Facts:
The claimants were four small or medium-sized enterprises that entered into fixed-interest rate “tailored business loans” (FRTBLs) with Clydesdale Bank (CB) between 2002 and 2010 when it was a wholly owned subsidiary of the National Australia Bank (NAB). FRTBLs were not regulated products which necessitated a level of expertise on the part of the bank selling them. CB staff did not have such expertise so NAB’s employees were involved in selling TBLs to CB’s customers.
The first claimant, Farol Holdings Limited, is the parent company of Farol Limited which carries on business as a wholesale supplier of agricultural machinery, equipment and supplies, from its head office in Oxfordshire. The second claimant, Janhill Limited is a property investment company based in Macclesfield. The third claimant, Mr. and Mrs. TPW Uglow is a partnership that engages in dairy farming activities in Cornwall. The fourth claimant, Ivor Gaston & Son is a partnership that conducts cattle and pig farming activities in Scotland. Their claims were tried as lead cases, with in excess of nine hundred other stayed claims awaiting the outcome of this trial.
Decision:
The High Court dismissed all the claims. The claimants’ claims fell into two broad categories.
First, they argued that there was a breach of contract, deceit and negligent misstatement, as CB had no contractual entitlement to charge the break costs it had. Their claim failed as they did not demonstrate that the contract said that CB could only recover break costs if it had itself paid those break costs on a swap that it had entered into for the loan in question. Mr. Justice Zacaroli held that CB was entitled to charge those break costs, by reference to the cost to CB of terminating a corresponding back-to-back hedge which it had entered into with NAB, which was found to be legally binding. He also held that CB had been entitled to calculate its loss upon early repayment of an FRTBL based on the net present value (NPV) of the difference between the fixed rate of interest due for the remaining term of the FRTBL and interest at the prevailing floating rate for the same period, with the sum due from CB to NAB upon termination of a corresponding hedge being a reasonable proxy for that loss. Consequently, CB would have been entitled to charge the break costs, even if it had not entered into the corresponding hedges with NAB.
The second category related to false representation made about the fixed rate payable by the claimants. Each FRTBL was provided at a single overall fixed rate of interest, which comprised two components: a “fixed rate” and a “margin”. The fixed rate offered included an element of income to CB which was not disclosed to customers. The claimants alleged that such non-disclosure was a misrepresentation and the additional revenue rendered the relationship unfair within the meaning of section 140A of the Consumer Credit Act 1974. Mr. Justice Zacaroli dismissed these claims, holding that the omission did not result in dishonesty and the employees did not represent that the only income generated on the loans was by way of the margin.
He also found that the relationships were not unfair, concluding that, unlike a variable rate loan, a fixed rate loan provided additional and valuable benefits to the customer for which it would expect to be charged more. He looked at different factors such as that: a) these were business borrowers, and so towards the more sophisticated end of the scale; b) a reasonable customer would expect the bank to make a profit on the loan; c) the borrowers received the benefits of fixed rates in exchange for the overall rate they paid; d) there was a competitive market for small business lending where customers either did or could have sought prices from other banks, and CB’s pricing was at the lower end of the available market for the customers in this claim, and so e) the fact that the bank staff had discretion to charge less than 50bps did not in the context of a competitive market make it unreasonable for them to try to get the full 50bps whenever they could. He concluded that there was nothing unfair in CB making a profit from that service. The non-disclosure of the income did not render the relationship unfair.
Implications:
This 185-page long judgement provides a very detailed analysis of the issue. Although misrepresentation claims are highly fact-specific, this ruling establishes that lenders are entitled to charge break costs to customers on an NPV basis. Charging break costs will depend on the wording of their terms and conditions and which losses they seek to claim as break costs.
The judgement also made clear that banks can charge a margin to cover additional costs of providing fixed rates and earn a profit. Such profit, even if undisclosed, does not make the relationship unfair.