[2012] CSOH 133



in the cause







Pursuer: I G Mitchell QC, Wallace; Balfour & Manson LLP

Defender: A. Clark QC, MacGregor; Brodies LLP (First Defenders)

21 August 2012

[1] The pursuer, Grant Estates Limited ("GEL") is a single venture company which in 2007 was developing properties at 1 School Wynd and 4 Bank Street, Elie, Fife with the assistance of loan finance from The Royal Bank of Scotland plc ("RBS"). In common with many property developers, GEL encountered financial difficulties in the economic downturn from about 2008. As a result of GEL's inability to meet its obligations under its finance agreements, RBS placed it into administration on 25 February 2011. GEL has attempted to challenge the appointment of the administrators in various processes but has eventually concentrated on this action as the vehicle for its challenge.

[2] The directors of GEL are two brothers, Mr Ruari Stephen and his brother Mr Jamie Stephen, who were sisted as additional pursuers on 11 April 2012 in order to be responsible for any adverse awards of expenses and thereby avoid an order for caution under section 726 of the Companies Act 1985.

[3] Mr MacLennan and Mr Craig, the second defenders, are the administrators of GEL but have taken no part in this action in which GEL and its directors seek among other remedies, the suspension of their appointment as joint administrators. To date the administrators have not been able to make progress in the administration as they have given undertakings not to dispose of the properties pending the outcome of the debate which I have heard. In that debate RBS has sought to have the action dismissed as fundamentally irrelevant.

[4] At the heart of GEL's claim against RBS is an allegation that the bank's employees mis‑sold to GEL an interest rate swap agreement ("IRSA"), which they represented was a device to protect GEL from a rise in interest rates. As a result of the financial crisis, the sharp fall in interest rates in 2008 and their low level thereafter, the IRSA, far from protecting GEL from rising interest rates, became a burden on the company, which would have benefitted from the lower rates which it would have paid on its borrowing. GEL in challenging the validity of the administration has from the outset asserted that, but for the obligations which it incurred under the IRSA, it would not have been in default of its obligations under its loan agreement with RBS and would not have gone into administration. RBS has challenged that assertion and pointed out that GEL had not the means to repay the loan.

[5] GEL alleges that the sale of the IRSA was (i) in breach of the requirements of both the Conduct of Business Sourcebook ("COBS ") issued by the Financial Services Authority ("FSA") and also the Markets in Financial Instruments Directive 2004/39/EC as implemented by Directive 2006/73/EC ("MiFID") and (ii) as a result of misrepresentation by RBS's employees which it characterises as fraudulent or at least negligent. It also asserts that RBS entered into a contract to give it advice on financial products and also that it was negligent in that advice. RBS challenges the relevancy of each of those cases.

[6] The summons claimed three principal remedies. First, it sought reduction of the loan agreement, the securities in support of the borrowing and the IRSA on the basis that they were all parts of a single unlawful scheme. In the debate Mr Iain Mitchell QC for GEL departed from the assertion that his challenge to the IRSA would invalidate the loan agreement and the securities. He sought reduction only of the IRSA. Secondly, GEL made claims for restitution based on the invalidity of those agreements and securities. Thirdly, it sought damages for loss resulting from (i) the breach of the COBS rules and MiFID, (ii) breach of contract, (iii) negligent advice and (iv) misrepresentation.

[7] In the wide‑ranging debate there were five principal issues. They were (i) whether the alleged breaches of the COBS rules could be made the subject of a claim in a civil action; (ii) whether RBS was in breach of contract; (iii) whether GEL had pleaded a relevant case of negligent misrepresentation; and (iv) whether there were relevant averments of fraudulent misrepresentation. The fifth issue was whether compliance with the COBS rules was a term of the contract or was subsumed within a delictual duty of care. Connected to the second issue, GEL also argued that section 17 of the Unfair Contract Terms Act 1977 applied so as to prevent RBS from relying on its contractual provisions that limited or excluded its contractual liability for the advice which its employees had given.

[8] During the debate Mr Mitchell intimated that for pragmatic reasons GEL was not insisting on its claim that RBS's employees acted fraudulently. That issue therefore does not affect the outcome of the debate. But as I am concerned that the allegations were made at all, I discuss the fraudulent misrepresentation case in paragraphs [85] - [93] below.

The averred factual background
[9] The relevant events began with an email from Mr Kevan Munro of the Global Banking and Marketing ("GBM") division of RBS to Mr Ruari Stephen on 3 July 2007 in which he referred to a prior telephone call and attached a copy an RBS booklet called "Interest rate hedging solutions". The booklet described in simple terms commonly used hedging products including base rate caps, base rate collars and base rate swaps. In the email he gave some guidance on the cost of an interest rate cap and said that he would telephone to discuss the matter further. The email contained certain standard statements that the bank was not giving advice, that the recipient should understand the potential risks that derivative products involved, and that RBS might have an interest in the financial instruments. GEL avers that the email was sent but denies that Mr Stephen received it. RBS therefore did not rely on it in the debate.

[10] On 6 and 11 July GEL and RBS entered into a loan agreement under which GEL borrowed £775,000 at an interest rate of 1.4% over base rate which on 6 July was 5.75%, and with a repayment date of five years after the loan was drawn. The loan agreement contained a precondition on the drawing of the loan that RBS was satisfied with the customer's interest rate hedging arrangements and GEL undertook to maintain those arrangements.

[11] GEL avers that on 19 July 2007 Mr Ruari Stephen met Mr Munro of RBS and that the former sought and the latter gave financial advice in relation to interest rate swap agreements. It avers:

"During the course of that discussion, Mr Munro indicated that although the base rate currently stood at 6.5% pa, those rates were likely to rise and that a fixed rate of 6.4% pa was reasonable."

Mr Stephen did not take out a hedging arrangement at that time.

[12] At that meeting Mr Munro gave Mr Ruari Stephen a letter containing a Notice of Regulatory Classification and as an attachment the bank's terms of business. I set out the relevant terms of business including the risk warning in paragraphs [29] and [30] below. The letter informed GEL that it was a "Private Customer" within the meaning and for the purposes of the FSA rules. It drew attention to the risk warning and informed GEL that by signing and returning the letter it acknowledged receipt of the risk warning and confirmed acceptance of its contents. It stated:

"Action to be taken

Please read our Terms of Business carefully. They contain important information about our respective rights and obligations, including about certain limitations on our liability to you. ... By signing and returning this letter, you will be deemed to have agreed and accepted our Terms of Business which will therefore become legally binding on you and, in the absence of any other agreement between us and you, will apply to all dealings which we may conduct with you or on your behalf. If you are in any doubt about the meaning or the legal or financial effect of these Terms of Business or any other documents we provide to you, you should obtain professional advice as necessary."

On 11 August 2007 Mr Ruari Stephen signed on behalf of GEL an acknowledgement of the letter, which stated that he had read and understood the notice of regulatory classification and the risk warnings and assented to their terms. He sent the acknowledgement to RBS.

[13] Notwithstanding the precondition in the loan agreement, RBS advanced the £775,000 loan to GEL on 17 October 2007 without putting in place any interest rate hedging arrangement.

[14] On 25 October 2007 Mr Ruari Stephen emailed Mr Munro to thank him for a telephone call on the previous day and stated that he would discuss interest rate options with his brother and take a decision. He said that he would telephone RBS.

[15] RBS avers that by letter dated 29 October 2007 it issued revised Terms of Business to GEL to take account of the requirements of MiFID which came into effect on 1 November 2007. But as GEL denies receipt of the letter or the terms of business, the letter and the new terms of business are not relevant to the debate.

[16] On 8 November 2007 Mr Munro emailed Mr Ruari Stephen to record that the Bank of England had kept the base rate at 5.75%, which he stated was a "little bit unexpected." He continued:

"However the problems in the stock markets have moved into the interest rate markets - which means that a 6 year swap/fix is now trading at 5.75%. e.g. you could fix your costs for debt at the same price as you are currently paying for the next 5 years. Really need the documents I sent you signed and back. Any questions give me a call."

[17] On 9 November 2007 Mr Stephen and Mr Munro spoke on the telephone. GEL avers as follows:

"During the course of that conversation, Mr Munro indicated to Mr Stephen that, while he considered that interest rates were about to fall when the Monetary Policy Committee met the following day, he believed they might quickly rise again."

GEL also avers that:

"By email dated 9 November 2007, Mr Munro contacted the pursuer giving further advice and making further representations in respect of an interest rate swap arrangement."

[18] That email stated, so far as relevant:

"Ruari further to our call I have priced up a couple of ideas that a lot of customers are looking at present. I have based it on the following Amount - £500,000 - bullet Start date -19/10/07 End date - 19/10/12 - 5 years Current Floating Base Price - 5.75% excluding lending margin Fixed Rate/Swap - 5.87% - excludes lending margin Interest Rate collar - Min 5.5% to Max 6.5% - excluding lending margin, In this example base rate floats between 5.5% and 6.5% so at the moment would be 5.75% but for example if it went to 7% you would pay 6.5% and likewise if it fell to 5% you would pay 5.5%. No fee for either of these products. Hopefully you have the documents we need signed - they are called notice of risk warnings - if you could sign them and return we can then close out by phone. I will give you a call early next week to discuss in detail.

Regards Kevan Munro

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transactions, you will ensure that you fully understand the potential risks and return of this, and/or any related transactions and determine if is appropriate for you given your objectives, experience, financial and operation resources, and other relevant circumstances. You should consult with such advisors as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc ("RBS") will not act as your advisor or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisors make of the contents of this document. RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or related financial instruments. ...."

[19] Mr Stephen and Mr Munro appear to have had a further telephone discussion on 5 December because Mr Ruari Stephen refers to it in his affidavit, without recalling what was discussed, and because on 6 December 2007 Mr Munro emailed Mr Stephen in these terms:

"I have checked with Aberdeen and you are quite right the facility is for 60 months (5 years) so the maturity of your facility will be 31/7/2012. Therefore what the deal will look like is start 5/12/2007 end 31/6/2012 - the reason I have taken it to then is interest is taken on calendar 1/4s. So first adjustment would be on the 31/12/07 and then 31/3/08, 30/6/08 etc etc etc. amount 500K bullet rates 5.48% - dropped again a little lower. As always worth remembering that if you wish to repay this money before the expiry of the swap rate then there could be a cost or benefit depending on which way interest rates have moved. Will txt you in the morning to get a decision."

[20] GEL also avers that on three occasions on 6 December Ms Fiona Muntz of the GBM division of RBS spoke to Mr Stephen on the telephone. RBS produced recordings of those phone calls but I was not asked to listen to them. GEL avers:

"In the course of the first of those conversations Ms Muntz stated that she understood that the pursuer wished to put in place 'fixed rate protection'. She then made a number of representations to Mr Stephen. During the course of the conversation, he asked her to give him advice on a number of matters concerning the proposed IRSA, which she did. In particular, in course of giving the advice and making the representations, she repeatedly described the making of such an arrangement by the pursuer as 'protection' of the pursuer. Mr Stephen asked if the whole amount were placed on a fixed rate as opposed to a swap rate what the costs would be. In response Ms Muntz stated that 'the swap rate is the same as the fixed rate there being merely a difference of terminology but that it is a bit ambiguous'. She went on to state that at present the pursuer had a floating rate with its relationship manager and that the floating part can be 'fixed with a swap'. She stated that the overall rate would be 5.47% plus lending margin and that would be fixed for the period of time the pursuer was thinking about, which was for five years. Mr Stephen asked about 'protecting' either £775,000 or £500,000. Interest rates and their likely trend were further discussed. Ms Muntz further stated that the first defender did not take a position in relation to the proposed deal and that the first defender was trying to protect the pursuer. During this call, Mr Ruari Stephen repeatedly asked about ways to avoid or limit the pursuer's exposure if interest rates were to fall and to limit breakage costs. Mrs Muntz suggested only that the 'protection' might be limited to part only of the amount borrowed. Further, the first defender both through Mr Munro and through Ms Muntz referred to Bank of England Base Rate, implying that the Swap (and, hence, the breakage charges) was priced upon the basis of Bank of England Base Rate. During the third of those telephone calls, which took place at about 2.42 p.m., Ms Muntz explained that it would be possible to take out £500,000 of 'protection' immediately but that depending on the outcome of discussions with the first defender's relationship manager for the pursuer, it would probably be possible to increase the 'protection' to £775,000 later in the day. Mr Ruari Stephen gave instructions to Ms Muntz to proceed on that basis."

[21] On 6 December 2007 GEL instructed RBS to enter into the IRSA transaction. On the same day RBS sent GEL a post-transaction acknowledgement confirming the terms of the transaction and asking Mr Stephen to sign and return a copy of the acknowledgement. In the notes attached to the acknowledgement the following was stated:

"1. The transaction terms agreed between us verbally are legally binding contract terms. Following execution of the trade you will be required to sign legal documentation (which may include a confirmation and Master Agreement) to confirm those terms.


3. The interest rate contract that you have entered into with RBS is a separate legal contract from any borrowing it may relate to. In particular, they may be terminated independently of each other and early termination of one does not automatically terminate the other.


8. You are acting for your own account, and have made an independent evaluation of the transactions entered into and their associated risks and have had the opportunity to seek independent financial advice if unclear about any aspect of the transaction or risks associated with it and you place, or have placed, no reliance on us for advice or recommendations of any sort.


11. We would also draw your attention to our terms of business."

[22] On 19 December 2007 RBS sent GEL a letter setting out the terms of the IRSA for £775,000 which had been transacted on 6 December. The letter provided for GEL to sign a confirmation of the agreement. But GEL did not sign or return either the post transaction confirmation or the IRSA letter. The IRSA contained deemed warranties from GEL to the following effect:

"(e) it is entering into this Agreement solely for the purpose of reducing the risks associated with fluctuating rates of interest and not for the purposes of speculation.

(f) in entering into this Agreement it is not relying upon [RBS] in relation to any advice or forecast or estimate of future trends in relation to interest rates or otherwise nor in relation to the fiscal consequences of this Agreement.

(g) it is acting for its own account, and has made its own independent decisions to enter into this Agreement and as to whether this Agreement is appropriate or proper for it based on its own judgement and upon advice from such advisers as it has deemed necessary. It is not relying on any communication (written or oral) of [RBS] as investment advice or as a recommendation to enter into this Agreement; it being understood that information and explanations related to the terms and conditions of this Agreement shall not be considered investment advice or a recommendation to enter into this Agreement. It understands that no communication (written or oral) received from [RBS] can be considered to be an assurance or guarantee as to the expected results of this Agreement."

[23] On 4 September 2008 Ms Birch‑Machlin of the GBM division of RBS wrote to GEL and referred to the telephoned instruction of 6 December 2007, the original RBS terms of business, the revised terms of business and the formal confirmation dated 19 December 2007. She stated:

"To our knowledge, you have not yet signed and returned a copy of the Formal Confirmation. In accordance with our internal policy (and Clause 9 of the original RBS Terms of Business and Clause 13 of the revised RBS Terms of Business), I am writing to inform you that we will assume that you have approved the terms of the Transaction as set out in the Formal Confirmation, unless you notify us of any objections that you might have within the next five London business days."

GEL did not respond to this communication and the parties operated the terms of the IRSA. While GEL initially challenged the validity of the IRSA on the ground that there was no written agreement, it did not persevere with that challenge which was undermined by RBS's terms of business which I discuss in paragraphs [29] and [30] below.

The allegations of advice and misrepresentation
[24] It is central to GEL's case that RBS gave it financial advice in relation to interest rate swap agreements in both July and December 2007 and that GEL relied on that advice in deciding to enter into the IRSA. In his affidavit, which parties agreed that I could consider in expansion of GEL's pleadings, Mr Ruari Stephen emphasised that he trusted RBS to do what was in GEL's best interests when advising him on financial products of which he had no experience. In summary he stated that RBS advised him that interest rates were likely to rise and that the IRSA provided protection to GEL against such rises and allowed it to fix its costs over a five year period. He accepted that advice and acted on it. This, GEL avers, created a contract to give financial advice.

[25] In alleging both fraudulent and in any event negligent misrepresentation, GEL avers that RBS had a pressing need to maximise its cash flow to fund its expansion, including the acquisition of ABN Amro. It avers (in article 11 of Condescendence) that RBS's pro forma documentation which Mr Munro completed had a section headed "ABN Impact Discussed?" and asserts that that indicated a connection between the sale of IRSAs and the need to raise capital.

[26] In support of the allegation of fraudulent or negligent misrepresentation, GEL avers that in a report for customers dated 6 December 2007 Mr Dicks and Mr Walker, who were economists employed by RBS, had predicted further cuts in interest rates. Although the report was not produced, I was informed that it predicted a fall from 5.75% to 5.25%. GEL avers that RBS's opinion was that "interest rates were likely to fall, to continue to fall, and to remain low for some time."

[27] Against this background, GEL avers five separate misrepresentations. They are, first, Mr Munro's representation on 19 July 2007 that interest rates were likely to rise, and secondly his representation in November 2007 that although interest rates were about to fall, they would rise again. The others are representations by Ms Muntz in the telephone calls on about 6 December 2007. The third is her statement that RBS did not take a position on the deal and that it was protecting GEL. The fourth is her representation that GEL could limit its exposure to a market of falling interest rates by taking an IRSA for only part of the sum which it had borrowed. This, GEL avers, was calculated to convey the impression that there was no other way of limiting such exposure such as by means of an interest rate cap. Fifthly, GEL avers that both she and earlier Mr Munro misrepresented the truth by saying that the IRSA was priced on the Bank of England base rate when in fact it was based on the LIBOR rate.

[28] In article 13 of condescendence GEL avers that those representations were fraudulent. In the following article of condescendence it avers in the alternative that the representations were made negligently.

RBS's Terms of Business and Risk Warning
[29] RBS's terms of business which it gave GEL on 19 July and which Mr Ruari Stephen signed on 11 August 2007 included the following provisions:

"1.1 These Terms of Business apply to all designated investment business carried on by The Royal Bank of Scotland plc. ...

2.2 Where these Terms conflict with Applicable Regulations, the latter shall prevail. Applicable Regulations shall include the FSA Rules, the rules of any other relevant regulatory authority or exchange and any applicable laws and regulations in force from time to time. ...

3. Our Services

3.1 These Terms shall take immediate effect. Any queries about them should be addressed to Corporate Markets Regulatory Risk Department, 135 Bishopsgate, London EC2M 3UR.

3.2 We will provide you with general dealing services on an execution-only basis in relation to ... contracts for differences and rights or interests in investments. ...

3.3 We will not provide you with advice on the merits of a particular transaction or the composition of any account nor will we bring investment opportunities to your attention. You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information only and do not amount to advice, an assurance or a guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete. ...

4. Our Authority and Duties

4.4 Your attention is drawn to the fact that when we deal with you, we, an affiliate, or some other person connected with us, may have an interest, relationship or arrangement that is material in relation to the investment, transaction or service concerned. Such material interests may include inter alia: ...

d) holding a position in, or trading, dealing or market-making in, investments purchased or sold by you;

4.6 Any information we have provided to you relating to trades is believed to be reliable, but no representation is made or warranty given or liability accepted, as to its completeness or accuracy. In particular, market conditions and pricing may have changed by the time you approach us with a view to entering into a trade. Any opinions constitute our judgement as of the date indicated and do not constitute investment advice or an assurance or guarantee as to the expected outcome of any transaction. ...

9. Confirmations

After we have executed a transaction, we shall confirm details to you (which confirmation may be in electronic format or made available on a website, in which case such electronic format shall have the same effect as if served on you in written hard copy). The content of our confirmations will, in the absence of manifest error, be deemed conclusive and binding on you unless you object in writing within five business days of despatch.

10. Best Execution

As we or our affiliates will act as principal in all transactions covered by these Terms, no duty of best execution arises under FSA Rules as no transactions are executed in circumstances giving rise to duties similar to those arising on an order to execute a transaction as agent. You may either accept or reject the price we offer you and we do not represent that such price is necessarily the best price. ...

19. Exclusion of Liability/Indemnities

19.1 Nothing in these Terms shall oblige us to do anything that we believe to be contrary to Applicable Regulations. Nothing in these Terms will exclude or restrict any liability that we owe you under FSA Rules. Except to the extent that the same results from our or their gross negligence, wilful default or fraud, we, our directors, officers, employees and agents shall not be liable for any loss resulting from any act or omission made under or in relation to or in connection with these Terms or the solvency, acts or omissions of any third party with whom we deal or transact business or who is appointed by us in good faith on your behalf. We will make available to you, when and to the extent reasonably so requested and at your expense, any rights that we may have against such person."

[30] Annexed as schedule 1 to the terms of business was a risk warning notice which included the following:

"This notice is provided to you, as a private customer, in compliance with the rules of the Financial Services Authority ('FSA'). Private customers are afforded greater protections under the rules than other customers are and you should ensure that your firm tells you what this will mean to you. This notice cannot disclose all the risks and other significant aspects of warrants and/or derivative products such as futures, options, and contracts for differences. You should not deal in these products unless you understand their nature and the extent of your exposure to risk. You should also be satisfied that the product is suitable for you in the light of your circumstances and financial position. Certain strategies, such as 'spread' position or a 'straddle', may be as risky as a simple 'long' or 'short' position. ...

4. Futures

Transactions in futures involve the obligation to make, or to take, delivery of the underlying assets of the contract at a future date, or in some cases to settle the position with cash. They carry a high degree of risk. ...

6. Contracts for differences

Futures and options contracts can also be referred to as contracts for differences. These can be options and futures on the FTSE 100 index or any other index, as well as currency and interest rate swaps. However, unlike other futures and options, these contracts can only be settled in cash. Investing in a contract for differences carries the same risks as investing in a future or an option and you should be aware of these as set out in paragraph 4 and 5 respectively. Transactions in contracts for differences may also have a contingent liability and you should be aware of the implications of this as set out in paragraph 9."

The legal issues in the debate
(i) Whether breaches of COBS rules are actionable
[31] Mr Mitchell for GEL submitted that the contractual framework which RBS sought to put in place did not protect it from civil actions for breaches of the COBS rules nor did it alter the reality that if RBS staff gave advice to a customer, they were not dealing on an execution-only basis. It was clear from clause 2.2 of the terms of business (paragraph [29] above) that the FSA rules prevailed over the terms if there was a conflict.

[32] Counsel accepted both that COBS implemented MiFID and that GEL had no direct claim against RBS under MiFID. The issue therefore was the correct interpretation of the UK legislation and regulatory rules having regard to the results which MiFID sought to achieve.

(a) Interpretation consistent with EU law
[33] In discussing how the court should interpret United Kingdom legislation and the COBS rules in the context of EU law Mr Mitchell referred me to a considerable tract of authority including von Colson and Kamann v Land Nordrhein- Westfalen [1984] ECR 1891, Köbler v Austria [2003] ECR I-10290, Marshall v Southampton and S W Hampshire Area Health Authority [1986] 1 QB 401, Marleasing SA v La Comercial Internacional de Alimentación SA [1990] ECR I-4135, Wagner Miret v Fondo de Garantía Salarial [1993] ECR I-6911, Faccini Dori [1994] ECR I - 3325, El Corte Inglés SA v Rivero (Case C-192/94), Inter-Environment Wallonie ASBL v Région Wallonie [1997] ECR I-7411, Mangold v Helm [2005] ECR I-10013, Pfeiffer and Others [2004] ECR I-8835, Adeneler v Ellinikos Organismos Galaktos [2006] ECR I-6091, Angelidaki v Organismos Nomarkhiaki Aftodiikisi [2009] ECR I-3071, Kücükdeveci v Swedex GmbH & Co KG [2010] ECR I-365, Dominguez v Centre Informatique du Centre Ouest Atlantique [2012] EUECJ C-282/10 and R v Secretary of State for the Home Department ex p Factortame Limited [1990] ECR I-2433.

[34] It seems to me that those authorities on the superordination of EU law can be summarised so far as relevant to this case in the following four points.

[35] First, the member states are obliged to take all appropriate measures under article 4 of the Treaty on European Union ("the TEU") to ensure fulfilment of their obligations arising out of the Treaties and the acts of the institutions of the EU. Where the act of the EU institution is a directive, the member state must comply with the third paragraph of article 288 of the Treaty on the Functioning of the European Union ("the TFEU"). That means that national courts in applying domestic law are bound to interpret the relevant national law, whether it is adopted before or after the directive, so far as possible, in the light of the wording and the purpose of the directive in order to achieve the result sought by the directive.

[36] Secondly, this obligation on the national courts is inherent in the system of the TEU and TFEU as it permits the courts to ensure that EU law is fully effective when they determine the disputes before them.

[37] But, thirdly, the obligation does not override the general principles of law including legal certainty and non-retroactivity. Nor can it be the basis of an interpretation of law contra legem; the national court must use only the interpretative methods recognised by its national law and must not exceed its jurisdiction.

[38] See in particular von Colson at para 26, Marleasing at para 8, Pfeiffer at paras 113-119, Pupino [2005] ECR I-5285 at paras 44 and 47, Adeneler at paras 108-111, and Dominguez at paras 23-27.

[39] Fourthly, where the national law cannot be interpreted in a way which conforms to the relevant directive, the member state may be liable to make good loss and damage which results from a failure to implement the directive in accordance with the judgment in Francovich v Italy [1991] ECR I-5357 if the three conditions which it set out are met.

[40] Mr Mitchell went further in submitting by analogy with the principle of equal treatment in Mangold at paras 74-78 that there was a general principle of EU law that there was to be a harmonised and transparent working of the market for financial services and consumer protection in that market. He argued that the national court must set aside a provision of national law which was in conflict with that principle. I am not aware of any such principle and Mr Mitchell produced no authority to support its existence.

(b) The COBS rules
[41] Under sections 138 and 139 of the Financial Services and Markets Act 2000 ("FSMA") the Financial Services Authority ("the FSA") has powers to make rules which apply to authorised persons. The FSA is also the competent authority designated by the United Kingdom for the purposes of MiFID. Exercising its rule making power, the FSA produced COBS, in which rules which create binding obligations have the suffix "R". Where a provision has the suffix "G", it is normally guidance which need not be followed and which does not create a presumption of non‑compliance.

[42] As discussed below, as a general rule a private person who suffers loss as a result of the contravention of a rule may raise a court action for damages. Breaches of the rules may lead to disciplinary action under Part XIV of FSMA.

(c) UK legislation on a direct right of action for breach of COBS rules
[43] Section 138 of FSMA empowers the FSA to make rules in relation to the carrying on of regulated activities. Section 150 provides:

" (1) A contravention by an authorised person of a rule is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty. ...

(5) 'Private person' has such meaning as may be prescribed."

[44] That prescription is found in regulation 3 of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001 No 2256) ("the 2001 Regulations") which provides:

"(1) In these Regulations, "private person" means -

(a) any individual, unless he suffers the loss in question in the course of carrying on -

(i) any regulated activity; or

(ii) any activity which would be a regulated activity apart from any exclusion by article 72 (overseas persons) or 72A (information society services) of the Regulated Activities Order; and

(b) any person who is not an individual, unless he suffers the loss in question in the course of carrying on business of any kind."

(d) Submissions and discussion
[45] Counsel addressed two principal issues which arose from the definition in Regulation 3 of the 2001 Regulations. First, Mr Mitchell submitted that the distinction between individuals and corporate persons was not authorised by MiFID and the Regulation should be construed in a way which was compatible with EU law. Secondly and in any event, he submitted that the phrase "in the course of carrying on business of any kind" should be construed narrowly and that something which was done as a one-off transaction or which was incidental to a business was not encompassed within the statutory expression. In the event that I was against him on the second issue and the UK legislation could not be construed in a way which was compatible with EU law, Mr Mitchell submitted that the restrictions of the UK legislation had to be set aside.

[46] In support of his submission on the first issue Mr Mitchell referred me to MiFID. He referred to recitals 2-5, 9, 17, 29, 31, 33, 41, 58 and 61 and articles 1, 4, 13, 18, 19 and 21 of the 2004 Directive. He also referred me to recitals 1-6, 44-48, 69 and 81, and articles 21, 22, 27, 28, 29, 31 and 37 of the 2006 Directive. In summary, he submitted that in accordance with MiFID, RBS, which was providing services to its client, was under an obligation of best execution in relation to the IRSA which was a complex financial instrument. The 2004 directive made no distinction between natural persons and non‑natural persons and the 2006 directive did not distinguish between an individual retail customer and a corporate retail customer.

[47] I agree that the two directives which comprise MiFID do not make a distinction between a customer who is a natural person and one who is a non‑natural person. But the question is whether MiFID requires a member state to provide the consumer protection for which it calls by means of a civil action. In a careful and helpful submission Mr Mitchell demonstrated how the relevant provisions of MiFID had been implemented in COBS. But, as Mr Clark pointed out, the United Kingdom legislation provides regulatory remedies for breaches of the COBS rules. This is consistent with recital 58 of the 2004 directive which envisaged that member states would designate competent authorities to enforce the obligations created by MiFID. The FSA can enforce the COBS rules by public censure (FSMA section 205) or by imposing a financial penalty (FSMA section 206). The court on the application of the FSA or the Secretary of State can make a restitution order requiring payment to the FSA if it is satisfied that a person has contravened a requirement imposed under FSMA (FSMA section 382). Particularly relevant to the customer is the power given to the FSA to require an authorised person to pay compensation to persons who have suffered loss or an adverse effect as a result of contravention of such a requirement (FSMA section 384). These regulatory remedies, which implement MiFID, do not distinguish between natural and non-natural persons.

[48] The answer to the first issue is therefore that MiFID does not require a member state to provide protection to a customer by means of a direct right of action against the authorised person. Nor did the United Kingdom choose to confer such a right when it implemented MiFID. As I set out below, section 150 and the 2001 Regulations were a response to a perceived mischief which antedated MiFID. It is not correct to assert, as Mr Mitchell did, that the United Kingdom had chosen to implement MiFID by allowing the enforcement of rights by civil action but had done so in a discriminatory way which MiFID did not authorise. MiFID was implemented in COBS and in the regulatory remedies to which I have referred. Accordingly, the limitation in regulation 3 of the 2001 Regulations on the right of a non‑natural person to sue does not have to be construed narrowly in order to avoid contravening EU law.

[49] I turn then to the second issue which is the meaning of the phrase in regulation 3(1)(b) of the 2001 Regulations, "in the course of carrying on business of any kind." For the reasons which I have just set out this question of statutory construction is not complicated by an EU overlay which I discussed in paragraphs [34] to [39].

[50] In the absence of any authority and without regard to the legislative history of the provision, I should be inclined to interpret the phrase broadly. It refers to "business of any kind" and is clearly intended in its context to be broader than the phrase in regulation 3(1)(a), "in the course of carrying on - any regulated activity". Consideration of the history of the legislative provision of a right of action for breach of the regulatory regime also supports a broad interpretation of the phrase in the 2001 Regulations.

[51] In Titan Steel Wheels Ltd v The Royal Bank of Scotland plc [2010] 2 Lloyd's Rep 92, David Steel J discussed the prior legislative history of the restriction of the right of the non-natural person to sue for breaches of regulatory provisions. As he set out in paragraphs 51 - 58 of his judgment, the government initially enacted a right to sue for regulatory breaches in section 62 of the Financial Services Act 1986 ("the 1986 Act"). Because the 1986 Act entailed a wide-ranging reform of the regulation of financial services, section 62 was not brought into force for six months while the government consulted the financial services industry. The government responded to concerns which the industry expressed about investors raising strategic lawsuits to gain competitive advantage. Parliament enacted section 193 of the Companies Act 1989 which introduced section 62A of the 1986 Act. That provision empowered the Secretary of State to make regulations determining the circumstances in which a person other than a private investor could raise a civil action for regulatory breaches.

[52] In September 1990 the DTI issued a consultative document (Ref FS3a 1/90), "Defining the Private Investor", which contained a draft statutory instrument including a regulation which was substantially the same as regulation 3 of the 2001 Regulations. The DTI said (in para 4.2) that it wished to avoid complexity and sought to introduce a definition which was "as brief and clear as possible." In para 5.2 of the consultation paper the DTI stated:

"This proposed definition is intended to have the following effects:-

All individuals would retain their s62 rights for all purposes. Individuals who carry on investment business would lose their s62 rights only in relation to any action taken by them, or anything done to them, in the course of that investment business.

All non-individuals would lose their s62 rights in relation to any form of business. Most charities and similar bodies do not carry on any form of business, and would therefore retain their s62 rights for all purposes. Those who do carry on business would lose their s62 rights only in relation to any action taken by them, or anything done to them, in the course of that business."

As David Steel J stated, the draft regulations were eventually promulgated as the Financial Services Act 1986 (Restriction of Right of Action) Regulations 1991 (SI 1991 no 489) and the relevant phrase was adopted in the 2001 Regulations.

[53] It appears therefore that the mischief which section 150 of FSMA and regulation 3 of the 2001 Regulations address is the misuse by businesses of a right of civil action to raise strategic actions to obtain competitive advantage and that any non‑natural person, including a charity, is barred from raising a civil claim in respect of anything done by or to it in the course of business.

[54] That consideration points towards a broad interpretation but by itself does not determine what is the scope of the phrase "in the course of carrying on business of any kind." In support of his narrow construction of that phrase, Mr Mitchell submitted that COBS was designed to promote the protection of investors and restrictions on a civil right of action militated against that aim. He suggested that prevention of strategic law suits did not require a wide interpretation of the phrase. In support of his preferred test he referred me to four cases which were discussed in Titan Steel, namely Havering LBC v Stevenson [1970] 1 WLR 1375, Davies v Sumner (HL) [1984] 1 WLR 1301, R&B Customs Brokers Co Ltd v United Dominions Trust Ltd (CA) [1988] 1 WLR 321, and Stevenson v Rogers (CA) [1999] QB 1028. Each of those cases concerned statutory provisions with slightly different wording from the 2001 Regulations.

[55] Havering and Davies were concerned with section 1(1) of the Trade Descriptions Act 1968 and the phrase "in the course of a trade or business". In the context of that Act, which created criminal offences in the interest of consumer protection, the phrase was held to require a degree of regularity in an activity so as to be an integral part of the person's business. R & B Customs Brokers Ltd concerned the phrase "in the course of a business" in section 12(1) of the Unfair Contract Terms Act 1977 ("the 1977 Act") and the question whether a finance company could exclude an implied term as to fitness for purpose when selling a car to the plaintiff company for use by one of its directors. The Court of Appeal held that the finance company could not because the plaintiff company was dealing as a consumer for the purposes of the section and section 6(2) of that Act. It adopted a similar approach to that in Havering and Davies and held that for a contract to be made in the course of a business the transaction had to be an integral part of the business concerned and if it was incidental to the carrying on of the business a degree of regularity had to be shown. In Stevenson the Court of Appeal considered the phrase "in the course of a business" in section 14(2) of the Sale of Goods Act 1979. It looked at the phrase in the context of the Act and interpreted it broadly as the aim of the section was to provide increased protection to buyers who purchased goods from a seller who was carrying on business. Thus it distinguished the earlier cases, including R & B Customs Brokers Ltd.

[56] I am not persuaded that the "integral part of business" test is the correct criterion for the phrase in regulation 3 of the 2001 Regulations for the following three reasons. First, it is trite that a statutory provision must be interpreted in the context of the Act or regulations of which it forms part. The case law developed from the Trade Descriptions Act 1968 involves a very different context. The demands of contextual interpretation can trump the desire for consistency in construing statutory phrases.

[57] Secondly, it is clear from the DTI consultative document that the government sought to adopt a simple test to prevent opportunistic "strategic claims". Even a charitable organisation is excluded if its claim arises in course of carrying on a business. The DTI deliberately took a broad approach in the interests of simplicity when it might have taken a more nuanced approach to address the mischief.

[58] Thirdly, the phrase is not confined to a professional investor or someone carrying on regulated activity, who might be the most obvious originator of a strategic action. The use on regulation 3(1)(b) of the words "business of any kind" is in my view a deliberate extension of the restriction beyond that set out in regulation 3(1)(a) which addresses regulated activities. If Parliament had intended the phrase to cover only transactions which were an integral part of the person's business, that would have confined the restriction principally to such regulated activities. Instead, it appears to have cast the net more widely to prevent a competitor from using an associated company, which was engaged in other business activities, as the claimant in a strategic action. In that context the "integral part" test makes little sense.

[59] Accordingly, I reach a conclusion similar to that of David Steel J in Titan Steel that the "integral part of business" test is not relevant to regulation 3(1)(b) of the 2001 Regulations. I observe for completeness that counsel also referred me to Camerata Property Inc v Credit Suisse Securities (Europe) Ltd [2012] EWHC 7 (Comm) in which Flaux J followed David Steel's reasoning in Titan Steel in concluding that the phrase in the 2001 Regulations had a wider meaning than "in the course of business" in the 1977 Act and similar phrases in the other statutes.

[60] In any event if, contrary to my view, the phrase is properly interpreted as encompassing only transactions which are an integral part of a person's business, that test is met in this case. The circumstances are very different from the purchase or sale of a company car acquired for the use of a director or employee. Such transactions can readily be categorised as incidental to a business. By contrast, the hedging transaction was part of the arrangement with RBS which was fundamental to the financing of GEL's business. GEL is a development company which sought to develop residential properties using in large measure borrowed funds. It aimed to generate income from lettings. It was and is an essential part of the business planning of such companies to ensure that the income which the developed properties can generate will be available soon enough and in sufficient amount to meet the interest payments on the borrowings and generate a surplus to pay back the borrowed funds over time. To do so, the developer will seek to manage financial risk, including the risk of increased interest charges due to market fluctuations. That is what GEL's directors were doing in their dealings with RBS.

[61] The fact that GEL did not regularly enter into such arrangements does not matter because GEL was established as a one‑venture company. The transaction was still an integral part of the particular development business (c.f. Davies, Lord Keith of Kinkel at p. 1305G; R & B Customs Brokers Ltd, Dillon LJ at pp.330H - 331B).

[62] I conclude that GEL is not a "private person" in terms of s. 150 of FSMA and regulation 3 of the 2001 Regulations and accordingly has no right of action for breaches of the COBS rules. Its case based directly on those breaches is therefore irrelevant.

(ii) A collateral agreement to advise?
[63] GEL avers (in article 16 of condescendence) that in the circumstances averred and summarised above Mr Ruari Stephen asked RBS for advice and that its employees provided financial advice. This, it asserts, amounted to a contract to give such advice, giving rise to implied terms in relation to the exercise of skill and care. GEL does not assert any express agreement to give advice but seeks to establish the contract by implication from the parties' acts.

[64] The fundamental problem of this case, as Mr Clark submitted, is that the alleged implied contract contradicts RBS's terms of business to which GEL agreed. See, for example para 3.3 of the terms of business set out in paragraph [29] above. There are no averments of any express agreement to depart from those agreed terms.

[65] In Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm) Hamblen J addressed a similar argument that the bank was under a duty of care in contract to advise on hedging and derivative instruments in the context of oil derivative transactions. In paras 474 -476 he founded on the decision of the Court of Appeal in The Aramis [1989] 1 Lloyd's Rep 213 and held that a contract will only be implied from the parties' conduct where it is necessary to do so to give business reality to a transaction. He also referred (at para 477) to the judgment of Mance J in Baird Textile Holdings ltd v Marks & Spencer plc [2001] CLC 999 at para 61 in which he upheld the test of necessity and stated:

"It could not be right to adopt a test of necessity when implying terms into a contract and a more relaxed test when implying a contract - which must itself have terms."

[66] This is not a case in which an attempt to imply a contract fails because the parties would have acted as they did without a contract. In this case there was a written contract setting out what RBS was to undertake and expressly warning GEL that it should obtain its own independent financial, legal and tax advice. The acts of the employees of RBS are consistent with a contractual regime in which the customer had agreed that it would not treat any views which they expressed in bringing about the derivative transaction as advice on which it was entitled to rely. Mr Ruari Stephen signed the terms of business which established this contractual regime. In the circumstances I am satisfied that GEL has no averments which can support the test of necessity. Its case of an implied contract is accordingly irrelevant.

[67] I have also to consider the suggestion that the first sentence in para 2.2 of the terms of business should be construed as incorporating certain of the COBS rules into the parties' contract. The sentence is:

"Where these Terms conflict with Applicable Regulations, the latter shall prevail."

In my view it has the effect that the terms of business cannot qualify or exclude duties imposed on RBS under the COBS rules. Thus the contract cannot be pleaded against a complaint to the FSA that RBS had broken those rules. It might be argued that the sentence is unnecessary if that were all that it sought to achieve, but the sentence has value as a clarification. Does it go further and create contractual rights out of the COBS rules? In my opinion it does not. If it had been intended to incorporate obligations under COBS into the parties' contract I consider that the terms would have stated that clearly. The terms did not. A customer of RBS might rely on the sentence in the civil courts to prevent the bank from enforcing a provision which adversely affected the customer's ability to obtain a regulatory remedy, if there were such a provision. But that is very different from making the COBS rules into contractual rights. GEL's contractual case therefore fails.

(iii) Whether there is a relevant case of negligent misrepresentation and negligent advice?
[68] Mr Clark challenged as irrelevant GEL's cases of negligent misrepresentation and negligent advice (articles 14 and 17 of condescendence) on the basis that the parties' relationship was governed by the terms of their contract which excluded any basis on which the common law would impose a duty of care in the provision of advice.

[69] In recent years the courts have adopted at a high level of generality three approaches or tests in determining whether a duty of care in tort or delict to avoid causing pure economic loss exists in a particular case. They are:

(i) the assumption of responsibility test, coupled with reliance;

(ii) the three‑fold test, namely whether the loss was a reasonably foreseeable consequence of a defender's act or omission, whether the relationship between the parties was of sufficient proximity and whether it was fair, just and reasonable in all the circumstances to impose such a duty on the defender; and

(iii) the incremental test of developing novel categories of negligence by analogy with established categories.

The assumption of responsibility test is applied objectively and may involve the court imposing responsibility in a manner essentially similar to the three‑fold test. Whichever test is adopted, the court, when deciding whether the law imposes a duty of care, will have regard to the detailed circumstances of the particular case: Commissioners of Customs & Excise v Barclays Bank plc [2007] 1 AC 181, Lord Bingham at paras 4-8. In a commercial context the focus on those detailed circumstances and the particular relationship between the parties requires the court to take into account among other things the terms which the parties have agreed will govern their commercial dealings in order to ascertain what their reasonable expectations would have been.

[70] GEL argues that those circumstances include the regulatory obligations contained in the COBS rules. It asserts that RBS's employees did in fact provide financial advice in circumstances in which it was entitled to and did rely on that advice. It asserts that RBS broke the COBS rules in the advice which its employees gave. Mr Mitchell submitted that even if the breaches of the COBS rules were not directly actionable as breaches of statutory duty, they were relevant to the existence of a common law duty of care. He linked the obligations under COBS with a delictual duty of care by arguing that no reasonably competent adviser would have acted in a manner inconsistent with the COBS rules. In substance he submitted that, whatever RBS stated in its terms of business which GEL accepted, RBS's employees gave financial advice which breached the COBS rules, and GEL relied on that advice, thereby giving rise to a common law duty of care.

[71] I am not persuaded that GEL can rely on either the acts of the RBS employees or the COBS rules to bring into existence a common law duty of care in relation to the provision of financial advice. In relation to the former it is necessary to consider the effect of the contractual terms which the parties agreed. In many cases involving claims for pure economic loss the courts have resisted invitations to develop the law of tort or delict to impose common law duties in commercial transactions in conflict with the terms on which parties have agreed in their contracts to conduct their affairs and have allocated their respective risks and responsibilities.

[72] Mr Clark referred me to a number of cases which addressed this issue in circumstances which are analogous to those in this case, namely J P Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm) and, on appeal, [2010] EWCA Civ 1221 ("Springwell"); Standard Chartered Bank v Ceylon Petroleum Corporation (above); IFE Fund SA v Goldman Sachs International [2006] EWHC 2887 (Comm) and on appeal [2007] EWCA Civ 811, [2007] 2 Lloyd's Rep 449; Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd's Rep 511; Bank Leumi (UK) plc v Wachner [2011] EWHC 656 (Comm) and Raiffeisen Zentralbank Osterreich v The Royal Bank of Scotland [2011] 1 Lloyd's Rep 123. He referred also to Titan Steel (above) and Wilson v MF Global UK Ltd [2011] EWHC 138 (QB).

[73] In my view the following five propositions in relation to a delictual or tortious duty of care can be derived from those authorities:

(1) It is not sufficient to set up a duty of care to assert the existence of an "advisory relationship". There is a clear distinction between giving advice and assuming legal responsibility for that advice. A salesperson of a financial product may give investment advice or express opinions without becoming an investment adviser and undertaking duties of care as such. Whether the giving of advice gives rise to legal obligations in tort or delict to exercise reasonable care or to advise on certain matters depends on the terms of the legal relationship between the parties: Standard Chartered Bank, Hamblen J at paras 505ff, 544.

(2) The absence of any written advisory agreement is a significant pointer against the existence of an advisory obligation: Springwell, (first instance) Gloster J at para 440; Wilson v M F Global, Eady J at para 174.

(3) Parties can enter into a contract which defines the basis of their trading or banking relationship and allocates risk in a way which negates any possibility of a general or specific advisory duty coming into existence: Springwell (1st instance), Gloster J at paras 475 and 478. The outcome can be expressed in different ways but with the same meaning. The contractual terms can define the parties' relationship in a way that no assumption of responsibility can be inferred. The relationship so defined is not equivalent to that of professional adviser and advisee which would make it just and reasonable to impose a duty of care: IFE Fund SA, Toulson J at paras 70-71.

(4) The contractual delineation of responsibility and allocation of risk may preclude a party from founding on the actual reality which eventuates if he has contracted to accept a particular state of affairs as true. Thus if A and B agree that B will not advise A and A will not rely on any statement by B as advice, the contract will bar A from asserting the giving of that advice and his reliance on it. See, for example, the non-reliance statements in Standard Chartered Bank which prevented Ceylon Petroleum Corporation from asserting that advice had been given and relied on (para 544). See also Peekay Intermark Ltd, Moore‑Bick LJ at para 56; and Springwell (CA), Aikens LJ at para 156f. English law treats the matter as a species of estoppel in which issues of unconscionability do not arise, namely contractual estoppel. In Scots law I consider that the correct analysis is that there is a contractual bar and that issues of inconsistency and fairness, which would be relevant in personal bar (Reid and Blackie, Personal Bar, chapter 2), do not arise.

(5) The approach in (4) above extends to a retrospective agreement in relation to past events. A and B may agree that their relationship will be on the basis of a certain state of affairs in the past which they know not to be the case, such as that B had not made any representations, and A will thereafter be obliged to act on the basis of that acknowledgement. See Peekay, Moore‑Bick LJ at para 57; Springwell (CA) Aikens LJ at paras 141 - 171.

[74] The application of those propositions to the averred facts undermines GEL's case of negligent misrepresentation and negligent advice.

[75] If there had been no contractual delineation of responsibility the court would have had to consider evidence of the circumstances in a proof in order to decide whether there was an advisory relationship of a nature that gave rise to a duty of care (propositions (1) and (2) above). But here contract is clear. In paragraph [29] above I set out relevant provisions from RBS's terms of business which GEL received and accepted. In this context I refer in particular to RBS's statements in (i) para 3.2 that it would provide dealing services on an execution‑only basis, (ii) para 3.3 that it would not provide advice on the merits of a particular transaction and that the customer should obtain independent advice, (iii) para 4.6 that it made no representation or warranty and that it would give no investment advice and (iv) para 10 that it undertook no duty of best execution.

[76] What the RBS employees said to Mr Ruari Stephen falls to be analysed in the context of those terms of business. If, as averred, GEL relied on their statements as investment advice, that reliance was not reasonable in the face of the contractual arrangements into which the parties had entered. The answer to GEL's case in negligence is pithily stated by Hamblen J in Standard Chartered Bank (at para 544):

"The point and effect of the Non-Reliance Statements is to require the parties to accept a particular state of affairs as true, even if the actual reality was different. One cannot, merely by referring to what is asserted to be the underlying reality, avoid the effect of those provisions."

In this case the parties have allocated their respective roles and responsibilities in the agreed terms of business. Thus if RBS's employees provided information and opinions which might fairly be described as advice, the contractual provisions catered for that situation: Peekay, Moore‑Bick LJ at para 56; Titan Steel, David Steel J at paras 77-93.

[77] In reaching this view I have borne in mind that, in contrast with some of the cases which were cited, the parties in this case were of unequal bargaining power. GEL was a small property company and its directors did not have experience of investing in complex financial instruments. Parliament has addressed certain ill consequences which are the result of unequal bargaining power in the 1977 Act. It has also enacted a regulatory regime which the contractual provisions do not supersede and which may provide statutory remedies if GEL can establish breach of that regime. But unless there is a remedy in the 1977 Act, I see no basis for overriding the contractual allocation of responsibility in the context of a common law claim. In the relevant paragraphs of the terms of business RBS made it clear that it was willing to enter into the IRSA with GEL only on the basis that GEL should take independent advice and that it should understand the risks which the transaction involved. I consider that the principle which Moore-Bick LJ stated in Peekay (at para 43) is both relevant and salutary in the interest of certainty in commercial dealings:

"A person who signs a document knowing that it is intended to have legal effect is generally bound by its terms, whether he has actually read them or not."

[78] Mr Mitchell also pointed out that the directors of GEL were young and inexperienced. While I recognise the inequality of bargaining power between GEL and RBS, I do not think that the relative youth of the directors is a separate and relevant consideration as a ground for departing from that principle. Company law expects directors of a limited liability company to achieve an objective standard of competence and knowledge (see section 174 of the Companies Act 2006) and GEL cannot be heard to plead their inexperience and the resulting lack of knowledge. Where COBS rule 10.2.1 applies, the authorised person has an obligation to enquire into and assess the experience of the client when considering the appropriateness of a financial product. But that duty under COBS, if applicable, does not in my view alter the position of GEL at common law.

[79] More widely, I do not think that GEL can rely on the COBS rules to create a common law duty of care in relation to the provision of advice. A common law duty can arise from the existence of a statutory duty as part of the background circumstances; and the existence of a statutory duty may show that a particular risk should have been foreseen. When the court assesses the effect of the statutory duty on the question whether it is just and equitable to impose a duty of care the primary consideration is, in my view, the policy of the statute. Looking to the policy of the FSMA one discovers that it provides protection to consumers of financial services through a self-contained regulatory code and statutory remedies for breach of its rules. As I have said, it needs no fortification by the parallel creation of common law duties and remedies. Further, the existence of a duty in negligence for failure to comply with the COBS rules would circumvent the statutory restriction on the direct right of action which I discussed in paragraphs [31]-[60] above. See, as examples of the correct approach of looking to the policy of the statute (in the context of the statutory duties of public authorities), X (Minors) v Bedfordshire County Council [1995] 2 AC 633, Lord Browne-Wilkinson at 739; and Stovin v Wise [1996] AC 923, Lord Hoffmann at 952F-H. To my mind that approach is applicable also where Parliament imposes statutory duties on private bodies and individuals.

[80] I therefore conclude that GEL's cases of negligent misrepresentation and negligent advice are irrelevant.

(iv) Section 17 of the Unfair Contract Terms Act 1977
[81] To counter the effect of the contractual terms of business on its claims that RBS acted in breach of contract GEL asserts that the provisions in RBS's terms of business which purport to exclude liability for breach of a contractual obligation in relation to the giving of financial advice should not be given effect because it was not fair or reasonable to incorporate those terms into the parties' contract: section 17 of the 1977 Act. It avers that:

"by seeking to stipulate in the standard form contract that no advice is given, [RBS] is, in effect, seeking to exclude liability for that advice."

[82] In my opinion this is not so. It is necessary to look at the substance of the contractual provisions rather than their form. But that does not assist GEL. The terms, which GEL accepted several months before the IRSA transaction was effected, defined the relationship between the parties and the character of what RBS's employees said. Those terms do not restrict liability for breach of a contractual obligation but by defining the scope of service negate the relationship of adviser and advisee and the assumption of a general or specific advisory duty. See IFE Fund SA, Toulson J at paras 70‑71, and, on appeal, Waller LJ at para 28; and Titan Steel, David Steel J at para 98f. Further, as Mr Clark pointed out, section 25(5) of the 1977 Act, which extends a reference to excluding or restricting liability for breach of an obligation or duty to include a reference to excluding or restricting the obligation or duty itself, does not apply to section 17.

[83] GEL agreed in advance the contractual definition of its relationship with RBS and must accept the consequences of that agreement on its contractual and other common law claims. The circumstances are very different from those which Christopher Clarke J discussed in Raiffeisen Zentralbank (at paras 314-315) when he spoke of a transaction with a man in the street in which a retrospective provision parted company with reality. Had the deemed warranties in the IRSA (paragraph [22] above) stood alone, things might have been different; but they did not.

[84] GEL's case under section 17 of the 1977 Act therefore fails.

Whether relevant averments of fraudulent misrepresentation?
[85] As I have said, Mr Mitchell departed from his case of fraudulent misrepresentation. It is not necessary for my decision to consider the relevancy of those averments. But as I am concerned that the case was pleaded at all, I make the following observations.

[86] It is the law in this jurisdiction and in England and Wales that fraud involves actual dishonesty. Erskine described fraud as:

"a machination or contrivance to deceive."

(Erskine, Institute (Nicholson ed.) II. 668)

More recently, Christopher Clarke J in Raiffeisen Zentralbank (at para 338) stated:

"In order to establish a claim in deceit it is necessary for the claimant to prove that the relevant representations were dishonestly made in that the defendant: (a) knew that he was making the statement that the court finds him to have made; and (b) had conscious knowledge of the facts alleged to render the statement false."

[87] In cases in which damages are sought for fraudulent misrepresentation it is common in this jurisdiction to refer to the standard definition of fraud in Derry v Peek (1889) 14 App Cas 337, in which Lord Herschell stated at p.374:

"First, in order to sustain an action in deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false."

Recklessness itself in this context is a species of dishonesty, a wilful disregard of the importance of truth, and is not merely a failure to take care, however gross: AIC Ltd v ITS Testing Services (UK) Ltd [2007] 1 Lloyd's Rep 555, Rix LJ at paras 256-257.

[88] Mr Clark also referred me to the well-known authorities on the need for clear and specific averments of fraud, namely Shedden v Patrick (1852) 14 D 721, Kaur v Singh 1998 SC 233, The Royal Bank of Scotland plc v Holmes 1999 SLT 563, and Wright v Cotias Investments Inc 2001 SLT 353, Lord Macfadyen at para 38. In the Royal Bank case Lord Macfadyen stated (at p. 569K-L) that it was essential to have clear and specific averments on three matters, namely:

(i) the act or representation founded upon,

(ii) the occasion on which the act was committed or the representation made, and

(iii) the circumstances relied on as yielding the inference that that act or representation was fraudulent.

[89] In my opinion GEL's case fails on the third of these matters. In relation to the allegation of fraud in expressing an opinion on future interest rates it relies on a contrast between what Mr Munro told Mr Stephen in July and November 2007 and what Ms Muntz said in December 2007 on the one hand and the views stated by two RBS economists in a report dated 6 December 2007. It avers that the economists expressed an opinion that interest rates were likely to fall, to continue to fall and to remain low for some time. Although neither party made available the report, Mr Clark informed me that the prediction was that interest rates would fall from 5.75% to 5.25%. It is not suggested that anyone in RBS foresaw the collapse of interest rates from 2008 or that interest rates would remain depressed for several years. In each case GEL avers that Mr Munro and Ms Muntz were either aware of the economists' opinion or "could readily have ascertained that opinion." In the context of averments of fraud in which there must be a clear and specific basis for the inference of dishonesty, that weaker alternative is fundamentally irrelevant.

[90] Further I was given no explanation as to how a report dated December 2007 could be used to infer fraud in relation to a statement made in the preceding July and November. In any event GEL appears not to have considered whether the economists' published views were possibly sufficient to support the inference that opinions that interest rates were likely to rise, or to fall and later rise, were dishonest views in relation to a derivative instrument which was to remain in place for five years.

[91] In relation to other averments of fraud, namely (i) Ms Muntz's representation that RBS did not take a position on the deal and that RBS was protecting GEL, and (ii) her failure to alert GEL to the possibility of using interest rate caps, GEL again avers that if she was not aware she could readily have ascertained the correct information. Again that falls under the weaker alternative rule. Finally, there are no averments to support the inference of fraud in relation to a representation by both Mr Munro and Ms Muntz that the IRSA was priced upon the Bank of England Base Rate rather than LIBOR. Mr Stephen's affidavit does not disclose the context of the alleged statements or support the view that GEL relied on them in deciding to enter into the IRSA.

[92] In my view GEL's averments of fraud are either irrelevant or fundamentally lacking in specification and fall to be excluded as irrelevant.

[93] As Lord Brodie stated in Zurich CSG Ltd v Gray & Kellas 2007 SLT 917, at para 24:

"Fraud is not something to be lightly inferred. Nor should it be lightly averred."

Allegations of dishonesty can have very serious consequences for people, particularly those engaged in regulated professions, and can blight careers, at least temporarily, even if they are eventually not substantiated. I invite counsel to bear in mind these considerations.

Other matters
[94] As I have dealt with the substantive grounds of the action and found them to be irrelevant, it is not necessary to deal with subsidiary arguments and matters. But lest my opinion is overturned on appeal, I record briefly my views on those arguments and matters and also concessions that were made.

[95] Mr Clark attacked as irrelevant GEL's assertion (in article 9 of condescendence) that RBS could not rely on the deemed warranties in clause 8 of the IRSA (set out in paragraph [22] above) which it sent out on 19 December 2007 because they came too late to be incorporated into the contract. He submitted that this was not so because paragraph 9 of the agreed terms of business provided that the contents of formal confirmations of transactions were deemed to be final and binding unless an objection was taken within five days. I am satisfied that that submission is correct.

[96] As mentioned in paragraph [25] above, GEL avers that in a pro forma note which Mr Munro used at the meeting on 19 July 2007 there was an item "ABN impact discussed". GEL asserts that this showed a linkage between the IRSA transaction and the commercial imperative of generating profit to fund the acquisition of ABN. But Mr Mitchell could not explain why the form had a reminder to discuss the acquisition with the customer. He was not able to disagree with Mr Clark's suggestion that the pro forma entry was to remind RBS employees to discuss with customers whether they had dealings with ABN and whether they might be affected by the merger. I am satisfied that the reference to ABN does not support the inference which GEL avers.

[97] Mr Mitchell conceded that he could not seek the reduction of the loan agreement or the standard securities and consented to the repelling of his first and third pleas in law.

[98] If I am correct in my view that the COBS rules do not assist GEL in its contractual or delictual claims, it is not for this court to rule on GEL's allegations of mis-selling and in particular that RBS breached rules 2.1.1, 2.1.2, 2.2.1, 3.3.1, 4.5, 9.2.1, 10.2.1 and 11.2 of the COBS rules. GEL if so advised can pursue its complaints before the FSA. But, as Mr Clark pointed out, section 151(2) of FSMA provides that a contravention of the COBS rules does not make the transaction void or unenforceable. GEL's regulatory claim, if successful, (or any common law claim based on the COBS rules if I am overturned) does not provide a basis for suspending the administration of GEL.

[99] I am grateful to counsel for both parties for their careful submissions.

[100] As I am satisfied that GEL's averments in support of its civil action for breach of COBS and each of its common law claims are irrelevant, I sustain the defenders' first plea in law, repel the pursuers' first, second, third and eleventh pleas in law and dismiss the action. I will have the case put out by order to deal with (i) the administrators' undertaking, (ii) the other proceedings, and (iii) expenses.