A recent borrower-friendly decision arose from a lender’s attempt to enforce an indemnity granted by, Barnett Waddington Trustees (BWT), to pay break costs upon the early repayment of a fixed rate loan [1].


BWT had entered into a fixed rate term loan with The Royal Bank of Scotland Plc (RBS). Under the terms of the loan agreement, BWT was required to pay a prepayment fee if it repaid the loan within the first five years of the term. Additionally, the loan agreement also provided that BWT was liable to “indemnify the Bank on demand against any Loss….which the Bank sustained or incurred as a consequence of….(d) any prepayment or repayment”. “Loss” was defined as “any cost to the Bank incurred in the unwinding of funding transactions undertaken in connection with the Facility”.

In BWT’s case after five years had elapsed BWT sought to repay the loan, albeit early. RBS informed BWT that as a condition to the early redemption, BWT had to pay an “interest rate swap termination cost” of circa £2.4 million. BWT challenged the cost and it transpired that it was the cost of unwinding an internal swap made between two different departments of RBS.


The question before the court was therefore whether the cost of unwinding the internal swap fell within the scope of the indemnity wording and the definition of “Loss”. The issue for RBS with regard to the internal swap was that, unlike an external swap, as the two sections of RBS were part of the same legal entity, it had not actually suffered any loss or cost in unwinding its internal transaction. BWT could not therefore be liable to pay termination costs that were the result of an internal account adjustment arising between two departments of the same bank.

However, it should be noted that BWT’s counsel conceded that a “specific hedging transaction by the bank with a third party, back to back with the facility” was covered by the indemnity clause which raised the question of whether or not such clauses are subject to the conduct of business rules in the FSA Handbook. Unfortunately the judgement did not address the point with regard to an external hedge arrangement between RBS and a third party, and further, it left open the question of whether a swap between two different legal entities within the same group of companies would trigger the indemnity.


Following this case lenders should be mindful that when seeking to enforce break cost clauses the nature of the swap, the wording of the clause in question and the notice arrangements provided to the borrower will all be assessed in concluding whether or not break costs are payable. It is of particular significance in the, not unusual, scenario of internal swaps within different parts of the same bank.

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[1] Barnett Waddington Trustees (1980) Ltd  v The Royal Bank of Scotland plc


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.