Several recent decisions have highlighted the problem that the form of a contract may be greatly at variance with its substance as the parties deliberately and knowingly operated it. Features of many of these cases are “basis clauses” and the principle of contractual estoppel. The decision of Mr Tim Kerr QC, sitting as a deputy High Court judge in Crestsign Limited v National Westminster Bank plc and Royal Bank of Scotland, grappled with both points. His decision is now subject to an appeal which is expected to be heard in the coming months.
The decision in Crestsign
Crestsign, through its directors (Mr and Mrs Parker), wished to refinance £3.3m of loans in connection with its property business. Early in 2008, the Parkers had discussions about the refinance with Natwest and RBS (the banks), who were prepared to sanction the loan but wanted to introduce hedging, or interest rate management terms. Mr Parker had no understanding of such sophisticated instruments and he made this clear to the banks’ representatives, including Mr Gillard, who was an expert in such matters and who, the court found, engaged in “hard sell”. The deal was concluded on the basis of a swap agreement for a five year only loan term, but the separate interest rate management contract locked in Crestsign for ten years.
The court:
- Found that it was obvious that the variant forms of contract which had been presented by the banks carried with them an unacceptable risk that Crestsign could be “locked in” for a ten year term with the serious risk of very high quarterly payments resulting from low interest rates, coupled with the risk of inability to borrow beyond the five year term of the loan, and an inability to switch to an alternative provider because of prohibitively high break costs.
- Accepted the evidence of Crestsign’s expert witness that the swap was unsuitable because it hedged all of the debt, was inflexible for Crestsign (though not for RBS) over the ten year period, placed nearly all the risk on Crestsign and little on RBS, and over-exposed Crestsign to adverse interest rate conditions for seven of the ten years.
- Found that if the banks owed a duty of care to Crestsign, they were in “clear breach” of it, and that if Mr Parker had been properly advised, he would have steered clear of any swap product and, if the nature of an interest rate cap had been explained to him alongside that of a swap, he would have paid the premium for the cap.
In the event, however, the deputy judge, found that the banks did “provide negligent advice but they successfully excluded any duty not to do so”. What drove him to this conclusion was the banks’ use of a series of standard form documents which stated that the relationship between the parties was not that of adviser and an advised party, and that Crestsign should make its own assessment of the suitability of the products. The judge, relying upon the decision of Jonathan Clarke J in Raffeisen Zentralbank v RBS concerning clauses which purport to define the basis of a contractual relationship, concluded that the documents did define “the relationship as one in which advice was not being given”. Further, relying on the Court of Appeal’s decision in J P Morgan Chase Bank v Springwell Navigation Corporation, Crestsign was contractually estopped from asserting the existence of a duty of care. The estoppel would arise because the assertion of the duty contradicted the premise upon which the contract was said to be made. The court held that the Unfair Contract Terms Act 1977 did not apply because “the clauses in question are all basis clauses and not exclusion clauses.”
Basis clauses and contractual estoppel: considerations of section 13 of UCTA and earlier authorities
The principles at stake here are extremely important. If the Crestsign decision stands, it will be remarkably easy for anyone who would otherwise owe a duty of care to avoid responsibility, not by purporting to exclude the duty (which would be vulnerable to attack under UCTA on the basis of not satisfying the requirement of reasonableness), but by disclaiming the duty of care, being the basis upon which the court expressly found for the banks (at paragraph 114 of the judgment).
As for the “basis clause” finding, the court found that, despite what the terms said, in substance advice was given by the banks. It is not clear why, in these circumstances, section 13(1) of UCTA would not have applied, rendering the basis clause an exclusion clause susceptible to challenge. That section provides that:
“(1) To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents—
…
(b) excluding or restricting any right or remedy in respect of the liability, …;
…;
and (to that extent) sections 2 [negligence liability] and 5 to 7 also prevent excluding or restricting liability by reference to terms and notices which exclude or restrict the relevant obligation or duty.”
In Smith v Eric S Bush, the House of Lords held that this section rendered a disclaimer subject to the requirement of reasonableness, because it has the effect of seeking to exclude a liability which would otherwise arise. Neither the section, nor this decision, appears to have been before the court in Crestsign.
As for contractual estoppel, again it is not clear why section 13 of UCTA could not be engaged against a contractual provision which, by seeking to give rise to an estoppel, excludes or restricts a remedy. Further, there is real room for debate, if not in the Court of Appeal then in the Supreme Court, as to whether Springwell should prevail over two earlier decisions of the Court of Appeal (Lowe v Lombank Ltd and Grimstead v McGarrigan), in which powerfully constituted courts rejected the notion that it was possible to convert a statement as to past facts, known by both parties to be untrue, into a contractual obligation. If the parties know that advice has been given, and representations made, and there has been the requisite reliance, a term that this was not the case will not give rise to an estoppel.
