceed to consider the point, however, I would also refuse permission on the ground that, even if it were arguable that there had been a breach of the Rules, it was not arguable that the breaches gave rise to a right of action in the Company, for the reasons set out below.

In paragraphs 65R to 65FF of the draft amended particulars of claim, the Company seeks to advance a claim that it is entitled to a right of action for breach of the COBS Rules by reason of the provisions of FSMA and the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (“the 2001 Regulations”). That case, which is formulated in fifteen paragraphs and nearly six pages of text, can I think be summarised in a way that makes its logic clear.

The starting point is section 150 of FSMA, which was in force at the relevant time; corresponding provisions are now contained in section 138D. The following provisions of section 150 are material for present purposes:

“(1)

A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention …

(3)

In prescribed cases, a contravention of a rule which would be actionable at the suit of a private person is actionable at the suit of a person who is not a private person …

(5)

‘Private person’ has such meaning as may be prescribed.”

The 2001 Regulations contain the following relevant paragraphs:

“3.

(1) In these Regulations, ‘private person’ means—

(a)

any individual, unless he suffers the loss in question in the course of carrying on—(i) any regulated activity; or (ii) any activity which would be a regulated activity apart from any exclusion made by article 72 of the Regulated Activities Order (overseas persons); and

(b)

any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind; …”

“6.

(1) The definition of ‘private person’ in regulation 3 is prescribed for the purposes of section 150(5) of the Act (and so the contravention by an authorised person of a rule is actionable at the suit of a person who falls within that definition and who suffers loss as a result of that contravention).

(2) A case where any of the conditions specified by paragraph (3) is satisfied is prescribed for the purposes of section 150(3) of the Act (and so in such a case the contravention of a rule is actionable at the suit of a person who is not a private person).

(3) The conditions specified by this paragraph are that—

(a)

the rule that has been contravened prohibits an authorised person from seeking to make provision excluding or restricting any duty or liability;

(b)

the rule that has been contravened is directed at ensuring that transactions in any security or contractually based investment (within the meaning of the Regulated Activities Order) are not effected with the benefit of unpublished information that, if made public, would be likely to affect the price of that security or investment;

(c)

the action would be brought at the suit of a person (who is not a private person) acting in a fiduciary or representative capacity on behalf of a private person and any remedy would be exclusively for the benefit of that private person and could not be effected through an action brought otherwise than at the suit of the fiduciary or representative.”

The Company’s primary contention is that it is a private person within section 150(1) of FSMA and paragraph 3(1)(b) of the 2001 Regulations, on the ground that it has not suffered the losses of which it complains “in the course of carrying on business of any kind”.

The meaning of “private person” in this context was considered by David Steel J in Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2012] 1 C.L.C. 191. The claimant, Titan, was a manufacturer of steel wheels for the “off-highway” vehicle industry. Because of the location of its market, it needed to sell Euros and purchase Sterling on a regular basis. It alleged that the defendant bank, RBS, had mis-sold to it two currency swaps. There was a trial of preliminary issues, including the issue whether Titan was a “private person” as defined by the 2001 Regulations. Titan contended that its business was the manufacture of steel wheels; it was not engaged in the business of financial services and, though it used hedging products, it did not do so for trading purposes but only for purposes incidental to its manufacturing business. It submitted that the words “unless he suffers the loss in question in the course of carrying on business of any kind” in paragraph 3(1)(b) ought to be interpreted narrowly. In this regard, it relied on the legislative history of the 2001 Regulations, decisions on other legislation and “matters emerging from Hansard and other travaux preparatoires”: see [49]. RBS, on the other hand, submitted that paragraph 3(1)(b) should be construed broadly; it pointed to the words “business of any kind”.

In a thorough and careful judgment, David Steel J rejected Titan’s contention and held that the words “unless he suffers the loss in question in the course of carrying on business of any kind” bore a wide meaning. At [62] – [63] he held that Titan had failed to establish any of the preconditions for reliance on statements made in Parliament as an aid to construction of statutory provisions, as explained by Lord Bingham of Cornhill in R v Secretary of State for the Environment, Transport and the Regions, ex parte Spath Holme Ltd [2001] 2 AC 349. He then proceeded to consider the authorities relied on by Titan as having been decided under supposedly analogous statutory provisions. He held that they did not dictate a restrictive construction of the relevant words in paragraph 3(1)(b):

“68.

The overarching difficulty with treating those authorities as determining the meaning of ‘in the course of carrying on business of any kind’ is that the phrase in the FSMA regulations is different from the phrase under consideration in these cases, namely ‘in the course of a business'. It renders the additional words ‘of any kind’ redundant.

69.

There are various additional factors which contradict the submission made by Titan:

(i)

The context is very different. The regulations seek to draw a distinction between natural and corporate persons and between regulated activity and other business.

(ii)

The authorities cited above are concerned with consumer protection. The protective purpose of the regulations in contrast is to stem ‘strategic’ claims against those conducting regulated activity (all the while preserving recourse to claims in tort or contract).

(iii)

The phrase ‘in the course of business' has been held in a different context to justify construction ‘at their wide face value’: Stevenson v Rogers [1999] 1 QB 1028.

70.

I recognise that corporate entities who sustain losses as a result of the purchase of financial products will usually be in business of some kind. As the 1990 consultation paper states, charities and similar bodies are the more obvious exceptions. It follows that a wide interpretation of reg. 3(1)(b) would exclude little in terms of liability of a regulated body. But I prefer the view that the words can properly be construed as having their wide meaning as contended for by the Bank.”

The decision in Titan Steel Wheels Ltd v Royal Bank of Scotland plc is directly on point. For the Company, Mr Berkley rightly accepts that the case he advances under paragraph 3(1)(b) depends on the contention that the case was wrongly decided on this point. He seeks permission to amend the particulars of claim in this respect in order that he may advance that contention at trial and if need be before the Court of Appeal.

I refuse permission to amend to plead reliance on paragraph 3(1)(b). The case sought to be advanced is contrary to the law as stated in the Titan Steel Wheels case, and in my judgment there is no proper basis on which I should hold the point of law to be reasonably arguable. First, I respectfully agree with the reasoning of David Steel J and with the construction he adopted. Before me, Mr Berkley sought to rely on Ministerial statements in Parliament in support of his proposed construction of paragraph 3(1)(b). Those efforts take the matter no further than the similar efforts of Titan, and they are answered sufficiently by David Steel J’s conclusions at [63]. Indeed, reliance on the statements seems to me to be an attempt to explain the clear by the less clear. Second, the decision in the Titan Steel Wheels case was made upon a full trial of the relevant issue and after consideration of detailed submissions. Third, the decision has been treated as authoritative and its reasoning has been approved in subsequent cases. The decision was followed in Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7 (Comm), where Flaux J (who, it may be noted, was dealing with applications under r. 3.4 and r. 24.2 and was therefore applying the same tests that I must apply) said at [98] that there were no grounds for considering it to have been wrongly decided. The decision in the Titan Steel Wheels case was also considered by Lord Hodge in the Court of Session in Grant Estates Ltd v Royal Bank of Scotland Plc [2012] CSOH 133, where the issue arose for determination whether the pursuer, Grant Estates Ltd, was a “private person” for the purposes of section 150 of FSMA and regulation 3 of the 2001 Regulations, both of which applied in Scotland. Lord Hodge substantially agreed with the reasoning of David Steel J and adopted a broad construction of the words “unless he suffers the loss in question in the course of carrying on business of any kind” in paragraph 3(1)(b).

In the alternative to its primary contention, the Company claims to be entitled to bring a claim pursuant to section 150(3) and paragraph 6(2) and (3)(a), on the ground that the Bank contravened a rule that prohibited it from seeking to make provision excluding or restricting any duty or liability to the Company. The principal rule said to have been contravened (draft amended particulars of claim, paragraph 65AA) is COBS 2.1.2R:

“A firm must not, in any communication relating to designated investment business, seek to:

(1)

exclude or restrict; or

(2)

rely on any exclusion or restriction of;

any duty or liability it may have to a client under the regulatory system.”

As I understand it, the Company also contends (draft amended particulars of claim, paragraphs 65BB and 65CC) that the Bank breached COBS 2.1.1R (see paragraph 25 above) by reason of its contravention of the Guidance to that Rule in COBS 2.1.3(1)G:

“In order to comply with the client’s best interests rule, a firm should not, in any communication to a retail client relating to designated investment business:

(1)

exclude or restrict; or

(2)

rely on any exclusion or restriction of;

any duty or liability it may have to a client other than under the regulatory system, unless it is honest, fair and professional for it to do so.”

Despite the length and detail of the proposed amendment and the fact that it has been through at least one further revision, the Company’s case as to the alleged breaches of these Rules remains obscure. Paragraph 65DD of the draft amended particulars of claim relies on exclusions in the Rate Swap Confirmation and in the Retail Client Agreement (paragraph 10 above), though it does not set out the exclusions or further identify which provisions are being referred to. In his oral submissions Mr Berkley repeatedly said that there was no express exclusion and that he relied on the terms of the Swap Confirmation issued by the Bank to Mr Bailey in 2007, as set out in paragraph 35 of the Defence. As that particular provision was not part of a transaction with the Company, it is difficult to see how it has any bearing on the case. However, the Rate Swap Confirmation dated 12 April 2011, and signed in acceptance by Mr Bailey on 14 April 2011, has relevantly similar provisions.

The 2011 Rate Swap Confirmation contains the following passages:

“Each party represents to the other that (absent a written agreement between the parties that expressly imposes affirmative obligations to the contrary):

(a)

Non-Reliance: It is acting for its own account, and it has made its own independent decisions to enter into the Transaction and as to whether the Transaction is appropriate or proper based upon its own judgement and upon advice from such advisers as it has deemed necessary. It is not relying on any communications (written or oral) of the other party as investment advice or as a recommendation to enter into the Transaction, it being understood that information and explanations related to the terms and conditions of the Transaction shall not be considered investment advice or a recommendation to enter into the Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of the Transaction.

…

(c)

Status of Parties: The other party is not acting as a fiduciary or an adviser to it in respect of the Transaction.”

The Retail Client Agreement contained provisions as already set out at paragraph 23 above.

It is not reasonably arguable that the provisions of the Rate Swap Confirmation or of the Retail Client Agreement were in breach of COBS 2.1.2R. They did not purport to exclude or restrict duties or liabilities arising under the regulatory system. On the contrary: the Retail Client Agreement made it clear that it was not purporting to exclude or restrict such liabilities.

As I understood his argument, Mr Berkley submitted that the matter went deeper. The objection was not that the Bank purported to exclude or restrict regulatory liabilities or duties that would otherwise arise on a basis acknowledged to exist. It was that the Bank, by the terms of its documents, had sought to falsify the factual position and, by contractual agreement, establish the existence of a state of affairs that did not exist. One aspect to this was the attempt to establish as a basis of relations that the Bank was providing a non-advisory service and made no personal recommendations. The other aspect was the attempt to establish by contract the absence of a fiduciary relationship. Both of these were attempts to establish by contract a state of affairs that was contrary to the truth.

For reasons already sufficiently indicated, the contention that the references to a non-advisory service and to the absence of a personal recommendation are a falsification of the true state of affairs is quite hopeless. There is no prospect at all of the Company establishing a breach of COBS 2.1.2R. For essentially similar reasons there is no prospect of the Company successfully relying on COBS 2.1.3(1)G to establish a breach of COBS 2.1.1R. In all the circumstances, I do not propose to burden this judgment with a consideration of the consequences of a finding that there was an arguable case that either rule had been broken.

Mr Berkley submitted that it was properly arguable that breaches of the COBS Rules were actionable by the Company in contract, even if there was no statutory right of action. This point, again, does not strictly arise for consideration, in view of my rejection of the allegations of breach of the COBS Rules. I would however have refused permission to amend to plead reliance on contract.

The Company’s case is set out in paragraph 65B of the proposed amended particulars of claim, which sets out provisions in the Retail Client Agreement; see paragraph 23 above. Mr Berkley submitted that it was at least arguable that those provisions incorporated the applicable COBS Rules as contractual obligations of the Bank. In support of this submission, he relied on two decisions at first instance. The first was that of Thomas J (as he then was) in Larussa-Chigi v CS First Boston Ltd [1998] C.L.C. 277. One of the preliminary issues for determination by the judge was whether the Bank of England’s London Code of Conduct was incorporated into the contract between the parties. One of the contractual documents contained this passage:

“None of your transactions with us in these instruments will be ... within the investor protection scheme established by the Act. Instead they will be governed by a Code of Conduct established by the Bank of England, to which we will adhere.”

At 294 Thomas J said that these words were “amongst the clearest words that could be chosen by parties to indicate that the transactions in question were to be governed by the code” and he held that they were effective to incorporate the provisions of the Code into the contract. Another contractual document provided as follows:

“All transactions in Securities shall be subject to … the rules and regulations of … the Bank of England so far as they are applicable and to applicable law so that: (a) if there is any conflict between (i) these Terms and Conditions and (ii) any such rules, customs and applicable law, the latter shall prevail”.

In the light of the earlier provision, Thomas J held that these provisions also had the effect of incorporating the Code of Conduct into the contract. He said at 295:

“Mrs Chigi argued that, read naturally, para 1.4 made the transaction subject to the applicable regulation of the Bank of England—the London Code of Conduct—and that was to prevail over First Boston’s standard terms and conditions. First Boston contended that the purpose of cl. 1.4 was clear. It did not have the effect contended for by Mrs Chigi but was intended to ensure that if there was any conflict between the general terms of business and any regulatory provision, First Boston would be entitled to comply with that regulatory provision. It may be that First Boston intended the clause to have the limited effect for which they contended. However, it did not naturally read in that way and in my judgment Mrs Chigi is correct in her contention that the transactions were made subject to the applicable regulations of the Bank of England, namely the Code of Conduct.”

The other case relied on by Mr Berkley was the decision of Toulson J (as he then was) in Brandeis (Brokers) Ltd v Herbert Black, American Iron and Metal Company Incorporated (2001, unreported). The claimant’s Terms of Business letter, which was a contractual document, said: “These Terms and all other agreements and arrangements relating to the subject matter of these Terms are subject to the SFA Rules.” The judge said:

“19.

Paragraph 1 of Brandeis’s terms of business letter has to be read in conjunction with the remainder of the document. I would expect that a businessman reading such a letter, which stipulated at the beginning that ‘These Terms and all other agreements and arrangements relating to the subject matter of these Terms are subject to the SFA Rules’ and then proceeded to set out the services to be provided, would understand it as meaning that both parties would be bound by the SFA Rules insofar as they affected the services which were to be provided under the agreement. I consider that the arbitrators were therefore right in their conclusion that the relevant contracts incorporated the SFA Rules which they identified.”

If it had been necessary, I would have rejected the argument that the COBS Rules were incorporated into the contract between the Company and the Bank and would have refused permission to amend on that ground.

The alternative argument advanced by Mr Berkley, with reference to paragraphs 65P and 65Q of the proposed amended particulars of claim, is that there was (by reason of section 13 of the Supply of Goods and Services Act 1982) an implied term of the contract between the parties that the Bank would exercise reasonable skill and care in providing services under the contract, and that the COBS Rules represented the appropriate standard with which the Bank would have to comply if it were to act with reasonable care and skill.

This argument cannot be sustained on the facts of the case, in view of what I have already said concerning the scope of the application of the COBS Rules to the Bank’s conduct vis-à-vis the Company. In short, if the Bank was not in breach of the COBS Rules, the Company cannot rely on such breach as evidence of lack of reasonable skill and care.

Paragraphs 65GG to 65OO of the proposed amended particulars of claim allege that the Company is entitled to rescission of the Swap, damages and/or equitable compensation on the ground that the Bank’s conduct involved economic duress, unconscionable conduct and misrepresentation. The conduct relied on is the Bank’s insistence that, if Mr Bailey broke the Swap Agreement without procuring its novation to the Company, it would insist on payment of breakage charges. The Company says that no breakage charges were properly payable.

These ways of putting the case are wholly unarguable, not only because the Bank was correct to say that breakage charges would be payable but because, even if the Bank had been wrong on the point, there is no real prospect of establishing that its conduct would have impeached the Swap or given a claim for damages or compensation.

I deal first with the question of breakage charges. The Rate Swap Confirmation dated 12 April 2011 made clear that the “novated” Swap was to be subject to the terms of the ISDA (International Swaps and Derivatives Association Inc) Master Agreement. Before me, argument focussed on section 5 of the Master Agreement, headed “Events of Default and Termination Events”, which contained the following provisions (the underlining is mine):

“(a)

Events of Default. The occurrence at any time with respect to a party or, if applicable, any Credit Support Provider of such party or any Specified Entity of such party of any of the following events constitutes an event of default (an “Event of Default”) with respect to such party:-

…

(viii)

Merger Without Assumption. The party or any Credit Support Provider of such party consolidates or amalgamates with, or merges with or into, or transfers all or substantially all its assets to, another entity and, at the time of such consolidation, amalgamation, merger or transfer:

(1)

the resulting, surviving or transferee entity fails to assume all the obligations of such party or such Credit Support Provider under this Agreement or any Credit Support Document to which it or its predecessor was a party by operation of law or pursuant to an agreement reasonably satisfactory to the other party to this Agreement; or

(2)

the benefits of any Credit Support Document fail to extend (without the consent of the other party) to the performance by such resulting, surviving or transferee entity of its obligations under this Agreement.”

The argument before me proceeded on the shared premiss that the application of section 5(a)(viii) to the arrangements between Mr Bailey and the Company turned on the question whether the Company was “another entity” for the purposes of paragraph (viii); see the underlined text above. Mr Berkley submitted that it was not, because it was a Credit Support Provider and the relevant “another entity” had to be neither a party nor a Credit Support Provider. Mr Hanke accepted for the purposes of the argument that the Company was indeed a Credit Support Provider, as being a guarantor of Mr Bailey’s liabilities to the Bank (though in fact he reserved the Bank’s position as to the existence or extent of any such guarantee), but he submitted that the relevant “another entity” must simply be an entity other than the person, be it party or Credit Support Provider, that is doing the relevant act (consolidating, amalgamating, merging or transferring, as the case may be).

I reject Mr Berkley’s submissions on this point; in my view they are manifestly wrong.

As I have said, the argument before me proceeded on the basis that, if the Company was capable of being “another entity” although it was a Credit Support Provider, section 5(a)(viii) applied to the facts of the case. That may or may not be right; the information before me is not very specific, but I should have thought that, if Mr Bailey were retaining a shareholding giving him ultimate ownership of his companies, he would in fact not be transferring substantially all his assets to another entity. This does not in my view change the substance of the position in the least; it only shows that section 5(a)(viii) may not be relevant. Two important facts must be kept in mind. First, Mr Bailey was the debtor to the Bank under the loan agreements and could not pass those liabilities to the Company without the Bank’s agreement. Second, he had a subsisting and distinct, though related, liability to the Bank under the Swap; this too was an ongoing, personal liability, which he could not simply jettison. Failure to make the payments falling due under the Swap was an event of default. Mr Bailey’s case is stated in paragraph 6.2 of his witness statement: “I certainly did not want the Rate Swap Agreement to be transferred to [the Company] and I did not ask for this to be done. I wanted to end it altogether.” But it was not up to him whether or not to end the Swap Agreement. The Bank was perfectly entitled to hold him to the Swap Agreement. If it did so, he could either perform it according to its terms or breach it and give the Bank the right to terminate it and seek compensatory payment under the Swap Agreement. It is impossible to see what cause he has to complain if the Bank told him that, if he wished to be free of liability under the Swap Agreement, he would have to procure the assumption of equivalent liabilities by the Company.

Although the matter was not raised in argument before me, I might add that the 2007 Rate Swap Confirmation provided, by way of addition to section 5 of the Master Agreement, that the cancellation of a Facility Agreement (which included the Treasury Loan) or the prepayment or repayment by Mr Bailey of any advance drawn by him under a Facility Agreement would constitute an additional termination event. This is further confirmation, if such were needed, that the Bank was correct to say that breakage charges would be due if the Company took over responsibility for the loan, unless it also undertook liability for the Swap.

This is sufficient to dispose of the proposed amendments in paragraphs 65GG to 65OO. But I would not think the case raised by the arguments to have any chance of success for other reasons also.

This part of the proposed claim is set out in paragraphs 65PP to 65UU of the proposed amended particulars of claim. The argument is to the following effect. (1) The purpose of the 2011 Swap Agreement, as stated in the Rate Swap Confirmation, was to hedge the Company’s assets and liabilities. (2) The fixed interest rate under the Swap Agreement was at the outset and has been at all material times very much higher than the base lending rate. (3) Therefore the stated purpose of the Swap Agreement has been defeated in performance and there has been a failure of the basis of the Swap Agreement. (4) Therefore the Bank has been unjustly enriched by the receipt of the payments under the Swap Agreement and must make restitution in respect of them. (An alternative claim on the basis of frustration was abandoned at the hearing of the applications.)

The claim in unjust enrichment has no prospect of success, for at least the following reasons.

The argument for the Company has the following steps:

The Company accepts that, if there was a novation of the Swap Agreement to the Company in 2011, as was alleged in both the original particulars of claim and the proposed particulars of claim as they stood at the start of the hearing of the applications, the equity of rescission cannot have passed to the Company, because the 2011 Swap would be a new and distinct contract from that which Mr Bailey had been entitled to rescind. Therefore it has advanced a new case by the addition of text to paragraph 65 of the proposed particulars of claim. The important part is in the following terms:

“The second claimant contends that the ‘Novation’ of 4 April 2011 did not amount to a true or complete novation of the Swap as between the first and second claimants. The second claimant contends that the purported novation amounts to an assignment or a ‘partial novation’ as recognised in Deutsche v Unitech Ltd [2013] EWCA Civ 1372. The second claimant avers that the terms of the ‘Novation Confirmation’ of 11 April 2011 permit for the equity of rescission to subsist beyond the trade date of 4 April 2011 and the first claimant’s rights to be transferred to the second claimant. The second claimant pleads for the survival of rights, duties and obligations, in particular the equity of rescission and the declaration of unenforceability.”

Deutsche Bank AG v Unitech Ltd [2013] EWCA Civ 1372 concerned appeals in two cases. In each case a bank was claiming to be entitled to recover moneys owed by its customers under loan agreements or swap agreements. The customers or their guarantors were seeking permission to amend their pleadings to allege that they were induced to enter the agreements by misrepresentations made by the banks. In one case, Flaux J gave permission for the amendment. In the other, Cooke J refused permission. In the latter case, the relevant contract was a credit facility agreement, whereby the bank would make the loan and then seek participation in the loan from other lenders; nine claimant lenders had acceded to it; of those, two had acceded by novation. Cooke J “pointed out that the effect of novation is to extinguish the existing agreement and create a new contract. Any right to rescind in relation to the credit facility agreement was therefore lost when that agreement was extinguished and replaced by the new novated agreements”. That decision had led to summary judgment in favour of the lender claimants on the issue of the continued availability of rescission; cf. [21]. At [33] Longmore LJ, with whom Underhill LJ and Sir Bernard Rix agreed, identified the issue that arose:

“It is, of course, common form for one bank to make a loan and then seek to encourage participation in the loan from other lenders. No doubt any accession by a new lender could be done by novation in the strict legal sense of that term by extinguishing any previous contract (including any contract already acceded to by previous new lenders) and creating a new contract each time there is a new accession. One may wonder what the commercial point of such an elaborate arrangement would be, unless it was the deliberate intention of the parties to defeat any equities (such as the right to rescind) which might apply to the original contract. But strict legal novation is obviously a conceptual possibility. The question is whether that is what was contemplated and did occur in the present case.”

Clause 29 of the credit facility agreement contained lengthy and complex provisions dealing with changes of parties. The key part was clause 29.2:

“… a Lender (the Existing Lender) may at any time: (a) assign any of its rights; or (b) transfer either by way of novation or by way of assignment, assumption and release any of its rights or obligations under this Agreement, to any other person (the New Lender).”

In deciding that the amendments should be allowed because they raised an arguable case, Longmore LJ said:

“35.

This is an elaborate provision which undoubtedly draws a distinction between ‘assignment’ on the one hand and ‘transfer either by way of novation or by way of assignment, assumption and release of any of [the Existing Lender’s] rights or obligations under this Agreement’ on the other hand. … But when we see that in each case the new lender is to become ‘a Lender under this Agreement and will be bound by the terms of this Agreement as a Lender’ (clauses 29.5 (c)(iii) and 29.5 (d)(iv) respectively), one wonders whether the term ‘novation’ is indeed being used in its strict legal sense. If it were, the parties would be making a new agreement and not agreeing to be bound by the terms of the old agreement at all.

36.

[As the lenders had all acceded on almost identical terms, though two of them (BBK and BMI) by ‘novation’ and the rest by ‘assignment, assumption and release’], it begins to look as if it is a matter of indifference … which kind of transfer is being used. We were told that a leading textbook writer about credit agreements thinks that clause 29 is drafted in the way it is because English law recognises a term ‘novation’ whereas New York law does not. Be that as it may, it is difficult to see why the Credit Agreement … should be completely discharged merely because BBK or BMI as the case may be signs a document with novation in its heading when other new lenders accede to the agreement without any need for it to be discharged.

37.

In these circumstances, it seems to me to be arguable … that novation is not being used in its strict legal sense of the old contract being discharged. If, however, it is being used in this strict legal sense, there must at least be an argument that, on the facts of the present case, there is only a partial novation so that BBK and BMI became parties to a new contract freed of the equity of rescission whereas the other parties (whether the original or the new lenders) remain bound under ‘this Agreement’ and will be affected by any such equity. That is by no means to say that the concept of partial novation is free from difficulty but an application for permission to amend is not the right time at which all these problems should be addressed.”

I have cited from Deutsche Bank AG v Unitech Ltd at such length because I think that the reasoning of Longmore LJ has been in some respect misunderstood by those acting for the Company. The Court of Appeal was not using “partial novation” to mean something a bit like novation. It was using the expression to describe a possible scenario in which, in a multi-party agreement with parties joining at different times, there might be a brand new contract (by novation) for some of the joining parties, who would therefore not be subject to equities affecting the original contract, while other parties remained bound by the original contract and subject to any equities affecting it. Concretely: if the case were one of partial novation, there could be no rescission against BBK and BMI, but there might still be an equity of rescission as against the other lenders. The Court of Appeal considered that the question whether this was a possible analysis required full argument at trial, and therefore it allowed the point to be taken by amendment. But no such possibility arises in the present case, because this is a bilateral contract, not a multiparty contract in which different parties have joined at different times. Therefore the proposed amendment, even in its latest version, cannot stand.

That is not the end of the matter. Mr Berkley urged forcefully the consideration that significant losses may have been suffered by both Mr Bailey and the Company on account of what happened in 2007 but only Mr Bailey’s losses will be reimbursed under the Bank’s review (paragraphs 14 and 15 above). Although that might be correct, it is not itself a reason for allowing the Company to claim rescission. After all, the fact that no such claim will lie if there has indeed been a true novation shows that such an outcome may well result from the application of normal legal principles. The real question, in the light of Longmore LJ’s judgment, is not whether there has been a ‘partial novation’ but whether the 2011 Swap Agreement between the Bank and the Company was a new agreement, by novation or otherwise, or a continuation of the 2007 Swap Agreement. This requires consideration, in the light of the factual background set out above, of the contractual documents.

The 2011 Rate Swap Confirmation was set out in almost precisely the same manner as the 2007 Rate Swap Confirmation. It was expressed to supersede any previous confirmation or communication relating to the Transaction. It said:

“This Confirmation, together with all other documents referring to an ISDA Master Agreement (each a ‘Confirmation’) confirming transactions (each a ‘Transaction’) entered into between us, shall supplement, form part of, and be subject to, an agreement in the form of the ISDA 1992 Master Agreement as if on the Trade Date of the first Transaction between us we had executed an agreement in that form. … In the event of any inconsistency between the provisions of the [Master] Agreement and this Confirmation, this Confirmation will prevail for the purposes of this Transaction.”

The 2011 Novation Confirmation said that its purpose was “to confirm the terms and conditions of the Novation Transaction entered into between us on the Novation Date”. It purported to evidence “a complete and binding agreement between us as to the terms of the Transaction” and to constitute a Confirmation for the purposes of the ISDA Master Agreement. Clause 1 said that the definitions and provisions contained in the 2004 ISDA Novation Definitions and in the 2006 ISDA Definitions were incorporated into the Novation Confirmation; in the event of inconsistency, the provisions of the Novation Confirmation would prevail. The Novation Date and the Novation Trade Date were stated to be 4 April 2011. The Novation Confirmation then stated:

“Transferor: Mark Thomas Raymond Bailey

Transferee: MTR Bailey Trading Limited

Remaining Party: Barclays Bank Plc (London Head Office)

New Agreement (between

Transferee and Remaining Party): None”

The terms of the Old Transaction (that is, the 2007 Swap Agreement) were then summarised; the terms of the New Transaction were identified by reference to the 2011 Rate Swap Confirmation. Immediately above the signatures (Mr Bailey signed on his own behalf and on behalf of the Company) was this statement:

“The parties confirm their acceptance to be bound by this Novation Confirmation as of the Novation Date by executing a copy of this Novation Confirmation and returning it to us. The Transferor, by execution of a copy of this Novation Confirmation, agrees to the terms of the Novation Confirmation as it relates to the Old Transaction. The Transferee, by its execution of a copy of this Novation Confirmation, agrees to the terms of the Novation Confirmation as it relates to the New Transaction.”

I was referred to the 2004 ISDA Novation Definitions, though not to the 2006 ISDA Definitions. The 2004 Definitions contain some basic definitions in Article 1. “Transferor” is “a party which transfers by novation to a Transferee all of its rights, liabilities, duties and obligations with respect to a Remaining Party”. “Transferee” is “a party which accepts by way of novation all of the rights, liabilities, duties and obligations of a Transferor with respect to a Remaining Party under and in respect of the Novated Amount of a Transaction”. “Remaining Party” is “a party which consents to a Transferor’s transfer by novation and the acceptance thereof by the Transferee of all of the Transferor’s rights, liabilities, duties and obligations with respect to such Remaining Party under and in respect of the Novated Amount of a Transaction.” “Novation” is merely defined in terms of a Transaction subject to the Definitions. “Novation Transaction” is defined as follows:

“[A] Transaction in which (a) each Transferor transfers by novation to a Transferee and releases and discharges a Remaining Party, if applicable, (b) that Transferee accepts the transfer by novation of, and (c) that Remaining Party, if applicable, consents to such transfer by novation and acceptance of, all the rights, duties and obligations of a Transferor with respect to such Remaining Party and releases and discharges the Transferor(s) under and in respect of the Novated Amount of such Transaction.”

The words “if applicable” reflect the fact that the Definitions contemplate either a simple three-way novation or a four-way novation; in the latter case, all of the parties to the Transaction would be altered. I note the definitions of “Old Transaction”, “New Transaction”, “Old Agreement” and “New Agreement” but need not set them out here. I shall however set out the relevant part of section 1.19:

“By exchanging a Novation Confirmation, a Transferor, a Transferee and a Remaining Party will be deemed to have entered into a Novation Agreement (the ‘Novation Agreement’) as set forth in Exhibit A …”

Exhibit A is a three-way Novation Agreement. The key parts of the recitals are the following:

“With effect from and including the Novation Date the Transferor wishes to transfer by novation to the Transferee, and the Transferee wishes to accept the transfer by novation of, and the Remaining Party wishes to consent to such transfer by novation and acceptance thereof of, all the rights, liabilities, duties and obligations of the Transferor with respect to the Remaining Party under each Old Transaction with respect to the Novated Amount, with the effect that the Remaining Party and the Transferee enter into a New Transaction corresponding to each Old Transaction

The Remaining Party wishes to accept the Transferee as its sole counterparty with respect to each New Transaction

The Transferor and the Remaining Party wish to be released and discharged from, as a result and to the extent of the transfer described above, their respective obligations under and in respect of the Novated Amount of each Old Transaction”.

The operative parts of the Novation Agreement were in Section 2 and included the following:

“(a)

the Remaining Party and the Transferor are each released and discharged from further obligations to each other under each Old Transaction with respect to the Novated Amount and their respective rights against each other thereunder are cancelled …

(b)

the Remaining Party, taking the same position in each New Transaction as it took in each corresponding Old Transaction, and the Transferee, taking the same position taken by the Transferor in each Old Transaction, each undertake liabilities and obligations towards the other and acquire rights against each other under each New Transaction with respect to the Novated Amount and with terms identical to the terms (excluding collateral and other credit support arrangements and subject to Section 2(c) below) of each corresponding Old Transaction …

(c)

each New Transaction shall be governed by and form part of the New Agreement and shall be evidenced either (i) by means of the Old Confirmation (as deemed modified to be consistent with this Novation Agreement); (ii) by the Transferee and Remaining Party entering into a Confirmation specifying the terms of each New Transaction … or …”.

Although the existing particulars of claim clearly aver that the 2011 Swap Agreement was a new agreement, Mr Berkley submitted that the effect of the contractual documents to which I have referred was not to create a new contract but rather threefold: (i) to assign rights under the 2007 Swap Agreement to the Company; (ii) to release Mr Bailey from his obligations under the 2007 Swap Agreement; and (iii) to achieve an undertaking by the Company of new liabilities equivalent to those of Mr Bailey under the 2007 Swap Agreement. In the terms of clause 29 of the contract in Deutsche Bank AG v Unitech Ltd, this was a transfer not by “novation” but by “assignment, assumption and release”. A true novation was inconsistent with the language of transfer that runs throughout the documentation. That language was, however, consistent with the notion of assignment of rights and undertaking of liabilities. Mr Berkley said that this was also consistent with the law in force in New York, where assignment, assumption and release do the work of novation in English law. (It is common ground that the ISDA documentation is designed for use with either English or New York law and that all of the contracts in the present case are subject to English law. No evidence was put before me of the law of New York.) Mr Berkley submitted that the use of the word “novation” did not advance the matter, because the term was not given any substantive definition and the effect of the documents was a matter of substance rather than labels.

The Deutsche Bank case shows that it is at least arguable that it is conceptually possible to have either a novation (which destroys any equity to rescind the original contract) or an “assignment, assumption and release” (which does not destroy such an equity). Use of the word “transfer” does not seem to me to take matters any further: Longmore LJ spoke at [36] of either form of arrangement as a “transfer”, and that is also the language used by Chitty on Contracts (31^st edition, 2012) at para 19-086. Use of the word “novation”, however, while not determinative, is nonetheless significant. The word is not in general use; it is a legal term. The present case is not like the Deutsche Bank case, because in that case the contract provided for two alternative methods of transfer and it was necessary to consider whether the use of different labels was determinative when all the transactions were substantially identical; that is not so in this case. Further, the documentation relating to the 2011 Swap Agreement does not distinguish between assignment (of rights) and assumption (of liabilities); rather there is said to be a transfer “by novation” of the Transferor’s rights, liabilities, duties and obligations. And there was an express and mutual undertaking by the Bank and the Company of new rights and liabilities under the New Transaction. Throughout, the documentation treats the 2007 Swap Agreement and the 2011 Swap Agreement as different contracts, not as the same contract. In substance, there is a cancellation of the former contract and its replacement with a largely, though not entirely, identical new contract.

Therefore in my judgment, having regard to the particular contractual terms in this case, there is no good reason for interpreting the 2011 Swap Agreement as anything other than a true novation—which, of course, is what the Company’s pleaded case had always treated it as being. I therefore refuse permission for the Company to attempt yet another formulation of its proposed amendment.

Accordingly the Company’s application for permission to amend the particulars of claim will be dismissed in its entirety.

The Bank’s application for judgment against the Company requires consideration of two claims in the existing particulars of claim: first, the claim for relief for breach of fiduciary duty; second, the claim for a declaration of unenforceability. (A third claim, for rescission on the basis of misrepresentation to Mr Bailey, has already been considered in the context of novation and the proposed amendment.)

The existing particulars of claim contain a narrative of alleged facts and then in paragraphs 39 to 51 set out the duties said to have been owed to the claimants by the Bank at common law and under statute. Paragraphs 52 and 53 are in the following terms:

“52.

Further, since the claimants properly regard the defendant as a trusted advisor and specifically trusted Mr Standley and Mr Shaftoe, they did not feel any need to obtain further or independent advice. On the contrary they were entitled to and did assume that the defendant was acting in their best interests.

53.

In the premises the defendant owed a fiduciary duty to the claimant in relation to the entry into the Swap and owed a duty to the claimants to act in their best interests.”

The Bank originally sought to strike out the claim of both claimants, insofar as it rested on allegations of breach of fiduciary duty. As explained above, the application now relates only to the claim of the Company. The argument advanced by Mr Hanke on behalf of the Bank has three main limbs. First, a bank does not usually stand in a fiduciary relationship to its customers, although on the particular facts of a case it might exceptionally do so. This proposition is uncontroversial: see Kelly v Cooper [1993] AC 205. Second, there is nothing at all in the facts relied on by the claimants either in the statements of case or in the witness statements to indicate that there is anything exceptional in this case that would have given rise to a fiduciary relationship. Third, the contractual documents expressly negative the existence of a fiduciary relationship.

In my judgment, the first two limbs of Mr Hanke’s argument are sufficient to establish that the Company’s case for relief for breach of fiduciary duty is untenable.

Mr Berkley’s argument was to this effect. Although the relationship between a bank and its customer does not generally give rise to fiduciary duties, the circumstances in which it might do so increase as banks move away from their traditional activities of lending and deposit-taking and provide services involving advice concerning and sale of investment products. This is a developing area of the law and the question in a case such as the present is fact-sensitive and unsuitable for summary determination.

That argument fails, because the Company does not begin to show that there is a realistic prospect that examination of the facts at trial might establish that the Bank was in a fiduciary relationship towards it.

In respect of the 2007 Swap Agreement, Mr Bailey relied on the following matters in support of his case on fiduciary duty.

It is unnecessary to consider whether those matters gave rise to a realistic possibility that a fiduciary relationship would be established in respect of the transaction with Mr Bailey in 2007. I strongly doubt that they would; though I note that Hudson, The Law of Finance (2nd edition, 2013), suggests the selling of swaps as a possible arena for fiduciary relationships to arise: see para 5-12. At all events, however, the circumstances in 2011 vis-à-vis the Company were entirely different from those in 2007 vis-à-vis Mr Bailey, as has been sufficiently described above.

The present state of the law regarding the circumstances when fiduciary duties arise may conveniently be taken from an extended passage in the Law Commission’s recent report, Fiduciary Duties of Investment Intermediaries (Law Com No. 350); for reasons of space and ease of exposition, I omit the footnotes and references contained in the report.

“3.14

… What is relatively clear is that fiduciary relationships arise in two main circumstances:

(1)

Status-based fiduciaries – where a relationship falls within a previously recognised category, such as a solicitor and client; and

(2)

Fact-based fiduciaries – where the particular facts and circumstances of a relationship justify the imposition of fiduciary duties.

3.15

Status-based fiduciary relationships are those that are recognised, by their very nature, as inherently fiduciary. They represent the settled categories of fiduciary relationship. They include the relationships between: trustee and beneficiary; principal and agent; mortgagee and mortgagor; solicitor and client; company directors and the company; partners and co-partners; and civil servants and the Crown.

3.16

The categories of fiduciary relationship are not closed. However, the difficulty lies in identifying the circumstances which justify the imposition of fiduciary duties. The courts have traditionally declined to provide a clear definition, preferring to preserve flexibility. In 1992, we said that the test is based on ‘discretion, power to act and vulnerability’, though different commentators have characterised the appropriate test in different ways.

3.17

Several academics have emphasised the importance of an undertaking to act on behalf of another as the touchstone of a fiduciary relationship. It has been said that a fiduciary ‘is, simply, someone who undertakes to act for or on behalf of another in some particular matter or matters’. In his seminal work Fiduciary Obligations, Paul Finn said that: ‘For a person to be a fiduciary he must first and foremost have bound himself in some way to protect and/or to advance the interests of another. This is perhaps the most obvious of the characteristics of the fiduciary office for Equity will only oblige a person to act in what he believes to be another’s interests if he himself has assumed a position which requires him to act for or on behalf of that other in some particular matter.’

3.18

This view has judicial support. In Bristol and West Building Society v Mothew, Lord Justice Millett said that: ‘A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.’

3.19

A similar view, building on the idea of an undertaking, is that: ‘What must be shown … is that the actual circumstances of a relationship are such that one party is entitled to expect that the other will act in his interests in and for the purposes of the relationship. Ascendancy, influence, vulnerability, trust, confidence or dependence doubtless will be of importance in making this out, but they will be important only to the extent that they evidence a relationship suggesting that entitlement.’

3.20

This view has growing judicial support. The Privy Council has noted that: ‘The [fiduciary] concept encaptures a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in such a way which is adverse to the interests of the principal.’

3.21

In the Canadian case of Frame v Smith, Madam Justice Bertha Wilson said that: ‘Relationships in which a fiduciary obligation have been imposed seem to possess three general characteristics: (1) The fiduciary has scope for the exercise of some discretion or power. (2) The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests. (3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.’

3.22

Whilst vulnerability remains important, the courts now tend to see it as an indicator of fiduciary status, rather than its defining feature. In Hodgkinson v Simms, the Supreme Court of Canada said that although ‘the concept of vulnerability is not the hallmark of fiduciary relationship’ it was an important indicator of its existence. Similarly, in Hospital Products Ltd v United States Surgical Corp Justice Mason noted that whilst the primary test is whether there is an undertaking or agreement by the fiduciary to act for or on behalf of or in the interests of another person, it is: ‘partly because the fiduciary’s exercise of the power or discretion can adversely affect the interests of the person to whom the duty is owed and because the latter is at the mercy of the former that the fiduciary comes under a duty to exercise his power or discretion in the interests of the person to whom it is owed.’

3.23

James Edelman has argued that the courts are moving to coalesce the factors of trust, vulnerability, confidence, power and/or discretion into a single test based upon the legitimate expectations of the principal. The focus of this approach is on the undertaking: did the putative fiduciary, by his words or conduct, give rise to an understanding or expectation in a reasonable person that they would behave in a particular way. As Edelman notes: ‘The greater the degree of trust, vulnerability, power and confidence reposed in the fiduciary, the more likely that a reasonable person would have such an expectation.’

3.24

We think that this is a useful way to determine when fiduciary relationships arise. The key test is whether there is a legitimate expectation that one party will act in another’s interest. However, discretion, power to act and vulnerability are indicators of such an expectation.”

This way of putting matters is consistent with the approach of Gloster J (as she then was) in JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm). At [574] the judge rejected Springwell’s contention that, although the relationship of investment advisor and client was not one of the categories of relationship where a fiduciary relationship would simply be presumed by the law, such a relationship arose on the facts of the particular case. She observed that the parties had what was “essentially a commercial banking relationship”. Springwell “certainly relied upon, or ‘trusted’ [Chase’s] views, recommendations and advice.”

“But the mere fact that one party to a commercial relationship ‘trusts’ the other does not predicate a fiduciary relationship. The word ‘trust’, like the word ‘advice’ has a variety of meanings. In a broad sense, trust is an important element in many commercial dealings. As Steyn J (as he then was) pointed out in Barclays Bank plc v Quincecare Limited [168]: ‘… trust, not distrust, is also the basis of a bank’s dealings with its customers …’ Springwell no doubt ‘trusted’ Chase to conduct itself in a commercially appropriate manner. But I do not consider that Springwell had any legitimate expectation that, in its commercial dealings with Springwell, Chase would subordinate its interests to those of Springwell.”

On the Company’s own case, there is no question of it having in any relevant sense reposed trust and confidence in the Bank, or relied on the Bank to subordinate its interests to those of the Company, in 2011. It was taking the “novation” of the Swap not because it relied on the Bank’s advice but because it was the only way to relieve Mr Bailey of a contract he no longer wished to be bound by. Mr Berkley acknowledged this but said that the matter had to be considered in the light of the relationship that existed in 2007. I agree with Mr Hanke that such an argument must fail. The fact (if it be such) that the Bank was in a fiduciary relationship to Mr Bailey in 2007 does not mean that it was in a fiduciary relationship to the Company in 2011, and the alleged facts show clearly that it was not.

In those circumstances, it is strictly unnecessary to consider the third limb of the Bank’s argument, namely that the terms of its contract with the Company expressly negative the existence of a fiduciary relationship. I shall deal with the point only briefly. The Bank relies on the “Status of Parties” provision in the 2011 Rate Swap Confirmation: “The other party is not acting as a fiduciary for or an adviser to it in respect of the Transaction.” (There is a similar provision in the 2004 ISDA Novation Definitions.) In my view, that is a clear and binding statement of the limitation of the scope of the obligations that the Bank was undertaking to the Company. If it amounted to a “rewriting of history” by a party taking advantage of its dominant position over a vulnerable counterparty, the conclusion might be different. But the clause is far from stating anything contrary to the facts; indeed, it reflects them accurately: see paragraphs 50 and 51 above. There is in my view no reason why it should not be given effect. (Cf. the comments of Flaux J in Barclays Bank Plc v Svizera Holdings BV at [8].)

Section 27(1) of FSMA provides:

“(1)

An agreement made by an authorised person (“the provider”)—

(a)

in the course of carrying on a regulated activity (not in contravention of the general prohibition), but

(b)

in consequence of something said or done by another person (“the third party”) in the course of a regulated activity carried on by the third party in contravention of the general prohibition,

is unenforceable against the other party.”

The “general prohibition” is set out in section 19 of FSMA; see paragraph 21 above.

The case for the claimants, as stated succinctly in paragraph 11 of Mr Berkley’s skeleton argument, is that Mr Standley made a personal recommendation and gave advice to each of the claimants; his conduct was integral to the sale of the Swap; he was engaging in regulated activities and performing controlled functions; accordingly he was a “third party” carrying on a regulated activity in contravention of the general prohibition.

In my judgment, that argument is plainly wrong, for the reasons identified by Mr Hanke. The Bank was an authorised person. Mr Standley was not a “third party”; he was the Bank’s employee and agent. If Mr Standley made a personal recommendation or gave advice as is alleged, no question of section 19 or the criminal liability that may result from a breach of the general prohibition arises. Rather section 59 of FSMA would be engaged:

“(1)

An authorised person (‘A’) must take reasonable care to ensure that no person performs a controlled function under an arrangement entered into by A in relation to the carrying on by A of a regulated activity, unless the Authority approves the performance by that person of the controlled function to which the arrangement relates.

(2)

An authorised person (‘A’) must take reasonable care to ensure that no person performs a controlled function under an arrangement entered into by a contractor of A in relation to the carrying on by A of a regulated activity, unless the Authority approves the performance by that person of the controlled function to which the arrangement relates.

(3)

‘Controlled function’ means a function of a description specified in rules.

…

(4)

‘Arrangement’

(a)

means any kind of arrangement for the performance of a function of A which is entered into by A or any contractor of his with another person; and

(b)

includes, in particular, that other person’s appointment to an office, his becoming a partner or his employment (whether under a contract of service or otherwise).”

Quite apart from this difficulty, the Company’s section 27 claim has to overcome the obvious problem that Mr Standley was not involved in the transactions in 2011. The argument for the Company must therefore be that the engagement of section 27 in respect of the 2007 Swap Agreement means that section 27 avails the Company in respect of the 2011 Swap Agreement. That in turn would require treating Mr Bailey’s entitlement to a declaration of unenforceability as a kind of equity that passed to the Company, in the way in which his equity of rescission is said to have passed. The reasons why such an argument must fail have been set out in connection with novation, above.

I have refused permission to the Company to amend its claim. The Company’s claim based on breach of fiduciary duty will be dismissed summarily under Part 24. I shall strike out the claim for a declaration under section 27 of FSMA pursuant to r. 3.4(2)(a); it could as well be dismissed under Part 24. The Company’s claim for rescission must fail for reasons already stated; I shall give judgment for the Bank on that claim. The result is that the Company’s claim fails and will be dismissed.

Since this judgment was circulated in draft, the parties have agreed the terms of the appropriate order. I shall make the order in those terms.