Between 2004 and 2010 WW Property Investments Limited (‘’WW’’) borrowed money from National Westminster Bank plc (‘’NatWest’’). As a condition to such borrowing, WW was required to enter into four separate IRHPs comprising three so-called collars and one swap which served to limit its exposure to interest rate fluctuations. As it happened, in the period post credit crisis, interest rates fell and WW suffered under the IRHPs.
Whilst several issues were raised in the application to appeal, the most significant claim arose in relation to wagering.
It was argued for the appellants that hedging contracts are contracts for difference. These, it was contended, are almost always regarded as wagers at common law and it is a condition of such wagering contracts that the parties must possess equal knowledge of the outcome of the wager. NatWest possessed greater knowledge on the prospects of the hedge and therefore the contract of wager should be voidable.
Whilst Lord Justice Briggs noted that such an argument was ‘’ingenious’’, he and Lord Justice Clarke ultimately dismissed the claim as ‘’misguided heresy’’.
The court approved Hobhouse J’s judgment in Morgan Grenfell Ltd v Welwyn Hatfield District Council  1 All ER 1 where it was held that ‘’[interest rate contracts] are not gaming or wagering but are commercial or financial transactions to which the law will, in the absence of some other consideration, give full recognition and effect.’’ If there is a ‘’genuine commercial purpose’’ in the words of the Court of Appeal, it is not to be regarded as a wager.
The lengthy judgment handed down by the Court of Appeal marks the culmination of a number of High Court cases in recent years on the same issue. Although not technically binding as it related to permission to appeal, the court's clear dismissal of the wagering claim should come as welcome news to banks who are party to hedging contracts.
The focus of the court on the commercial purpose of hedges should also serve as a reminder to those involved in negotiating IRHPs that they should be viewed in a similar way to an insurance policy, designed to protect a party from exposure to interest rate changes, and not as a speculative gamble on interest rates.