The duty of a salesman

6 April 2018

On 5 December 2017, the High Court handed down its latest swaps mis-selling judgment in Marz Limited v Bank of Scotland Plc. The decision confirmed a bank can exclude obligations by agreement and rejected the imposition of an “intermediate duty” on banks as a general principle.

In 2008, the Bank of Scotland (the Bank) provided finance to Marz. A condition subsequent of the lending was that Marz entered into an interest hedging arrangement. The Bank explained various hedging products and recommended a trigger swap, which Marz entered into. Less than two months later, the financial crisis caused interest rates to plummet, leaving Marz tied to interest payments at well above market rate.

Marz brought proceedings against the Bank for its losses (approximately £1.85 million) claiming the trigger swap was unsuitable and that by explaining the available hedging products and recommending the trigger swap, the Bank breached: (1) express contractual terms to assess the product suitability contained in its Terms of Business; and (2) both contractual and tortious duties to use reasonable skill and care when providing advice or information.

It is well established that where a bank assumes responsibility for, and provides, advice, it must do so fully and accurately. Where it merely provides information, it must not mislead or misstate. The issue in determining the Bank’s contractual obligations was that the Terms of Business conflicted with the ISDA Master Agreement. The Terms of Business obliged the bank to “advise and deal with you…” and “where we make a recommendation or suggestion to you we will take reasonable steps to assess whether such services are suitable for you based on the information provided by you…”. Conversely, the ISDA Master Agreement (expressly stated to prevail in the event of a conflict) contained the standard ISDA 5(2) “relationship between parties” clause which specifically declared that the Bank was not acting as an adviser and the claimant was making its own independent decisions.

The judge held that the ISDA Master terms must prevail; any conflicting provision in the Terms of Business was inapplicable and ineffective.

Although Marz attempted to argue that ISDA clause 5(2) was an exclusion clause and was not reasonable within the meaning of UCTA 1977, the court disagreed. ISDA clause 5(2) was a clause clarifying the basis on which the parties contracted and accordingly UCTA 1977 did not apply.

The court also held that the Bank was not an adviser and did not owe any duty to use reasonable skill and care in respect of comments in relation to the swap. Determining factors here were that: (1) there was no advisory agreement between Marz and the Bank; (2) Marz had retained independent accountants to advise; and (3) Marz’s principal shareholder was an experienced businessman with previous knowledge of hedging products and was familiar with the industry standard documentation.

Finally, although Marz also claimed that as the Bank provided explanations of the various hedging products it owed it an “intermediate” duty to give accurate and proper explanations (as found in Crestsign v National Westminster Bank Plc), the judge rejected this argument stating that to impose a wider duty than to misstate on a salesman would “blur the lines between a salesman and an adviser”.

The judgment re-emphasises the hurdles faced by counterparties in existing financial transactions, and in particular highlights that whilst the Crestsign judgment created a potential avenue for disgruntled investors, the court has increasingly restricted claims to widen this duty.