St Dominic's Limited v The Royal Bank of Scotland Plc

This is a swaps mis-selling case. This judgment contains brief reasons why I acceded to the claimant’s application at the first CMC that the parties should have permission to adduce expert evidence on certain issues defined in a Schedule to the directions order made on that occasion. Broadly those issues focus on the features of the subject swap, the information which would be required in order to assess its suitability, whether the swap was suitable for the claimant and the relative cost to the claimant of the subject swap as opposed to any suitable alternative and/or an interest rate cap.

The claimant is one in a group of three companies which operates care homes. The other companies are called Aster Healthcare Limited (“Aster”) and Southern Counties Healthcare Ltd (“SCCL”). Aster is the holding company. All three companies are owned and controlled by Mr Sheth Jeebun and Mrs Zainah Jeebun.

On 7 December 2007, Mr Jeebun, who was acting on behalf of the claimant, agreed on the telephone with Mr Simpson, who was acting on behalf of the defendant, that the claimant would enter into a 15-year Amortising Dual Rate Base Rate Swap on a starting notional sum of £3,200,000 at 4.97% (for any quarter in which the base rate set within the range 4.25% to 6%) or 5.85% (for any quarter in which the base rate set above or below that range.

This was Swap 3 in a sequence of swaps which Mr Jeebun had agreed with Mr Simpson. Swap 1 was entered into in December 2006 by Aster. It was a 15 year Amortising Base Rate Swap at 5.28% for a starting notional sum of £4,950,000. Swap 2 was entered into by SCCL. It began as another 15 year Amortising Base Rate Swap at 5.33% for a starting notional sum of £3,600,000. The deal was agreed by Mr Jeebun on 16 November 2007 (Swap 2A), but was cancelled and replaced on 28 November 2007 by a swap for the same notional amount at two different interest rates, namely, at 5% for any quarter in which the base rate set within the range 4.25% to 6% and at 5.85% for any quarter in which the base rate set above or below that range (Swap 2B).

It is alleged that all 3 swaps were mis-sold. The present action concerns only Swap 3. The sales of Swaps 1, 2A and 2B to Aster and SCCL were eligible for inclusion in the FCA Review. On 4 and 19 June 2015 respectively, Aster and SCCL received revised Offers of Redress from the defendant, which they have accepted. There are no extant proceedings regarding Swaps 1, 2A and 2B. The sale of Swap 3 was not eligible for the Review because the claimant was not a customer who qualified for inclusion in the Review process. Although the claimant contends that the information provided by Mr Simpson when selling Swap 3 was no different from that provided to Aster and SCCL, the Offers of Redress to the latter involved no admission by the defendant of any breach of duty. The breach or breaches of duty in selling Swap 3 remain to be proved.

The cause of action relied upon in the particulars of claim is in negligence. There is no claim for breach of statutory duty under section 138D of FSMA 2000 because the claimant is not a private person. The overall complaint is that the information provided in relation to the Swaps was "so inadequate as to amount to a misrepresentation of the risks involved in the Swaps” (P/C paragraph 3). There are two limbs to the complaint. The first is that the defendant is alleged to have given the claimant insufficient information about the risks associated with the Swaps, in particular exit costs, but also the fact that the claimant would be over-hedged by entering into Swap 3 because the notional amount of that Swap included a sum of £1.2 million for building an extension to St Dominic’s Nursing Home which was only drawn down under the corresponding loan agreement over a period of 8 months with the result that during the 8 month period the claimant was paying notional interest under Swap 3 on notional amounts in excess of its actual indebtedness to the bank. The second limb is that the Swaps, including Swap 3, are alleged to have been unsuitable for the claimant and that the defendant failed to take adequate steps to ascertain the claimant’s business needs and attitude to risk.

. These allegations axe similar but not the same as those which were advanced by the claimant in Crestsign Limited v National Westminster Bank plc and Royal Bank of Scotland plc [2014] EWHC 3043 (Ch) (Mr Tim Kerr QC as he then was) and in Thornbridge Limited v Barclays Bank plc [2015] EWHC 3430 (QB) (Judge Moulder). However the factual matrix here is different not only by reason of the particular exchanges between the claimant (in the guise of Mr Jeebun) and the bank (represented by Mr Simpson), which is feature distinguishing every swaps mis-selling case from the next, but also by reason of the previous Swaps transactions between the claimant and the defendant in respect of which the bank has made Offers of Redress which have been accepted.

. The first CMC in this case was held on 22 September 2015. Mr Richard Edwards appeared as counsel for the claimant and Miss Rebecca Loveridge (Mr Mitchell’s junior) appeared as junior counsel for the defendant. Only one matter was controversial, which was whether expert evidence should be allowed. Mr Edwards submitted that it should. Miss Loveridge submitted that it should not.

. This is not the first such battle. This is the 47 ^th swaps mis-selling case to be case managed by me in the Bristol Mercantile List. My experience is that a number (but not all) of the defendant banks have opposed the introduction of expert evidence. None has been more rigorous in its opposition to expert evidence than the present defendant, RBS.

The arguments are becoming familiar (and so are counsel: it is, perhaps, not entirely irrelevant to note that Mr Edwards was claimant’s counsel in Crestsign and that Miss Loveridge’s leader in this case, Andrew Mitchell QC, was leading counsel for the defendant bank in both the Crestsign and Thornbridge cases). I dealt with some of the arguments in Battrick v Royal Bank of Scotland plc [2013] EWHC 4848 (QB). I concluded that judgment with a cautionary postscript to the effect that it was not a tablet of stone to be touted around other Mercantile Courts as support for an order for expert evidence because there might well be other swaps cases where, on the particular facts, expert evidence was not appropriate. Counsel deserve credit for not having cited the Battrick judgment to me on this occasion. Nevertheless, to my knowledge, Battrick has been to other judges.

My impression is that, pre- and post- Battrick. expert evidence has been ordered in swaps cases on more occasions than it has not (whether the view I have taken in the Bristol Mercantile List as exemplified in Battrick has played any part in this trend it is not possible to say). Expert evidence was given in the Crestsign case and in the Thornbridge case and has been ordered by Rose J in Warner Retail Ltd v National Westminster Bank plc [2014] EWHC 2818 (Ch), by Phillips J in Kexgill (Nottingham) Ltd and Kexgill (Preston) Ltd v Barclays Bank plc (Commercial Court claim no. 2014 Folio 661) and by Judge Keyser QC in Mohamed Ali Abedi v The Governor and Company of the Bank of Ireland and The Bank of Ireland (UK) plc (Cardiff Mercantile Court claim no. A90CF183). On the other hand, expert evidence was not ordered by Judge Waksman QC in the Manchester Mercantile Court in Green & Rowley v Royal Bank of Scotland plc [2014] PNLR 6 or by Judge Simon Brown QC in two Birmingham Mercantile cases: Spring Rental Ltd v Barclays Bank plc (claim no. A40BM041) and OM Properties Investment Co. Lid (claim no. A40BM008) (Footnote: ¹) ,

This is not, however, a numbers game. Each case has to be approached on its own facts. I have not always granted expert evidence in swaps cases. In one or two swaps cases the claimant has not asked for it. But in most of the swaps cases where an order for expert evidence has been requested, I have granted it. I have heard it suggested that this has led to a degree of forum shopping between Mercantile Lists. If that is so, it is regrettable. The purpose of this judgment is to reiterate this Court’s general approach to a request that expert evidence be permitted in swaps cases and to address, shortly, the reasons why expert evidence has been ordered in this case on the issues defined in the Schedule to the CMC Order.

The essential pre-conditions to an order for expert evidence are: (1) that there should be an acknowledged body of expertise in the issues in respect of which the expert evidence is to be adduced (see e.g. Barings plc (In Liquidation) v Coopers & Lybrand (No, 2) [2001] Lloyd’s Rep P.N. 379), and (2) that the expert evidence should be reasonably required to resolve the proceedings (CPR 35.1).

The argument in swaps cases has moved beyond the question whether there exists a body of expertise as to the characteristics of hedging instruments, what is expected as a minimum to be done, and what in practice is done, by banks selling swaps to comply with the regulatory requirements of the COB or COBS Rules or any duty of care to the customer derived from the regulatory regime, and as to KYC (Know Your Client) issues and as to the pricing of swaps and the pricing of their alternatives, such as interest rate caps. It is now accepted that there is a body of such expertise and some of the individuals who have been instructed by customers and banks in swaps litigation are coming to be well known (e.g. Mrs Jackie Bowie and Mr Nicholas Gibson who were, respectively, the claimant’s and the defendant’s experts in Crestsign). I know of no swaps case where valid objection has been taken that the chosen expert lacked the expertise to express an opinion on the issues put to him or her. In my experience the focus of the debate is on whether an expert opinion is necessary to resolve one or more issues or, if not necessary (in the sense that a decision could not be made without it), would be sufficiently helpful to the Court that it would be just and proportionate to allow it to be introduced. If it is likely to be of only of marginal relevance, it will not usually be allowed (see the recent judgment of Warren J in British Airways plc v Spencer [2015] EWHC 2477 (Ch)).

I begin by acknowledging what is not a proper remit for expert evidence. The confines of legitimate expert evidence were well expressed by Oliver J in Midland Bank Trust Co. v Hett, Stubbs & Kemp [1979] Ch 384 at 402C-E where he said:

Construction of the legal duty is a matter exclusively for the Court. Thus expert opinion of what, for example, a COB or COBS Rule means is inadmissible. Evidence from an expert which amounts to no more than saying what he or she would have done in the same circumstances should also not be admitted because it is of no value. However I would add the following rider. While construction of the applicable rules and interpretation of the ambit of the duty of reasonable skill and care is the Court’s function and not the function of an expert, the process of construction and interpretation takes place in a context. An expert can give evidence about that context. If the meaning of the rule and/or ambit of the duty is clear without such evidence, the evidence is likely to be of assistance in determining whether the rule has been broken or the duty breached. It will provide a yardstick either to assist in determining what the duty encompasses or to assist in resolving whether the defendant’s conduct fell short of the required standard. Objection is sometimes taken that expert evidence on issues of breach usurps the role of the Court. If the issue put to the expert is whether the defendant acted in breach of duty, the answer would indeed appear to trespass on ‘‘the very question which it is the court’s function to decide”. But the reality is that where an expert expresses an opinion about breach, for example in the context of the alleged mis-sale of a swap, his answer is simply evidence that what the bank did or did not say or do was insufficient in his view to meet the standards expected in the industry of financial institutions seeking to comply with the relevant regulatory rules, or the duty of care derived from them. It is the expert’s evidence of the standard of conduct that matters. The issue should always be framed in such a way as to elicit that evidence. The expert’s opinion about breach is secondary; hut I would not regard it as inadmissible (unlike expert evidence as to the content of the duty). The Court will usually want to know whether the expert considers that the defendant has or has not met the requisite standard and why, even though that is ultimately a matter for the Court’s to decide.

Thus, accepting (as I do) the qualifications expressed in the Midland Bank case, it seems to me that evidence of the practice of banks and other lending institutions who sell financial instruments such as interest rate hedging products is likely to be helpful and in some instances necessary to resolving the issues of breach of duty which arise in swaps mis-selling cases. As I said in Battrick the Court cannot (or at least should not) construe the regulatory regime and its component rules in a vacuum. If the evidence is confined to evidence from the fact witnesses, it will be one-sided. Only the banks can speak to the systems and practice they have adopted in the selling of IRHPs. Moreover, if the Court is to find that the systems and practice of the defendant in any given case fell short of discharging the relevant duty of care, it must do so on a reasoned and principled basis. Where the alleged breach arises in a very simple and straightforward context e.g. whether a particular communication to the customer was “clear, fair and not misleading”, it may be possible to arrive at a decision without the benefit of expert evidence about the quality of information provided elsewhere in the banking industry or expected to be provided. But where the issue is more nuanced, expert evidence is likely to be required.

Two other factors confirm, to my mind, this conclusion. The first is that, in cases of professional negligence, it is the norm to hear expert evidence at trial, and usually essential for the claimant to have the benefit of an expert opinion even at the pleading stage, since otherwise "... how can it be asserted that act x was something that an ordinary professional would and should not have done, if no professional in the same field had expressed such a view?” (see Coulson J in Pantelli v Corporate City Developments [2011] PNLR 12 at para. 17). A bank employee who sells swaps cannot exactly be equated to a member of a profession who is carrying out a professional duty, but their respective situations are quite closely analogous. Professionals often have a rule book to follow (e.g. the RICS Red Book on Valuation Standards and the Financial Reporting Standards promulgated by the Financial Reporting Council). Their duty of reasonable skill and care is shaped by those standards. Bank employees who market interest rate hedges are subject to the regulatory regime of the Financial Conduct Authority which, even if it does not give rise to statutory duties directly enforceable by the customer, shapes the duty of reasonable skill and care which the customer is owed. Now that there is a body of expertise in the practice of banks selling IRHPs, the analogy with the professional is in my judgment apposite,

The second factor is that in the overwhelming majority of swaps cases the defendant bank is able to call witnesses of fact who have considerable experience of the practice and procedure employed in selling IRHPs. These often include senior executives from the derivatives selling division and sometimes executives responsible for regulatory compliance. They have no difficulty explaining the systems put in place by the bank to ensure the discharge of its duties to the customer. The customer, by contrast, has no evidence with which to challenge the adequacy of these systems by reference to practice elsewhere unless it comes from an expert. The background of the players means that there is not a level playing field. Therefore unless there are reasons to suppose that any expert evidence will not be credible or is bound to lack utility, the claimant should be permitted to call it. Fairness then dictates that the bank should be given similar permission since evidence from an independent source that its practice is up to industry standards and compliant with the regulatory regime will carry more weight than evidence pointing in the same direction from its employees.

I turn to the expert evidence direction which I have given in the present case. Unusually, but helpfully, Mr Edwards produced a Schedule of Expert Issues for the CMC in an endeavour to narrow the issues on which expert evidence should be given. I am told that the Schedule was modelled on a similar Schedule produced in Crestsign, which formed the basis of the order for expert evidence in that case.

I have amended the Schedule so as to narrow the issues still further. The issues now contained in the Schedule are the following:

Identify what information a client in the position of the Claimant in December 2007 would need to take into account in order to determine the relative suitability of the two interest rate derivative products referred to in paragraph 1.

Having regard to the Claimant’s relevant circumstances in December 2007, and having regard to the regulatory standards applicable at the time:

Was Swap in 3 your opinion within a range of suitable products for the Claimant?

If the answer to (a) is “no”, what (if any) other product would in your opinion have been a suitable interest rate derivative product to offer to the Claimant, and why?

If more than one other product was suitable, what in your opinion was the most suitable, and why?

Identify the cost of Swap 3 to the Claimant and compare it with the cost of entering into (on 7 December 2007) each of: (a) the suitable other product(s) identified in your answer to question 3 (b) above; (b) (if different) an interest rate cap on all or some of the debt for all or some of the expected terms of the loan, at the strike rate, tenor and notional profile you consider most appropriate.

Calculate the mark to market value of Swap 3: (a) immediately after it was traded; (b) on 21 November 2008; and (c) at the date of your report,”

I make the following observations about this list:

I would not have ordered expert evidence about issue 1 if it had stood alone because there is no obvious dispute about the characteristics of Swap 3 and an interest rate cap (which is conceded in this case to have been the only viable alternative). Since expert evidence is going to be given on other issues, it is useful to include issue 1, especially if there is agreement about it between the experts on each side.

Issue 2 is designed to assist in resolving whether the information provided by the defendant to the claimant was adequate, in particular as regards break costs. It does not focus on what I would describe as the KYC issue, namely, whether the information obtained by the defendant from the claimant was sufficient to enable the defendant properly to assess the business needs and attitude to risk of the claimant. Mr Edwards did not identify the latter as requiring a separate instruction to the experts. Insofar as the KYC issue arises (it is raised in paragraph 41 of the particulars of claim), it will be covered by issue 3 which addresses suitability. I consider that the issue of whether the information provided by the defendant was adequate involves an evaluation which would be significantly assisted by expert evidence. The FCA’s written submissions as intervenor in the appeal in the Green and Rowley case suggest that there is a conflict of view in the industry about what constitutes adequate disclosure of break costs.

The suitability issue is central to the question of what information the defendant should have provided and whether information about any alternative product should have been given. It likewise involves an evaluation of factors which in my judgment will be significantly assisted by expert evidence,

I would not have ordered expert evidence on Issues 4 and 5 at the stage of the first CMC if I had not ordered expert evidence on issues 2 and 3. In many cases there turns out to be no dispute or no significant dispute between the parties on pricing issues, once the rival figures have been pleaded. In swaps mis-selling claims where quantum is the only potential issue for expert evidence, I have postponed a direction for expert evidence until after the claimant has completed pleading his case on quantum. However, the claimant invariably requires the assistance of an expert to establish his figures, whereas the bank has in-house expertise with which to produce its calculations. So, pricing issues are a legitimate area for expert evidence. Since expert evidence is being allowed on other issues, I think right to include Issues 4 and 5 also.