Case No: A3/2013/1188 
Neutral Citation Number: [2013] EWCA Civ 1590
IN THE COURT OF APPEAL (CIVIL DIVISION) 
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION 
(DAVID DONALDSON QC 
(Sitting as a Deputy Judge
of the High Court))
Royal Courts of Justice 
Strand, London, WC2A 2LL 

Tuesday, 22 October 2013
 
B E F O R E:

LORD JUSTICE LONGMORE 
 
LORD JUSTICE RYDER 
 
LORD JUSTICE BRIGGS 

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MORTGAGE AGENCY SERVICES NUMBER ONE LIMITED 
Claimant/Appellant
‑v‑
 
EDWARD SYMMONS LLP
Defendant/Respondent 
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Mr M Howard QC (instructed by Burges Salmon LLP) appeared on behalf of the Claimant/Appellant
Mr M Simpson QC (instructed by Plexus) appeared on behalf of the Defendant/Respondent
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J U D G M E N T
1.	LORD JUSTICE LONGMORE:  This appeal is about valuations of two separate commercial properties: 216 Sussex Gardens W2 and 32A to 36 Kilburn High Road NW6 respectively.  The claimant and appellant (whom I shall call the lender) lent money against the security of those properties, relying on valuations of the defendant (whom I shall call the valuer) which are now admitted to have been negligent.
2.	The lender has said (and this is also admitted) that if true and accurate valuations had been given it would not have been lent the money.  It has accordingly claimed by Particulars of Claim that it would not have lent the money and that it has therefore lost the difference between the  sums lent and the cost to it of borrowing money to enable it to do so on the one hand and what it has been able to recover from the properties and the borrowers on the other hand (always subject to the limitation that it cannot recover sums attributable to any fall in the property market that has occurred since the loan was made in accordance with SAAMCO Asset Management Corporation v York Montague Ltd [1997] AC 191).
3.	The present appeal concerns not that limitation but what is recoverable under the head of its "cost of funds" on the debit side of the equation from the lender's point of view.  In the lender's original pleading the recoverable cost of funds were described in the Sussex Gardens case as "Break cost of re‑balancing cash flow and eliminating interest rate exposure" and "interest on break cost from 5 December 2012".  In the Kilburn High Road case it was described as "Break cost incurred as at 27 November 2009" and "cost of funding incurred on the break cost 27 December 2009 to [oddly] 22 May 2009", presumably intended to be 22 May 2012.
4.	The valuer understood that the lender was claiming to have hedged the risk it was incurring by lending the sums to the borrowers at a fixed rate of interest while funding its loan by borrowing at or near the floating inter‑bank rate and that the lender had entered into an interest rate swap whereby the lender paid to its counterparty a fixed rate of interest on a designated sum and the counterparty paid to the lender a floating rate of interest on that sum.  In that way the risk that the lender would lose out if floating interest rates rose during the term of the loan was eliminated or minimised.  The valuer further understood that the claimed "break costs" were the costs of breaking these hedges after the borrowers had defaulted.  It considered that it could not be liable for such sums and on 19 December 2012 applied to strike out or obtain summary judgment in its favour in respect of these claims for "break costs".
5.	Nine days before the hearing of that application, on 12 April 2013, it emerged that the position was different from the valuer's understanding.  As far as the loan on the Sussex Gardens property was concerned, there was no interest rate swap entered into by the lender, instead the lender had managed the interest rate risk assumed by reason of the loan at a fixed rate of interest by matching the amount of the loan to a perpetual interest bearing shares issue ("PIBs").  It was only after the borrower had defaulted and, as the lender now accepts, after it ought to have treated the loan as irrecoverable in December 2008, that a fixed for floating swap (arguably attributable to the loan) was entered into with HSBC on 24 June 2009 and later broken on 25 May 2010 when the lender in fact treated the loan as lost.
6.	In the case of the Kilburn High Road loan advanced on 31 May 2007, the lender did, it is said, take out a fixed for floating interest rate swap with Société Générale to match the loan and hedge the interest rate risk.  It broke that swap a year later for its own reasons and thereafter managed the interest rate risk by matching the loan against its own reserves.  The borrower defaulted on 28 December 2008.  But that made no difference to the management of the interest rate until 27 November 2009 when the lender entered into a fixed for floating swap with HSBC to match the loan.  That was just one month before, as the lender now accepts, he should have treated the loan as lost.  The swap was, however, only broken in May 2012 when the lender treated the loan as in fact lost.
7.	The Deputy Judge acceded to the application to strike out the claims for break costs partly because he considered that the claims as a whole exceeded what has been called "the SAAMCO cap", so that the point was academic, and partly because he considered that no cost of funds was in law recoverable whatever its constituents.  Both the lender and the valuer agree, however, that it is premature to consider the applicability of any SAAMCO cap and that some cost of funds forms part of the basic loss in a "no transaction" case before applying the SAAMCO cap.  The true dispute is about the proper constituents of that "cost of funds", and that has been the focus of the argument in this court.
8.	Mr Mark Howard QC, for the lender, submits that loans on the security of commercial property are commonly made at a fixed rate of interest.  Banks will invariably want to protect themselves from losing out if interests rates change after money has been drawn down and will often enter into interest rate swaps at whatever is the appropriate rate as a hedge against the vagaries of interest rates.  It will sometimes be possible to identify a particular interest rate swap undertaken in relation to a particular loan, as the Société Générale was said to be for the Kilburn High Road building.  More usually, such interest rate swaps will not be identifiable as relating to a particular loan but will be part of a more global structure of protection against increase of floating interest rates.  But, he says, there is a thriving market for such swaps and there will invariably be a market rate for such swaps.  He accepts, of course, that he will have to prove not only the existence of such a market but also how the lender sought to manage the risk of interest rate movements.  He has indeed produced no fewer than three witness statements from Mr Davies of the lender to explain the lender's position, which, as I say, has turned out very differently from its original pleading.
9.	Mr Howard then says that once he has established that there is a market for such swaps, it makes no difference that the lender may not have entered into an interest rate swap with an external counterparty but has sought to manage the risk internally.  He could say (this is my analogy, not his) that the case is rather similar to a buyer or seller of goods for which there is an identifiable market who can recover damages for non‑delivery or non‑acceptance even if he has himself no contracts up or down a string which he is intending to fulfil by performance of a contract in issue between the parties.
10.	He says further that even if the lender has made no such internal arrangement, nevertheless there is a recognised cost of funding lending which is, or ought to be, recoverable.  He then says that the risk that the cost of breaking the swap will be incurred is an inevitable consequence of entering into an external or internal swap arrangement and if such break costs are incurred they are likewise part of the cost of lending.
11.	Mr Mark Simpson QC submits that this is all hopelessly wrong and that the only cost of funds is the variable rate of interest from time to time, rather as I indicated would be the case where the relevant loan was itself at a variable rate of interest (see Lloyds Bank PLC v Parker Bullen [2000] Lloyd's Rep PN 51).  He submits that in any case where there is a no interest rate swap with an external counterparty there is no loss, or only a fictional loss, which cannot possibly be recoverable.
12.	Here, there was no such external swap in the Sussex Gardens case until after the time when the lender now accepts it should have regarded the loan as lost and closed its internal position on 5 December 2008.  Although there may have been an initial swap contract with Société Générale in respect of the Kilburn High Road loan, that was broken for reasons internal to the lender and, although a swap was later known to be entered into with HSBC, it only lasted a month before the date of the final default, which the lender accepts is the date when break costs should have been incurred.
13.	More broadly, Mr Simpson submits that even if a hedge with an external counterparty could be proved to have existed until default, the cost of that hedge is not the true measure of loss but a decision of the lender made for its own reasons, with which the valuer has nothing to do and for which he cannot be held responsible.  
14.	Finally, he submits that on no view can break costs be recoverable because it is the default of the borrower, not the negligence of the valuer, which has caused the break costs to be incurred.  To allow break costs to be recovered is essentially to allow recovery for the consequences of the borrower's breach of contract in failing to service the loan for its contractual term and then repay the money advanced.  This is, he submits, precisely what the House of Lords said could not be recovered in Swingcastle Ltd v Alastair Gibson (A Firm) [1991] 2 AC 223.  He says further that the fact that the break costs were not added to the lender's claim against the borrower, although contractually they could have been, shows that they cannot truly be losses incurred by the lender.
15.	The arguments ranged more widely than this.  By isolating some of them in the way I have, I do not mean to inhibit the party's arguments in any way but they are all extensive, important and problematic to the extent that for my part I cannot see that this is a proper case for striking out all or any part of the claim, as the judge did.  Nor are they susceptible to disposal on a summary judgment application.  It does not seem to me that Mr Simpson's submissions are so unarguably correct that they can be upheld at this stage of the proceedings.  His submissions on break costs are perhaps more compelling than his other submissions but they cannot sensibly be considered on their own without any regard to the wider submissions about hedging in general and the relevance, if any, of the existence of an external counterparty.
16.	It is impossible to do justice to these wider submissions without evidence from the lender about how it hedged the relevant loans, if it did, and how it treated them in its books, and, inevitably, as it seems to me, some expert opinion evidence about the prevalence of hedging if loans are made on commercial property at a fixed rate of interest and about the existence of a market for interest rate swaps and how commonly that market is used.
17.	Mr Simpson says that lenders have been lending on commercial property at fixed rates for years and have never made a claim before for the cost of hedging against changes in variable interest rates but it may be that the recent prolonged period of low interest rates is itself a novel phenomenon.  In any event, novelty cannot of itself be an answer to the claim.  In this context, it is perhaps not completely irrelevant to note that claims do seem to have been made in the past for compound (rather than just ordinary) interest.  The fate of these claims has been somewhat mixed, as shown by a comparison of Birmingham Midshires Mortgage Services Ltd v Phillips [1998] PNLR 468 and The Mortgage Company v Halifax (SW) Ltd [1999] Lloyd's Rep PN 159.
18.	As it is, I would allow this appeal, set aside the order of the Deputy Judge and give permission to the claimants to amend their particulars of claim in accordance with the drafts now before the court as exhibited to the second witness statement of Mr Andrew Davies dated 30 May 2013.  Messers Edwards Symmons at least have the consolation that they do now know what case it is that they have to meet.
19.	LORD JUSTICE RYDER:  I agree.
20.	LORD JUSTICE BRIGGS:  I also agree.  In my view, this is a case in which the parties should give serious consideration to applying together to the Chancellor of the High Court for a direction that the further case management of this case and any interim applications be docketed, that is further determined by the judge who will in due course be, or probably be, the trial judge.  There are serious issues of potentially wide importance raised by the submissions which we have so far heard, they arise in a complex area and there will be a need carefully to manage disclosure, witness statements and, in particular, the identification of the issues to be dealt with by experts.  All those things ought to be managed by the trial judge, if at all possible.  This will have the additional advantage that the trial judge will be able to begin to immerse himself in the underlying complexities of the matter before the first day of the trial.