Clydesdale Bank and National Australia Bank successfully defend SME fixed rate lending claims

On 19 March 2024, Mr Justice Zacaroli handed down judgment in Farol Holdings Limited & ors v Clydesdale Bank PLC & National Australia Bank Limited [2024] EWHC 593 (Ch), following a 12-week trial in autumn 2023. In a judgment running to 185 pages in length, which will be of significant interest to the retail banking industry, each of the claims was dismissed.

Members of Fountain Court acted for the successful defendant banks. Bankim Thanki KC (leading Ian Wilson KC and Richard Hanke of 3VB), instructed by DLA Piper UK LLP (Adam Ibrahim), acted for Clydesdale Bank (CB). Patrick Goodall KC, Natasha Bennett and Francesca Ruddy, instructed by Herbert Smith Freehills LLP (Simon Clarke), acted for National Australia Bank (NAB).

The claimants were four SMEs which entered into fixed interest rate “Tailored Business Loans” (FRTBLs) with CB between 2002 and 2010, at a time when CB was a wholly-owned subsidiary of NAB. Their claims were effectively tried as lead cases, with in excess of 900 other stayed claims awaiting the outcome of this trial.

The claimants’ claims fell into two broad categories. 

First, whether CB was entitled to charge the break costs it had upon the customer’s early repayment of the FRTBLs.  The claimants brought claims for breach of contract, deceit, negligent misstatement and in restitution against the banks, contending that CB in fact had no contractual entitlement to charge the break costs it had. 

Mr Justice Zacaroli held that CB was entitled to charge those break costs, by reference to the cost to CB of terminating a corresponding back-to-back hedge which it had entered into with NAB, which was found to be legally binding.  He also held that CB had been entitled to calculate its loss upon early repayment of a FRTBL on the basis of the net present value of the difference between the fixed rate of interest due for the remaining term of the FRTBL and interest at the prevailing floating rate for the same period, with the sum due from CB to NAB upon termination of a corresponding hedge being a reasonable proxy for that loss. It followed that CB would have been entitled to charge the break costs it had charged whether or not it had entered into the corresponding hedges with NAB.

Second, whether false representations had been made about the fixed rate payable by the claimants on their FRTBLs.  Each FRTBL was provided at a single overall fixed rate of interest, which comprised two components: a “Fixed Rate” and “Margin”. The Fixed Rate offered to customers included an element of income to CB, referred to as “Added Value (AV)”, which was not disclosed to customers.  The claimants alleged that the banks had made various fraudulent, alternatively negligent, misrepresentations to the effect that the Fixed Rate was a market rate which did not include any additional profit for CB, with the Margin being CB’s only profit from the FRTBLs. Two of the claimants also contended that the non-disclosure of AV rendered their relationship with CB “unfair” within the meaning of section 140A of the Consumer Credit Act 1974.

Again, Mr Justice Zacaroli dismissed all these claims, holding that the CB and NAB employees did not (by omitting any mention of AV) represent, dishonestly or otherwise, that the only income CB generated on the loans was by way of the Margin. He also found that the relationships were not unfair, concluding that a fixed rate loan provided additional and valuable benefits to the customer, and that their provision involved the banks incurring additional costs. He concluded that there was nothing unfair in CB making a profit from that service or in the fact that the AV was not disclosed.

The full judgment can be found here.