Court of Appeal rules on interest rate swaps

The Court of Appeal at the end of June held in Bushline and Coomey v ANZ that ANZ’s representations to dairy farmer borrowers were false and of legal consequence. The High Court had previously found they were incorrect but of no legal effect.

Interest rate swaps are a complex financial arrangement under which a borrower can hedge their risks of movements in interest rates and, in particular, the variation between fixed and floating rates. However, as with any financial transaction, only one side can be ‘in the money’ and during the years of newly low interest rates before 2010, banks sold interest rate swaps as a hedge particularly in the rural sector on the back of a perception that interest rates would soon be on the rise.

Borrowers lapped them up and banks seemed only too ready to have their dealers sell them at equally alarming rates. These are hugely complex transactions and rely on a sophisticated understanding of financial markets. Banks are inherently well placed to understand those risks and price them. Many farmers are not. Although each case will depend on its own facts, the Bushline case now clearly establishes that banks had an obligation in relation to their swaps representations to what are essentially lay people relying on those banks to clearly spell out the upsides AND downsides of the arrangements.

As an indication of just how complex swaps are, this dispute has now been referred back to the High Court to determine damages from an identified range from less than $100,000 to more than $6,000,000.

Although Bushline can now consider its claim a success (they were so unsuccessful in the High Court that the Judge there awarded costs with a 50% uplift!), the bottom line is that if you’re entering into a financing transaction, you need to understand your rights and obligations along with the contingent exposures. On top of that, if you rely on the lender’s explanations, you must bear in mind that they are an interested party in the transaction who wants you to enter into it.

For advice on loan and financing terms including all security issues, please contact Sarah Churstain or Jono Cole.