Burges Salmon has acted for the Co-op in a successful appeal concerning interest rate swaps in the Court of Appeal. The appeal focused on whether The Co-operative Bank could recover the cost of breaking interest rate hedging arrangements, including interest rate swaps, from negligent valuers.
On 22 October, the Court of Appeal handed down a judgment in favour of Mortgage Agency Services Number One Limited, a subsidiary of The Co-operative Bank, overturning a decision to strike out part of its claim for losses caused by a negligent firm of valuers.
The bank is seeking to recover its losses after making fixed interest rate loans to commercial borrowers secured against two properties valued by Edward Symmons LLP. Following default by the borrowers, the valuations the bank relied on were admitted to be negligent. It is accepted by the valuers that had the valuations been accurate, the bank would not have made the loans. It is established law that in these circumstances a bank is entitled to recover against the valuer the cost of funding its loan to the borrower (subject to a cap on damages, often referred to as the SAAMCO cap).
As part of its claim, the bank says that as a consequence of lending to the borrowers at a fixed rate of interest, it became exposed to interest rate risk and took steps to hedge against that risk. This is common practice and indeed the bank was required by its regulator to limit its interest rate exposure as far as possible. The bank argues that its cost of funding the loan is the cost to it of the hedging arrangements including breakage costs when the borrowers defaulted on the loans. The bank claims that the correct way to calculate its cost of funds when lending at a fixed rate is by reference to the swap market, which reflects the market rate for a fixed rate loan for the term agreed with the borrower, at the date of drawdown.
Burges Salmon Banking Litigation associate Charles Crowne said: 'The case is significant given the lack of authority concerning the recoverability of break costs in a professional negligence context. Given the dramatic fall in interest rates since the start of the global financial crisis, these costs can be very high. The case also involves consideration of the complex ways in which banks fund their lending books and the cost to the bank of this funding.'
The Court of Appeal recognised that these are cases which raise potentially important issues and agreed that they should be allowed to proceed to trial.