A Court of Session judge has dismissed a claim against Royal Bank of Scotland for the sale of a complex financial product to a small business.
The landmark test case judgment involving interest rate swap agreements (IRSAs) could now help banks head off a flood of legal claims.
The Herald revealed in June how IRSAs have cost UK businesses billions of pounds in additional costs and potentially threaten thousands of jobs, and last month the Financial Services Authority (FSA) announced a "review and redress" process for all IRSA sales.
In the first case of its kind to go to judgment in the UK, Lord Hodge yesterday ruled against property company Grant Estates in its claim against RBS for mis-selling a hedging device that fixed the interest rate on the company's £777,000 borrowings in 2007 just as rates were about to plunge.
Property developers Ruari and Jamie Stephen had claimed the bank advised them to take out the IRSA as a protection against rising rates, when the bank knew they were likely to fall, and its extra cost burden had ended up pushing the business into administration.
The judgment has been eagerly awaited by the Bully Banks campaign, which has complained that the FSA review will be controlled by the banks and will force businesses to take legal action. The law firms involved in the campaign have revealed they have a raft of clients with substantial claims, many of which have been settled out of court.
However, Cat McLean, partner at MBM Commercial in Edinburgh, admitted yesterday that the judgment was "disappointing", adding: "It will be that much more difficult now to pursue a swap mis-selling case through the courts, as Lord Hodge's decision will have persuasive authority and is obviously very thoughtfully and carefully constructed."
She said it would also affect the FSA review process because it could "give encouragement to the banks to reject claims made under the review process, because the alternative to accepting a bank's decision to reject the claim is to litigate".
Colin Borland, spokesman for the Federation of Small Businesses in Scotland, also said the judgment was "disappointing". He said: "Many of our members have been affected to one degree or another, and lawyers and others are going to have to look carefully at it to decide the next move."
Mr Borland said a common feature of IRSA sales seemed to be that businesses were "instructed" to take them, on pain of losing their credit.
Lord Hodge, in a 100-paragraph judgment, says Iain Mitchell, QC, a leading member of the QA Legal consortium which is pursuing a number of cases in Scotland and England, failed to plead a relevant case on behalf of Grant Estates.
The judge also criticised the allegation of fraudulent misrepresentation by the bank, which he said lacked any supporting evidence, saying: "Allegations of dishonesty can have very serious consequences for people, particularly those engaged in regulated professions, and can blight careers, at least temporarily, even if they are eventually not substantiated."
Mr Mitchell had argued that RBS had a duty of care under common law in its relationship with the developers, who were young and inexperienced in financial markets, and that a business was entitled to the same consumer protection as an individual under EU law. He said the bank's misrepresentation was at least negligent and possibly fraudulent – allegations that the bank challenged and were not insisted on in court – and asked the Court of Session to scrap the interest swap deal and award damages.
Lord Hodge, however, ruled the bank was protected by its contract, which clearly stipulated the client was not receiving financial advice but must seek their own. Grant Estates, he said, had "agreed in advance the contractual definition of its relationship with RBS and must accept the consequences of that agreement on its contractual and other common law claims".
Andy Green, a spokesman for the Bully Banks campaign, said last night: "The fundamentals remain that a large number of cases have already been settled out of court. The vast majority of cases remain to receive judgment and the justice we think their cases merit."
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