Property Alliance Group Ltd v The Royal Bank of Scotland Plc

A bank which explains a proposed swap owes a fact-sensitive duty not carelessly to misstate. It does not thereby assume a general duty to advise or to disclose its internal assessment of future break costs. The scope of any responsibility depends on the relationship, the transaction and the information volunteered.

Implied representations require clear words or conduct viewed through the reasonable representee’s understanding. A bank proposing a LIBOR-referenced transaction may represent its own honesty concerning the relevant currency, but not wider matters unrelated to the transaction. A contractual power held for a lender’s benefit may be exercised in its own interests, but only for legitimate commercial aims and rationally in pursuit of them.

Property Alliance Group Ltd entered four interest-rate swaps with The Royal Bank of Scotland plc. The swaps were referenced to three-month sterling LIBOR. PAG terminated them in 2011 and incurred substantial break costs after interest rates fell.

PAG sought rescission and damages. Its surviving claims alleged negligent misstatement concerning potential break costs, misrepresentation that the swaps were hedges, implied fraudulent representations concerning LIBOR, and wrongful revaluation of its secured properties. Asplin J dismissed all claims in the Financial List: [2016] EWHC 3342 (Ch).

PAG appealed, challenging both legal conclusions and factual findings. The central issues were the scope of a bank’s duty when explaining swaps, the implications of proposing LIBOR-referenced contracts, and the limits on a lender’s contractual right to require valuations.

1. Appeal dismissed. The Court upheld dismissal of every remaining claim.

2. RBS owed PAG a Hedley Byrne duty not carelessly to misstate when explaining the swaps. That duty was fact-sensitive and did not create a general advisory duty. RBS had accurately explained that break costs could arise, depended on market conditions and reflected the difference between the relevant fixed and floating rates. It assumed no responsibility to disclose its subjective internal credit-limit utilisation figure or to provide worked future break-cost scenarios. PAG also failed to establish that it entered the swaps because that information was withheld.

3. References to a “hedge” were not misrepresentations. In their contractual and factual context, they described protection against rises in interest rates during the guaranteed period. PAG knew the swaps’ duration and RBS’s cancellation rights. The judge was entitled to find that PAG did not rely on a broader meaning. The Court nevertheless held that the judge’s separate finding of fraud against RBS personnel was unsupported by the evidence; that correction did not affect the dismissal of the claim.

4. By proposing the swaps after lengthy discussions, RBS impliedly represented that it was not manipulating, and did not intend to manipulate, sterling LIBOR. The representation did not extend to other currencies, nor was it confined to the particular three-month tenor. The judge’s finding that PAG had not proved manipulation of sterling LIBOR was not plainly wrong.

5. Clause 21.5.1 of the 2011 facility agreement was not wholly unfettered. RBS could act in its own commercial interests and need not balance them against PAG’s, but it could not commission a valuation for an unrelated purpose or where it could not rationally advance legitimate commercial interests. On the facts, the 2013 valuation was authorised. CPR 32.5 did not permit PAG to introduce only favourable extracts from an uncalled witness’s statement.

• Court of Appeal (Civil Division): PAG’s appeal was dismissed: [2018] EWCA Civ 355.
• High Court, Chancery Division, Financial List: Asplin J dismissed PAG’s claims for rescission and damages: [2016] EWHC 3342 (Ch).