For some practitioners in certain fields, this must be a fairly common experience. For the commercial practitioner the experience is less familiar, although since the financial crisis of 2007-8 where an advocate for a customer faces an advocate for a bank the former may find himself with two hands bound as a the result of a wrong turning in the common law. Reading many banking law textbooks one is struck by how the academics and practitioners who were drawn to write in the field are affected by a version of Stockholm syndrome. The natural starting point should be that banks wield significant social and economic power, and are essential cogs in the machinery of commerce and finance, but as a result are subject to unique risks. However many banking law texts appear regretful about the legislation and regulation which restricts the banks’ autonomy. Sir William Blair’s insightful Principles of Banking Law stands out as a noteworthy exception, but most banking texts provoke the conclusion that banking law is too important a matter to be left to self-styled banking lawyers. More worryingly, the perception that banks need protection from the unjustified claims of disgruntled customers appears to infect a significant number of cases in the Senior Courts. I have described this phenomenon in my writings as “documentary fundamentalism”, but that may if anything be an understatement.
Retail customer protection
For individual retail customers of financial services firms with a complaint the playing field is now significantly tilted in their favour by legislative and regulatory rules. Since 1988 under various enactments (currently the Financial Services and Markets Act 2000, heavily amended under the Coalition) and under the watch of successive regulators (the Financial Conduct Authority, or “FCA”, being the current incarnation) detailed conduct of business rules for investment business have provided that certain minimum decencies apply. Subsequently analogous conduct rules for mortgage, insurance, banking, payment services and, most recently, consumer credit business have been rolled out. Typically these rules provide that some effort should be made by financial services providers to ensure any financial product is suitable or appropriate for that customer, or at the very least that the risks and downsides should be explained. Critically these rules cannot be contracted out of. In addition ordinary consumers and small businesses are afforded a cheap and accessible route to redress for claims up to a maximum of £150,000 by the statutory Financial Ombudsman Service.
Life outside the protective retail bubble
However once one steps outside of that protective bubble of mandated regulation the modern common law has adopted a red in tooth and claw approach to investor claims and financial services disputes, which is wholly at odds with our traditional approach to contractual disputes. Much of the problem cases arise from the exotic derivative products which banks both (in the jargon) “manufactured” and “retailed” to their commercial customers, and which were obviously significant profit centres for their capital markets divisions. The mis-step in the common law started with the notorious Court of Appeal authority of Peekay v ANZ  which denied redress to wealthy Middle Eastern investors where a misrepresentation that the product had a proprietary basis (and was not purely contractual) was controversially held not to have induced the decision to invest. To add insult to injury the Court invented, on the flimsiest of authority, a new doctrine of “contractual estoppel” which gave super-charged effect to bank boilerplate clauses. Such small print routinely recites that no advice has been given and that no statements have been made during negotiations. What a curious sales process that must have been. The clear intention is that wherever possible the bank is held not to be in an advisory relationship with its customer, and certainly not – heaven forfend – in a fiduciary relationship with its customer. Alongside “no advice” and “no representations” clauses nearly every modern commercial and financial contract with near equal implausibility insists that if any representations have been made during negotiations they have not been relied upon, and that nothing outside the four corners of the contract has any legal effect. A signature alone on the bank’s terms was sufficient to give rise to this new species of “contractual estoppel” in Peekay. If you do not remember this doctrine of contractual estoppel from your contract law lectures you were paying attention. It did not exist before it was conjured up in 2006.
Like many outrageous propositions the supposed new doctrine was greeted with incredulity. The learned editors of Chitty on Contracts preferred to think the Court was referring to the well-established doctrine of estoppel by convention. However the collapse in emerging market debt which lay behind Peekay spawned another Court of Appeal authority – Springwell Navigation  – which entrenched the new doctrine, and confirmed that none of the usual requirements for an estoppel, namely a representation, reliance or unconscionability were required to give it effect. In Springwell the giant US investment bank JP Morgan Chase had wooed a wealthy Greek shipowning family business to provide both private banking and investment advisory services. The company found itself heavily over-exposed to emerging market debt during a crisis in those markets. Reading the massive first instance judgment one can see that the investor was at least partly the author of its own misfortune in buying into an unbalanced portfolio. However inevitably the bank when sued relied upon the virtual boilerplate world its lawyers had woven whereby it was providing no investment advice, the investor had not relied on any statements made during negotiations, and that the investor was relying on other advisers (what, another investment bank?) in making investment decisions. The doctrine of contractual estoppel gave full effect to these untruthful propositions. The Court of Appeal was content that banks could play the role of Petruchio in The Taming of the Shrew and insist that the sun was the moon, whatever the true cosmological position.
Whilst Peekay and Springwell concerned multi-millionaire companies making unwise investment decisions for whom there may be limited sympathy, the doctrine which these decisions spawned is now potentially in play in every litigated commercial or financial dispute. Each “entire agreement” clause, “non-reliance” clause (or its uglier sister, the “no representations” clause), and each clause representing that agents of the firm have no authority to say or do anything, has full effect to re-write history based on a signature alone, subject only to the limited assistance afforded by the Unfair Contract Terms Act 1977 where one party is dealing on the other’s standard terms, which judges appear reluctant to deploy in such commercial disputes. Indeed another worrying trend is for courts to classify “no advice” clauses and the like as “basis clauses” (spelling out the nature of the relationship), and not exemption clauses. This preposterous proposition requires ignoring the express “anti-avoidance” measures presciently included in the 1977 Act, and disregarding the clear intention of Parliament as expressed in that legislation.
Derivatives, aka “interest rate hedging products”
The field in which contractual estoppel is doing the most obvious harm is in the mis-selling of derivatives, and in particular interest rate swaps (or in the jargon of the regulator, “interest rate hedging products” or “IRHPs”) to Britain’s small and medium-sized businesses (SMEs) on an industrial scale by our leading banks. It would seem that entry into an IRHP became a routine condition of commercial lending to small businesses, including care homes and family farming businesses. Sometimes derivative features were embedded into commercial loans. A review into the process was agreed between the banks and the FCA, and some 40,000 of these toxic sales have been made subject to a Review. Some of the more egregious products were acknowledged by the banks to be unsuitable for SMEs per se. For other IRHPs the focus of the Review is on the sales process. Were customers informed of the eye-watering “break charges” – routinely six figure sums – which would apply on early termination by the customer? Were the risks and features properly explained? Did the IRHP match the amount and duration of lending facilities, or was the customer “over-hedged”? In the act of contrition which is the Review each of the banks are accepting that well over 90% of IHRP sales to SMEs were mis-sales.
However where IRHP cases have come before the Courts surprising conclusions have been reached. In Green & Rowley v RBS (2012) the investors’ entirely orthodox argument was that the regulatory duties of providing suitable advice and explaining the risks would be mirrored by a duty of care in negligence in like terms. The startling conclusion of the Court of Appeal was that the existence of a delimited and arguably time-barred claim for breach of statutory duty precluded the very existence of such a common law duty of care. The proposition that a duty would be on the same terms as the regulatory standards was greeted sceptically by the Court of Appeal despite a stream of authority in favour of such an elementary proposition. If one asked an expert witness what the competent financial practitioner should have said when selling an IRHP the answer would be the same whether the duty was expressed as statutory, contractual or common law. Most recently, in Crestsign (2014) the High Court found that despite the bank having advised an SME about an IRHP, and having given negligent advice – in the real world – it was completely exculpated by its “no advice” boilerplate (which was characterised as a “basis clause”) in the virtual world mandated by the Court of Appeal’s discovery of “contractual estoppel”. As an academic or commentator, when criticising the reasoning in commercial and financial cases one is often uttering counsels of perfection. However recent cases in this field merit the accusation of rank injustice.
Disapplying fiduciary standards
The widespread deployment of boilerplate clauses by banks and others is intended to negate any advisory or fiduciary relationship which might otherwise arise on the particular facts of a transaction. This judicial willingness to readily disapply fiduciary standards is wholly out of tune with the zeitgeist. The Government-appointed Kay Review (2012) on improving “long-termism” in investment markets identified the fiduciary standard as the benchmark for financial markets where a firm provided advice or exercised discretion, all the way down chains of intermediation. Kay also considered the fiduciary standard should apply irrespective of client classification, and should not be capable of being contracted out of. The Government has asked the FCA to examine the extent to which the current regulatory regime conforms to these high standards. It has recently fallen to the Law Commission in its paper on investment intermediaries (2014) to point out how far the common law (regulation aside) falls short. So economists and politicians assume that the courts will undertake the role of imposing certain minimum decencies on the parties and will police such bargains in the name of the fiduciary standard expected of trusted advisers.
A “Get out of jail free” card
In stark contrast to the views of the Government and the regulators (and the national mood), the courts have not merely shirked their traditional task of insisting on the minimum decencies and standard setting in the investment and banking sectors, they have gone to the other extreme of permitting banks and financial firms to routinely deploy a “get out of jail free” card via the doctrine of contractual estoppel. Shorn of any requirements of representation, reliance or unconscionability this illegitimate doctrine lacks any of the indicia of traditional estoppels. It appears to be little more than a super-charged version of the “signature rule” as canonized in L’Estrange v Graucob (1934) and celebrated by the Court of Appeal in Peekay. We should not forget that as talented a lawyer as the late Lord Denning was both successful counsel for the company insisting on its one-sided standard terms in L’Estrange, and wise enough to chastise the decision as part of the “bleak winter for our law of contract” in his swansong judgment in George Mitchell v Finney Lock Seeds . We need to re-capture some of that judicial robustness when courts are faced with absurd small print which insists that contracts spring into being with no preambles.
It is also noteworthy reading financial services cases how thin the classes of materials cited to, or relied on, by judges is. Statute, regulations and cases. One hardly ever sees reference to the consultation papers and policy statements of the financial regulators, or of Her Majesty’s Treasury, or the Law Commissions’ work, including on general contract matters such as unfair terms or the ineffectivemess of entire agreement provisions. Responsibility lies with the Bar to improve the quality of submissions to ensure that the judiciary is able to re-orientate itself so that it can play a vital role in standard setting for our financial institutions, which will allow the banks and other firms to re-invent themselves as reputable businesses. The excision of the doctrine of contractual estoppel by the Supreme Court at the earliest opportunity is a vital first step.
Contributor Gerard McMeel, Professor of Commercial Law at the University of Manchester