“12.1 Indemnity The Borrowers shall indemnify the Bank on demand against any Loss (including any Loss on account of funds borrowed, contracted for or utilised to fund any amount payable under this Agreement, any amount repaid or prepaid under this Agreement or any Advance and any loss of Margin) which the Bank has sustained or incurred as a consequence of: ..... (f) any cost to the Bank incurred in the unwinding of funding transactions undertaken in connection with the Facility, including inter alia costs incurred when there has been a reduction in the market level of interest rate underlying the Loan. Such costs will be equivalent to the loss of interest income to the Bank as a result of re-deploying funds at a lower interest rate than that which prevailed when the Facility was made available, such costs to be determined by the Bank in their sole discretion.”
“What our clients are seeking to ascertain is what steps did the bank take to ascertain the person with whom they entered into a loan agreement had the right to enter into that loan agreement so as to bind our client. If it can be established that the bank acted correctly in dealing with that person then the next question is whether the bank complied with all appropriate rules on selling a swap with that person. These are reasonable requests. If the loan agreement was mis-sold then the bank will appreciate that the loss to our client is in the region of two million pounds. … As we have stated in previous correspondence we have sent such documents as we have to counsel to advise whether the totality of our correspondence meets the criteria of the pre-action protocol leading to the pre-action disclosure.”
“We refer to our previous correspondence and especially your letter of 14th April in which you state inter alia, ‘…Merchant Place Property Syndicate 35 (Syndicate) was never sold an interest rate hedging product.’ You complain that we make different requests at different times. You will see that the prime area that we have been looking for is the question of disclosure… You have stated on more than one occasion that no interest rate hedging affects this case, yet our clients have received an email from Kathryn Fergusson who describes herself as an “Associate Director, RBS Global Restructuring Group,” and she writes that as at 13th November last year the loan value was£8,734,941 and Swap MtM is£2,500,000 . The bank cannot have it both ways. … Please clarify the exact position and, having regard to Kathryn Fergusson’s email please provide current redemption figures. Kindly note that we are asking for those figures as part of our investigation as to the situation. We do not have any instructions concerning redemption.”
“You mention that the Bank has previously stated that no interest rate hedging affects this case. This is not accurate. The Bank has maintained the position, and still does, that the Merchant Place Property Syndicate was not sold an interest rate hedging product and that this was not a condition of the finance. The position is that on1 April 2004 Merchant Place Syndicate 35 entered into a Loan Agreement with the Bank. We note that your client was advised at the time on [sic] the entry into this Loan Agreement by Jason Lewis of Howard Kennedy. In order for the Bank to provide this loan at a fixed (rather than floating) rate of interest, the Bank itself had to enter into an interest-rate swap in connection with the facility in order to fund the transaction and hedge the risk of changing interest rates. As set out in the Loan Agreement, your client remains liable and agreed to indemnify the Bank for any loss incurred if this funding transaction has to be unwound i.e. break costs for terminating this swap early to match any earlier repayment of the loan itself. It is for this reason that your client has, on a number of occasions, been provided with figures from RBS employees in respect of both the principal loan balance (plus interest) and the prevailing Market-to-Market or MtM on the swap. You have received redemption figures for your client’s debt exposure to RBS. We set out some indicative figures below: Outstanding principal on the loan -£8,671,962.93 Accrued interest on the loan -£53,243.48 Interest-rate swap termination costs (MtM) (as at 14.02) -£2,396,276.25 £11,122,446.77 Please note that these are indicative figures at as21 May 2014 only and are subject to change. Due to continuing market fluctuations in interest rates, the MtM amount will change (potentially both up or down) and updated figures will need to be re-issued immediately ahead of any proposed redemption.”
“8. Secondly, it appears that you misunderstand and mischaracterise the position in relation to a possible ‘swap’ or IRHP under the Loan Agreement: a) We can confirm that the Syndicate does not have an IRHP/interest-rate swap agreement with the Bank. The Loan Agreement is a fixed rate loan. As previously explained, in order for the Bank to be able to provide the loan on a fixed (as opposed to floating) rate basis, the Bank itself entered into an interest-rate swap in connection with the facility in order to fund the transaction and hedge the risk of changing interest rates. b) The interest-rate swap termination cost referred to in our letter dated27 May 2014 is recoverable from the Syndicate members as borrowers under (Clause 12.1 of) the Loan Agreement pursuant to which, as was set out in that letter, the Syndicate members agreed to indemnify us for any loss incurred as a result of the funding transaction being unwound early. 9. It appears that you are probing for an angle through which your client may seek to challenge his liabilities for losses under the indemnity in Clause 12.1 of the Loan Agreement. However, you fail to take into account the real and fundamental distinction between a scenario where your client has entered into an IRHP (which is not the case here), and your client being liable, as borrower under the Loan Agreement, to indemnify the Bank for losses in accordance with the provisions of that document.”
“As you say in your letter, we do have a copy of the Loan Agreement and you specifically refer us to paragraph 12.1 which is headed Indemnity. An indemnity is a provision to compensate for loss as is clear in the balance of the clause. Please identify, in this instance, the loss that was incurred and the circumstances thereof, by reason of which the bank has claimed under the indemnity.”
“Secondly, you ask for confirmation of the loss that the Bank has suffered and for the Bank to identify the circumstances for the loss. As regards the latter point, you will appreciate from my previous letter that the circumstances in which loss would arise would be on early repayment of the loan following sale of the property and the Bank’s internal interest-rate swap being unwound as a consequence. We should note that this is not the case at this stage and, therefore, no interest-rate termination costs exist at present. Your client has, however, been informed of the anticipated termination cost (by way of an indicative redemption figure) in anticipation of a possible early termination of the loan.”
“We have already explained the position to you. As stated in our letter of 10 June and previously, there is no interest-rate swap between the Syndicate and the Bank. The Bank entered into a separate, internal swap in relation to the funding of the fixed rate loan to the Syndicate. The interest-rate swap termination costs referred to in our letter dated17 May 2014 is recoverable from the Syndicate members as borrowers under (Clause 12.1 of) the Loan Agreement pursuant to which, as we set out in that letter, the Syndicate members agreed to indemnify us for any loss incurred as a result of the funding transaction being unwound early.”
“1. If the loan continues to maturity and it is then repaid in full, there will be no liability to pay in respect of the internal swap arrangement as this is due to mature on the same date. 2. Your client’s cost to date relate to the loan (in particular the payment of interest) and, as stated previously, the Bank was able to offer this to you client at a fixed rate because of the internal swap arrangement being in place. However, your client had so far incurred no additional costs in respect of this.”
“A problem from the very outset has been the lack of documentation that has been retained by our client. Matters remain unresolved and we continue to look into various aspects. One of the points that we are looking at is a point based upon the principles of contract law. You are aware that the bank repeatedly denied that there was a swap arrangement. On being pressed the bank revealed that a swap arrangement did exist but it was not one with our client but with another party. On being pressed the bank then revealed that the other party was in fact the bank itself wearing a different hat. It remains unclear whether the bank arranged a separate swap in relation to the specific loans in this case or simply bundled it in with many other similar cases. When asked under what provision of the Loan Agreement our client could be made liable for the cost of breaking the swap we were referred to Clause 12 of the Loan Agreement, which indemnifies the bank against any loss. The question that we have put to leading counsel is whether our client could be held liable under paragraph 12 for a loss which our client had no opportunity for foreseeing. We believe that counsel will shortly be returning from its summer break so we anticipate a response and his opinion in the not too distant future. You may care however in the interim to explain how our client could be held liable for a loss based on an arrangement of which she had no notice. Returning to the point made at the beginning of this matter, our initial approach to this situation is governed by the fact that our client does not have all of the appropriate documentation. That documentation has been requested from you but, not surprisingly, the bank has, to all intents and purposes refused…”
“We refer to our previous correspondence and confirm that we have been considering your letters, particularly those dated27th May 2014 and9th July 2014 . We note that you apparently claim, under the guise of Clause 12.1(f) hidden and potentially unlimited charges in respect of an interest-rate swap. In order that consideration can be given to the validity of the Bank’s potential claim we call upon you to answer the following questions: A) Please identify each and every funding transaction that the Bank allegedly undertook in connection with the loan facility provided in April 2004, saying in respect of each allegation: 1. Whether it was entered into orally or in writing. 2. [Particulars of any oral conversation and any note thereof] 3. If it was in writing identify each material document and provide a copy of the same. B) In respect of each transaction: 4. The cost the Bank has allegedly incurred in the ‘unwinding’ of the transaction or would incur if it was wound [sic] now. 5. Exactly how that cost is calculated.”
“We refer to our previous correspondence and, apart from the regulatory issues you are aware that our client’s position is that he denies that in the event of our client redeeming the loan to the Bank before full term that the Bank has the right to consider the cost of it undoing its internal swap as a loss and claiming that loss from our client pursuant to paragraph 12 of the loan. This is a relatively straightforward point. Our client claims that the Bank is unable to claim such loss as nothing in relation to that potential loss was ever made clear either to our client or to anyone representing our client.”
“In response to your questions: A) Your request for “each and every funding transaction that the Bank allegedly undertook in connection with the loan facility provided in April 2004” is not understood. We have already provided you with redemption figures should the Syndicate wish to redeem the loan before its maturity, setting out the Syndicate’s debt exposure to RBS which includes the cost of terminating the interest-rate swap early. B) As you know, the Bank has not incurred any cost in unwinding its interest-rate swap arrangement as it has not been unwound. If the loan continues to maturity and it is then repaid in full, there will be no liability to pay in respect of the interest rate swap arrangement as this is due to mature on the same date. In terms of the cost of terminating the interest-rate swap early, this is calculated on a mark-to-market costs basis…”
“You will appreciate that RBS is contending that, if our client redeems its loan now, it will be liable to pay a sum of nearly£2.4 million in addition to the principal and interest relating to the loan. Our client is entitled to the information it has requested. If this information is not forthcoming it will have to begin proceedings to obtain it.”
“We set out the position below in respect of points A) and B) in your letter dated11 September 2014 . A) You ask for information in respect of ‘each and every funding transaction that the Bank allegedly undertook in connection with the loan facility provided in April 2004’. We told you in our letter dated 2 October that we had already provided you with redemption figures should the Syndicate wish to redeem the loan before its maturity. Those figures set out the Syndicate’s debt exposure to RBS, which includes the cost of terminating the interest-rate swap early. Given this, it is implicit that there are no other funding transactions aside from the interest-rate swap set out in the redemption figures. Your response in your letter dated7 October 2014 is to point out that the Bank has included the cost of terminating the interest-rate swap early in its redemption figures. We consider we have responded to your query: there are no other funding transactions in connection with the Syndicate’s loan facility, aside from the internal interest-rate swap which has been the subject on [sic] ongoing correspondence.”
“The Claimants are the principal borrowers and the Defendant is the lender pursuant to a loan agreement made on1st April 2004 (“the Agreement”) relating to a term loan facility of£9,237,500 . The Claimants claim: 1. An inquiry as to what is due to the Defendants pursuant to the Agreement. 2. An inquiry as to whether the Borrowers (pursuant to the Agreement) are liable to pay to the Defendant, what it calls in its letter of27 May 2014 , an “Interest Rate Swap termination cost”, and (if such a liability arises) how, when and why it arises and how the alleged cost is to be calculated. 3. Further or other relief. 4. Costs.”
“3. In circumstances more fully described below, for several months I have been in correspondence with the Defendant in an endeavour to discover the amount payable to the Defendant in order for the Facility to be redeemed. The Defendant maintains that, in addition to the outstanding principal and interest, it is entitled to (what it calls) an “Interest Rate Swap termination cost” (see its letter of27th May 2014 ). The amount claimed in respect of this cost is said to be well over£2 million . 4. The Claimants inform me that they never agreed to take out any “Interest Rate Swap” with the Defendant. In correspondence the Defendant has admitted that the borrowers were “not sold an interest rate hedging product and that this was not a condition of the finance” …. 5. I have continued to correspond with the Defendant, asking very specific questions, yet the Defendant has failed to disclose the legal basis for its claim. Since the Claimants, via myself, have exhausted their dialogue with the Defendant this claim is brought in order to oblige the Defendant to justify its claim, if it can. If the claim cannot be justified then the Defendant must abandon it, and allow the borrowers the opportunity of redeeming the Facility without having to pay an unwarranted and very large extra cost.”
“13. As is common with fixed rate loans (particularly long-term fixed rate loans), the Bank itself entered into an interest-rate swap to fund the interest on the Loan and to hedge the risk the Bank faced on the possible fluctuation in interest rates in providing the (fixed rate) Loan (Internal Swap). The Internal Swap is between RBS Corporate Banking Division and RBS Markets, the interest rates desk which is responsible for hedging all of the Bank’s interest rate risk (including the Bank’s risk in funding the Loan) with market counterparties on a portfolio basis.”
“(a) Identify each and every funding transaction that the Bank allegedly undertook in connection with the Loan (i) The Bank responded on 20 October (exhibited at page 91-92 of MFB1) explaining that there were no other funding transactions made in connection with the Loan other than the Internal Swap that had been the subject of previous correspondence between the parties.”
“30. The Claimants wish the court to rule upon the claim made by Mr Barnett at paragraph 13 of his statement. The Claimants contend that they are not liable to pay the Defendant any sum in respect of the “Internal Swap” described therein. I contend that such a declaration can be made within the scope of the existing Part 8 claim. However, to remove any doubt that the court can consider this point, the Claimants invite the court to amend the claim in accordance with the draft amended claim form that has been provided.”
“3. A declaration that the Borrowers are not liable to pay the Defendant any sum in respect of the “Internal Swap” as described at paragraph 13 of the Witness Statement of Michael Felix Barnett dated2 December 2014 .”
“9. Thus it emerges that the Defendant, without entering into any agreement with the Borrowers, took upon itself the arrangement of some kind of “Internal Swap”, and it claims that the Borrowers are liable for all the costs of this “Internal Swap”
“As set out in paragraph 13 of Mr Barnett’s Witness Statement, D entered into an interest-rate swap to fund the interest on the loan.”
“It is really a simple question of construction, is it not?” to which Mr Warwick replied in the affirmative. At page 9 the Master observed that “the parties had finally landed on what the issue is, which is a very short issue of construction…”
“11. Second, Mr Kaye takes issue (at paragraph 15 of his second statement) with whether or not the Bank’s Internal Swap was a “funding transaction” within the meaning of clause 12.1(f) of the Loan Agreement. In this regard, I refer to paragraphs 13 and 18 of my first Statement. By way of further evidence as to the nature of the funding by the Bank of the Loan to MP35, I am informed by the Bank and believe that: … (e) In order to fund any future shortfall between the fixed rate of interest received under the Loan Agreement and the floating rate of interest being paid to Group Treasury, and as part of funding the Loan, Corporate Banking entered into the Internal Swap with the relevant Markets Desk (in this case, the sterling rates Markets Desk) for the relevant tenor rate and notional amount, essentially mirroring the characteristics of the Loan. The Markets Desk sits within the Bank, and is not a separate legal entity. (f) The Markets Desk will, in turn, fund the Internal Swap by entering into an interest rate swap with an external market counterparty. As set out in my first Witness Statement, the Markets Desk manages the Bank’s sterling interest rate risk on a portfolio basis by aggregating that interest rate risk. This means that each sterling swap booked internally is not necessarily funded externally on a “back-to-back” basis. (g) The Internal Swap is, therefore, a funding transaction without which the Bank would not be able to offer the (fixed rate) Loan, the costs of unwinding of which is a cost of the “unwinding of funding transactions undertaken in connection with the Facility” (clause 12.1(f) of the Loan Agreement).” (e) In order to fund any future shortfall between the fixed rate of interest received under the Loan Agreement and the floating rate of interest being paid to Group Treasury, and as part of funding the Loan, Corporate Banking entered into the Internal Swap with the relevant Markets Desk (in this case, the sterling rates Markets Desk) for the relevant tenor rate and notional amount, essentially mirroring the characteristics of the Loan. The Markets Desk sits within the Bank, and is not a separate legal entity. (f) The Markets Desk will, in turn, fund the Internal Swap by entering into an interest rate swap with an external market counterparty. As set out in my first Witness Statement, the Markets Desk manages the Bank’s sterling interest rate risk on a portfolio basis by aggregating that interest rate risk. This means that each sterling swap booked internally is not necessarily funded externally on a “back-to-back” basis. (g) The Internal Swap is, therefore, a funding transaction without which the Bank would not be able to offer the (fixed rate) Loan, the costs of unwinding of which is a cost of the “unwinding of funding transactions undertaken in connection with the Facility” (clause 12.1(f) of the Loan Agreement).”
“1…The issue is whether Cs are (or, more accurately, would be) in the event of early termination liable to indemnify D in respect of losses D may suffer in unwinding a hedging transaction entered into by D in connection with the Agreement.”
“The ambit of the dispute is narrow, Cs maintain as a matter of construction they are not liable in any circumstances to indemnify D for any loss suffered as a result of the hedging transaction D entered into in connection with the Agreement.”
“Mr Justice Warren: …The only interest rate swap that we are talking about is the one referred to in Mr [Barnett’s] First Witness Statement at para. 13, I believe, which is what you have called the Internal Swap; yes? Or is there something else? Ms John: Well, My Lord, that has a knock-on effect on the bank’s Markets Desk, takes a portfolio aggregate view and enters into an external market swap on the basis of its potential exposure. So it is an individually specified transaction, as it were. Mr Justice Warren: The internal swap is purely between divisions of the bank? Ms John: Correct. Mr Justice Warren: There is no contract underlying it, obviously, therefore? Ms John: That is correct. Mr Justice Warren: It is simply within the bank. There is no specific, this is the question, there is no specific external hedging transaction directly at the Loan to the Syndicate? Ms John: Not readily identifiable back-to-back specific, no My Lord.”
“Mr Justice Warren: They cannot tell you, because they do not know until they actually have to unwind the hedge what they will do. Mr Warwick: Well, what we have not even got, you see, we are told there is a portfolio, but we have no evidence of the portfolio. We are told it was with some other party; we do not know who the other party is. Mr Justice Warren: I do not know what is in evidence and what I have been told in the course of submissions. … Ms John: There is a slight problem trying to resolve this on a Part 8, which is why I raised this at the point of the CMC because I entirely agree with your Lordship’s point, “What are we being asked to prove?”
“Mr Warwick: Well, if we put aside the question of knowledge and we just focus on the language used, if instead of what I might call a conventional interest-rate swap which has been entered into between the bank and my client, the bank had gone off to a true third party and entered into a bespoke arrangement for this particular loan agreement, then I can see, I am not conceding this, but then I can see that when the bank then said, “Right, we have got this one loan agreement and next to it we have this separate agreement between the bank and a third party and we have entered into this to hedge what we regard as our risk of moving interest rates, and if one then – or if the loan falls to be repaid, then we will unwind that bespoke arrangement,”
“Mr Warwick: Well, Mr Lord, for the purposes of this case I would then accept that just as it is possible for lender and borrower, when they enter into a loan agreement, to enter into separate interest-rate swap agreements, and it happens so frequently, as I said in my introduction, that the courts are concerned with a good deal of litigation involving that. So moving on, instead of it being an arrangement between lender and borrower it is an arrangement between the lender and a third party, what I will call the hedging institution, then this transaction is entered into with the hedging institution on a back-to-back basis essentially with the loan agreement. Then your Lordship could say that is the funding transaction that is envisaged, if indeed the parties – because it is all a notional exercise when you exercise construction, but your Lordship would then say, “What was envisaged by (f)?”
“Mr Warwick: Well, My Lord, I suspect having agreed that you could have a bespoke arrangement on the day of the loan with a third party if they then decide to do it the next day or the day after that, perhaps when they sense that interest rates are moving in a particular way, I can see the argument that that would also fall within (f), because (f) does not say – when it says “in connection with the facility” does that mean – or when it says “in connection with” it does not say it has to be on the day the facility is taken out, there has got to be a nexus that providing it is in connection with that facility if you took it out a week later or a month later then, and it is this funding transaction, that probably falls within (f).”
“Mr Warwick: Well, My Lord, you have asked me a number of possibilities that would be covered by 12.1(f) and I have indicated that if the bank did take out a freestanding hedging arrangement with a third party to hedge its risk in relation to this loan agreement and if it incurred a cost in the unwinding of that then that could fall within (f). But it did not take out any freestanding arrangement with a third party.”
“7. More than five years have elapsed since the date of the Agreement and the making of the loan. The Borrowers are considering redeeming the whole loan. The Bank contends that, as a condition of such redemption, the Borrowers must pay an "Interest Rate Swap termination cost". As at27 May 2014 , this cost was quantified by the Bank at about£2.396 million . I was not told the precise figure as at the date of the hearing but it is clearly substantial. The Borrowers contend that such Interest Rate Swap termination cost is not within the scope of the indemnity contained in clause 12 of the Agreement since it is not a "Loss".”
“11. I am not much attracted by Mr Barnett’s point or with adjudicating on this particular spat. Clearly what the Borrowers are seeking in the original Claim Form is an answer to the question whether they would be liable for this cost if they were to prepay the loan. In any case, this does not much matter because the Claim Form has been amended to include a new paragraph seeking a declaration "that the Borrowers are not liable to pay [the Bank] any sum in respect of the "Internal Swap" as described at paragraph 13 of the witness statement of Michael Felix Barnett dated2 December 2014 ".”
“15. The reader of this correspondence would have no reason to think that the hedging transaction to which the Bank was referring was other than a purely internal matter although I am bound to say that, at that stage in October 2014, the nature of the internal arrangements had not been adequately explained to the Borrowers' solicitors or, indeed, at all. There is no reference in the correspondence to an external hedge with a third party: if there had been one, it might have been expected that the Bank would have given to the Borrowers some information about it. But this was not done. In any case, if there had been anything other than some internal arrangements, the second passage quoted from the20 October 2014 letter would have been wrong.”
“We consider we have responded to your query:”
“16. On any view, and the Bank does not suggest otherwise, there was no hedging agreement entered into between the Borrowers and the Bank.”
“28. The fourth point is a rather longer point and concerns precisely what it is that I am to decide. The Claim Form was formulated in the light of the correspondence and the position which the Bank had taken. The Borrowers' solicitors had consistently (albeit misguidedly or unreasonably in the Bank's view) sought details of the funding transactions on which the Bank would rely were the Borrowers to make a prepayment. Like a mortgagor seeking to redeem, the Borrowers sought the basis on which the Bank had based its calculations of the amount which would fall due. Although clause 21.2 of the Agreement provides that any certification or determination by the Bank is prima facie evidence of the matters to which it relates, the provision of figures is no more than prima facie evidence of the correctness of the figures. It does not mean that the Bank can simply decline to explain the legal basis on which the calculation is based. In the end, the Bank, in its letter dated20 October 2014 , pinned its colours to the Internal Swap as the relevant funding transaction, expressly disavowing reliance on any other funding transaction. 29. It was on that basis that the original Claim Form was drafted. The complaints about the deficiencies of the Claim Form did not go to that aspect of the dispute. The Borrowers' case in the litigation has always been that the funding transaction relied on by the Bank (and it was in fact the only funding transaction relied on by the Bank until much later as I will explain), that is to say the Internal Swap, was not within the scope of clause 12.1(f) of the Agreement. In case the Claim Form did not seek the right relief in the light of AG's [Addleshaw Goddard’s] observations about its deficiencies, the amendment which I have already mentioned was made. It did not, in my view, introduce a new claim which would have justified the Bank in saying that a totally new point was now being made and that it was not, after all, the case that there was some funding transaction other than the Internal Swap which would give rise to an indemnity under clause 12.1(f) were the Borrowers to make early payment. 30. I had thought, before the hearing began and having read Ms John's skeleton argument, that the Bank's case remained that the relevant funding transaction was the Internal Swap. But as the argument developed, it became apparent that this was not so. It remained her primary position, on behalf of the Bank, that the Internal Swap was the relevant funding transaction. But if that was not so, then the relevant funding transaction was the Internal Swap taken together with the arrangements with third parties by which the Bank manages its risk on a portfolio basis. 31. I will, of course, answer the question raised in Claim Form which is whether the Internal Swap is a relevant funding transaction. I will also deal to some extent with the issue whether the Internal Swap taken together with any sort of external hedging is a relevant funding transaction. But I will not address (other than tangentially) the question whether an external hedging transaction is capable of being a relevant funding transaction. I will not do so because it has not been argued, or at least properly argued, and whether the particular arrangements entered into by the Bank with third parties which cover its exposure in relation to the loan to the Borrowers will depend on the details of how the Bank manages its risk on a portfolio basis. As to that, I have no evidence but only some rather general explanations given by Ms John and which, even if they were uncontroversial, are not of sufficient detail to enable me to reach a conclusion. 32. Whether the Bank is precluded from relying on such arrangements as relevant funding transactions for the purposes of clause 12.1(f) is not a matter for me in this litigation. The Borrowers may have a case for saying that the Bank is precluded from doing so having allowed the Borrowers to come to court on the clearly stated basis that the Bank was relying only on the Internal Swap as the relevant funding transaction. Further, although Ms John did set out the secondary position that the relevant transaction was the Internal Swap together with the external arrangements on a portfolio basis, she did not seek to argue that the external arrangements alone were a relevant funding transaction. No doubt she would say that she did not do so because that was not a question raised by the Claim Form. But if the point is raised in the future, it may be that the reason it was not raised by the Borrowers on the Claim Form will be relevant to whether it can, at that future time, be raised by the Bank, that reason, of course, being that the Borrowers were told by the Bank that the only relevant funding transaction was the Internal Swap.”
“49. The point was also made that Mr Warwick has at no stage indicated what clause 12.1(f) does cover if it does not cover the facts of the present case. As to that, Mr Warwick accepted, in his reply submissions for the purposes of the present claim, that a specific hedging transaction by the Bank with a third party, back to back with the Facility, would be covered by clause 12.1(f). But he did not accept that it would include the external hedge arrangements on a portfolio basis which the Bank in fact transacted with third parties. As I have already explained, that is not an issue which is raised on the Claim Form and is not one which I am willing to address.”
“iii) Although Mr Warwick accepts that a back-to-back hedge is a "funding transaction", he does not accept that that is the case in relation to the actual arrangements in the present case. For reasons already given, that is not an issue on the Claim Form and I do not have the material to decide it.”
“56. I will make the declaration sought by paragraph 3 of the Amended Claim Form to the effect that the Borrowers are not liable to pay to the Bank any sum in respect of the Internal Swap. But this is not to be taken as a decision that the external hedging arrangement on a portfolio basis in the present case is not a "funding transaction" within the meaning of the definition of "Loss" or within the meaning clause 12.1(f). I am not, however, concerned in this litigation with any question whether it is open to take that point at any later stage.”
“16. However, in the light of the Judgment, the Bank also reserves its right to claim an indemnity on the basis left open by the Judge, i.e. by reference to any external transactions that might be unwound on prepayment. The Bank is investigating the external arrangements made when the Loan was advanced in 2004, and has written to the Borrowers in such regard. The Bank's rights to claim on that basis is outside the scope of the part 8 proceedings and any appeal.”
“57. Ultimately, in circumstances where the Bank had found the market counterparty interest-rate swap, and in light of the concession made by Leading Counsel for the Part 8 Claimants, the Bank decided not to pursue its appeal any further, as such a course of action appeared to be unnecessary both substantively and in terms of the parties' and the Court's time and resources.”
“6. Since it is the Claimants' contention that a renewed attempt by the Bank to justify recovery of the Swap Cost would be barred by estoppel and/or be an abuse of the process of the Court, the Claimants set out hereafter a summary of the background.”
“33… By reason of the history set out above the Bank is not entitled to require the payment of any Swap Cost as a condition of redemption of the Charge. The Bank's claim is res judicata (this term being used to extend to the several principles adumbrated by Lord Sumption in paragraph 17 of his judgement in Virgin Atlantic Airways Ltd the Zodiac Seats UK Ltd[2014] AC 160 ).”
“24. My firm was assisting the bank in relation to this correspondence at this time, and I recall that we had been struggling to understand exactly what KTC [Kaye Tesler] were after, that we have not already told them. We had been endeavouring throughout this period to correct misconceptions about possible external interest rate swaps with the Claimants, and the position in relation to the amount of break costs payable in respect of the Bank's internal funding arrangements in the event that the loan was repaid. So when responding to KTC's specific questions to the Bank in its 7 October letter, including "to identify each and every funding transaction that the bank allegedly undertook in connection with the Facility" and to identify "each funding transaction… The cost to the Bank incurred in the unwinding of that transaction…", The Bank was simply seeking to reiterate the position that we had been trying to explain previously – that the Part 8 Claimants had not entered into any swap and the "Interest Rate Swap termination cost (MTM)" was based on the internal swap that had been the subject of correspondence. There were no other funding transactions that had given rise to this potential MtM liability on redemption, which figure had already been provided by the bank… For that reason, the Bank simply did not have in mind and did not therefore provide detailed explanations of the mechanics of its own financing arrangements for the loan in this context.”
“47. In providing those explanations, given how matters had been left at the hearing before Chief Master Marsh, we felt that there was no need or indeed justification for our spending time investigating in detail and endeavouring to put in evidence the exact funding arrangements which had in fact been made by the Bank in making a fixed rate loan available to MP35 and what the Bank would actually do if the loan was repaid, which would in any event raise factual issues unsuitable for Part 8 determination. Further our understanding was that the Bank's interest rate risk was generally hedged across the Bank on a portfolio basis, and that the prospects of there being a bespoke "back-to-back" trade hedging its risk in the market were unlikely and any such trade would be difficult to identify. Indeed, those instructing me and our legal team proceeded up to and including trial on the understanding that that was the case. As a result, other than speaking to staff within the Bank regarding the usual approach taken to funding fixed rate loans, no searches for information and documents relating to external hedging in place at the time of the fixed rate loan made available to MP35 were undertaken in preparing the evidence.”
“55. From my own involvement at the time, I am aware that the bank did not know of the existence of this trade until that date [i.e. September 2015]. A search for a possible external swap was prompted partly because of the express concession made by Counsel for the Claimants at trial and the judgment, and partly by a desire on the part of the Bank to establish whether the judgment might affect any other relevant trades. In the event the Markets division within the Bank was asked to carry out a "drains up" investigation into whether this transaction was hedged with a separate swap (rather than across the whole portfolio), and a vanilla interest rate swap was identified as having been entered into on the day of the Internal Swap which corresponded so closely with the Internal Swap that it was deduced that it was put on in order to hedge that internal exposure. The reason why unusually a separate swap was entered into in this case was the unusually long tenor of the internal swap (corresponding with the loan) and the magnitude. Ultimately, the prior belief that there was no other transaction relevant to the Part 8 Claimants' complaints was honestly held. Neither the Bank, nor anyone in my firm, harboured an intention to mislead the Part 8 Claimants or the Court. Has set above, given that the issues which were to be determined in the Part 8 Proceedings were issues of contractual interpretation and given the express restriction on the Bank's ability to file evidence in those proceedings, no searches for information and documents relating to funding arrangements for the fixed rate loan made available to MP35 had been undertaken in preparing the evidence.”
“In trying this question, I believe I state the rule of the court correctly, when I say, that where a given matter becomes the subject of litigation in, and of adjudication by, a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time.”
“Thus the abuse in question need not involve the reopening of a matter already decided in proceedings between the same parties, as where a party is estopped in law from seeking to relitigate a cause of action or an issue already decided in earlier proceedings, but, as Somervell LJ put it in Greenhalgh v Mallard[1947] 2 All ER 255 , 257, may cover “issues or facts which are so clearly part of the subject-matter of the litigation and so clearly could have been raised that it would be an abuse of the process of the court to allow a new proceeding to be started in respect of them.”
“But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim. While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party's conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”
“On the other hand, it does not seem to me that there can be a general principle that a potential claimant is under a duty to exercise reasonable diligence, not yet having brought proceedings asserting a particular claim, to find out the facts relevant to whether he has or may have such a claim.”
“59 As for the relevance of a claimant’s failure to use what the court might consider to be reasonable diligence in finding out facts relevant to whether he has a possible claim, it may be that this could possibly be relevant to the inquiry described by Lord Bingham, depending on the circumstances. On the other hand, it does not seem to me that there can be a general principle that a potential claimant is under a duty to exercise reasonable diligence, not yet having brought proceedings asserting a particular claim, to find out the facts relevant to whether he has or may have such a claim. Moreover, I do not see how it can be relevant at all that the claimant may have failed to use due diligence in attending to his own interests at the time of the transaction or the events giving rise to the claims asserted. Unless, on the merits, that is a complete and inevitable defence to the claim, it seems to me to be entirely irrelevant to the inquiry which is necessary under Johnson v Gore Wood & Co[2002] 2 AC 1 . Nothing in Wigram V-C’s observations in Henderson v Henderson 3 Hare 100 supports that. That, however, is the context of the master’s comments on lack of reasonable diligence. If relevant at all, an inquiry as to any suggested lack of diligence on the part of the claimant would have to involve considering the circumstances of the particular claimant, including what knowledge he did have of the facts at any relevant stage, in order to decide whether he knew enough to put him on inquiry so as to try to find out more. In this context, as generally, it is also relevant that the onus is always on the defendant to show that the claimant’s conduct is an abuse of process.”
“15. It is clear that a claimant is under no general duty to exercise reasonable diligence to ascertain whether he has a potential further cause of action against the defendant (or third parties). On the other hand, in some cases the defendant may be able to show that the claimant knew enough to put him on an inquiry to find out more. Even then, it does not follow that there was an abuse on the part of the claimant, but it is relevant to the overall assessment and at a certain point the claimant’s knowledge may help to tip his behaviour into an abuse.”
"But when a trustee or anyone takes out and originating summons, he can make quite clear to those whom he has to bring before the court what point or points he wants decided, and it is for the defendants to raise and take points and file evidence which deals with the points which in the originating summons are put before the court for decision. I do not think they are called on to raise or deal with other and quite different points. But the point as to s25 [of a taxation statute] as it seems to me, is plainly not put before the court for decision in this originating summons, and I cannot myself think that the defendants were under a duty to raise it – under a duty in this sense, of course, that if they did not raise it they would not be allowed to after to assert their rights under the law as it is now held to be."
“Yes there is - it is the internal swap. There is no back to back external swap.”