Grant Estates Limited v The Royal Bank of Scotland plc

Summary of the Opinion issued by Lord Hodge.

Grant Estates Limited (GEL) and its two directors raised an action against The Royal Bank of Scotland plc (RBS) in which they alleged the mis-selling of an interest rate swap derivative.

GEL was a developer of property in Elie which was funded by a loan from RBS which it took out in October 2007.  The funding arrangement involved GEL entering into an interest rate hedging arrangement with RBS which had the effect of fixing the rate of interest due on the loan.  The arrangement protected GEL from the risk of rising interest rates; but it also prevented the company from benefitting from falling interest rates.

The subsequent financial crisis caused interest rates to fall sharply in 2008 and rates have remained low ever since.  As a result GEL had to pay considerably more as interest (or its equivalent) on its loan than it would have if it had had a floating rate of interest.

GEL got into financial difficulty and on 25 February 2011 RBS placed it into administration.  GEL challenged that decision and has sought to have the administration suspended.  In this action GEL alleged that employees of RBS in giving unsound advice to its directors had breached the regulatory rules in the Conduct of Business Sourcebook (the COBS rules) which the Financial Services Authority issued.  It sought among other things damages resulting from the alleged breach of the COBS rules, breach of contract, and misrepresentation.  RBS challenged the relevancy of the allegations in a legal debate.

In an opinion issued today Lord Hodge dismissed the action.  He held that GEL had no right to pursue a civil action in the courts for the breach of the COBS rules and that it should seek any remedy for breach of those rules through the Financial Services Authority (FSA).  He also rejected GEL’s claims (i) that RBS had broken its contract in the way its employees presented the transaction to it (ii) that RBS owed GEL a duty of care at common law to give proper investment advice and (iii) that RBS’s employees had been guilty of either fraudulent or negligent misrepresentation.  Lord Hodge held that GEL had agreed a contract with RBS which governed their relationship and that that agreement excluded its common law claims.  The agreement did not impinge on GEL’s right to seek a remedy from the FSA.  Accordingly, if GEL could establish its allegation of mis-selling in breach of the COBS rules, its remedy lay with the FSA.  

The full Opinion is now available.

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