Derivatives can be used to hedge, speculate, or a hybrid of the two. An astute gambler may claim his strategy is like a “naked” derivative: a calculated attempt to profit from a mismatch between the odds and the chances of the bet paying out.   But is a buyer using derivatives doing the same thing as a gambler?  This question was revisited in WW Property Investments Limited v National Westminster Bank plc [2016] EWHC 378 (QB).

The background

Between 2004 and 2010, WW borrowed money from the bank on a floating interest rate.  To hedge those interest obligations, WW entered into three interest rate “collars” with the bank and later a swap. The collars and the swap turned out to be disadvantageous to WW. They were reviewed as part of the Interest Rate Hedging Product Review undertaken by the bank by agreement with the FCA. The review resulted in WW and the bank entering into a compromise agreement in respect of claims relating to the collars, although WW reserved a right to claim for additional losses under the review. No compromise was reached in relation to the swap. WW later sued for losses under the swap.

WW’s hand

Among other things, WW claimed that the collars and the swap were unlawful wagers. Counsel for WW played the following cards:

  1. interest rate hedges amount to “contracts for differences”, which are wagers at common law;
  2. wagers contain implied terms that the chances are equal and the parties possess equal knowledge about the odds;
  3. the collars and the swap were subject to these implied terms as they were not betting contracts regulated by the Gambling Act 2005;
  4. the collars and the swap each had a market value at day one in favour of the bank that the bank failed to disclose; and
  5. the bank was therefore liable to WW for breach of the implied terms.

His Honour Judge Roger Kaye QC, sitting in the High Court, did not consider the collars, holding that all claims relating to these had been compromised in the earlier settlement. He considered the arguments on the swap.

Betting against the odds

The judge had an advantage: the exact same hand had been played several times before. Notably it had been played by the same counsel on six occasions in two recent cases. Each time it was rejected.

In Nextia Properties Ltd v Royal Bank of Scotland and another [2013] EWHC 3167 (QB), it had been rejected summarily by the High Court, and then permission to appeal had been refused on three occasions: first, by Lord Justice Christopher Clarke on paper; second, by Lord Justice Vos sitting in the Court of Appeal ([2014] EWCA 740); and third, by Lord Justice Vos again following a renewed application for permission to appeal. It also failed in Derek Gladwin Ltd v Barclays Bank plc (2015, unreported) in both the High Court and (at the permission stage) in the Court of Appeal.

The judge criticised WW’s counsel for re-heating similar arguments, calling this “pointless, expensive, and wasteful litigation to the detriment of the courts time and resources and needs of other litigants”.

The judge followed the Nextia and Gladwin decisions and affirmed the decision in Morgan Grenfell v Welwyn [1995] 1 All ER 1 that a contract for differences could not be a wager if the “purpose and interest of [the parties] was something other than wagering” (i.e. if at least one party had a genuine commercial purpose). In the judge’s opinion, WW had entered into the swap to limit its interest rate risk on its loans as part of a genuine hedging strategy. The bank was under no obligation to ensure equal chance, or to disclose the day one “market value” of the contracts.

The judge also approved of Lord Justice Vos’s view in Nextia that the Gambling Act 2005 had replaced the common law on wagers entirely, such that contracts regulated under the Financial Services and Markets Act 2000 were now beyond the ambit of gambling law.


There is a history of buyers of derivative contracts arguing that they are unenforceable as either wagers or insurance agreements that did not comply with the respective legal rules. It is notable that the latest round of such attacks since the financial crisis has again been rebuffed by the courts.

That said, the judgments in Nextia, Gladwin, and WW Properties are brief, as they were in response to strike out, summary judgment and permission to appeal applications rather than full trials. They also did not have the most promising fact pattern for an attack on derivatives as wagers. Maybe another litigant will gamble on playing a better hand more successfully in the future.