PAG v RBS: not just for swaps lawyers

Posted: 24/05/2018

The impact of the recent Court of Appeal judgment in Property Alliance Group Ltd v Royal Bank of Scotland plc [2018] EWCA 255 on swaps cases has been much discussed. Not a swaps lawyer yourself? Here are four reasons why it still matters.

Mezzanines and misstatement

There is no obligation on any individual, in English law, to actively speak in any given situation – but the law does provide protection in certain situations where one party chooses to actively provide information to another: 

• Where a claimant can show an advisory relationship, there is a high level of protection. However, advisory relationships are difficult to establish, and even then, may be defeated by a boilerplate non-reliance clause. 

• At the other end of the scale, the law has long recognised a duty not to misstate information when provided (the classic ‘Hedley Byrne’ situation) – but how far this duty extends is a matter of ongoing debate. In swaps cases, the problem is often not that the information provided was inaccurate, but that other information has been withheld (ie only half the story has been presented).

In a (cunning/misguided*) (*delete as applicable) attempt to extend the law, previous swaps claimants have argued that there is an intermediate or ‘mezzanine’ duty between these two duties. This was given some traction in Crestsign Ltd v National Westminster Bank plc [2014] EWHC 3043 (Ch), although the idea received a lukewarm reception in subsequent cases. 

Now, the Court of Appeal in PAG (in language worthy of ‘Yes Minister’) has confirmed that the concept of a mezzanine duty is “best avoided”. This is a welcome clarity for anyone considering a claim in negligence – though worth noting that  the Court of Appeal’s analysis suggests the Hedley Byrne duty could still encompass the kind of claim contemplated in Crestsign, provided there is an appropriate ‘assumption of responsibility’ between the parties.

Undeclared misrepresentations

Swaps claimants affected by LIBOR rigging face an interesting problem – how can you show, after the event, that you relied on a circumstance when entering a contract, which was so obvious at the time of entry, that neither party in fact mentioned it? It is common ground that, had they known LIBOR rigging was taking place, the claimants would not have contracted with RBS. But at the time of entry into the swap, no bank employee overtly represented that the LIBOR rate was honest, and the claimants didn’t raise a specific query, believing it to be an objectively set and monitored rate.

To use a more everyday analogy – when you bought your coffee on your way to work this morning – how confident were you that the coffee shop remembered to add VAT to the price, and that they correctly calculated the VAT they were charging you? Chances are that the barista didn’t mention it – and that you didn’t ask.

Welcome to the world of implied representations… with which comes the challenge of balancing formulation against reliance. The courts are reluctant to imply very general representations (eg “all our dealings are honest”), as this could give rise to a host of unforeseen obligations and liabilities; but the more specific the implied representation, the harder it is to show that a party in fact relied on it at all.  

The Court of Appeal in PAG proved surprisingly amenable to a more widely cast representation than had been put forward previously, making it simpler for claimants to prove reliance. This has potentially opened the door to a variety of implied misrepresentation claims, although claimants may still face difficulty in proving reliance and/or attribution.

Necessary implication

Towards the end of its relationship with RBS, PAG was placed in RBS’ Global Restructuring Group – a system for managing struggling businesses, which permitted RBS to exercise additional powers. One such was the right for RBS to carry out valuations of PAG’s portfolio – at PAG’s expense. 

RBS claimed it was solely their decision as to how and when such an exercise of their rights would be necessary. PAG understandably argued that RBS’ right was fettered, citing Socimer International Bank Ltd v Standard Bank London [2008] EWCA Civ 116: “a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality”.

The Court of Appeal agreed with PAG, holding that, “it can be inferred that the parties intended the power granted by [the clause] to be exercised in the pursuit of legitimate commercial aims rather than, say, to vex PAG maliciously”. It did however interpret ‘legitimate commercial aims’ rather generously – but this will nonetheless be a useful judgment for bank customers (or indeed any ‘weaker’ bargaining party to a contract) to deploy, to ensure that such one-sided powers are exercised fairly by the ‘stronger’ party.

No evidential cherry-picking

At first instance, RBS served a supporting witness statement from an RBS employee, who was not called in person. For its appeal, PAG sought to rely on a few paragraphs of this statement to support a particular point it wished to make; as the statement was from RBS’ employee, the partial evidence was put before the court using the hearsay rule. PAG did not however include the entire statement – as much of the remaining evidence was actively unhelpful to its other arguments. 

The Court of Appeal disapproved: it is important for the court (particularly where the witness is not being called) to be able to consider the witness’ evidence in context; cherry-picking of selected paragraphs will not be permitted. A reminder to us all – however tempting!

This article was published in New Law Journal in May 2018.

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