During the last financial crisis, the courts have seen many and various cases where dissatisfied clients have commenced proceedings against investment banks in relation to loss-making deals. The traditional lines of attack have been misselling, misrepresentation, negligent misstatement, negligence etc. The outcome has generally been favourable for banks, and their disclaimer clauses have held firm.

This case, however, is unusual. LIA sought to rely on claims in equity, alleging undue influence and unconscionable bargain on the bank’s part. These issues are usually raised in ‘husband and wife’ situations, where for example the latter has given a guarantee of her husband’s liabilities without proper understanding. Hearing these arguments being played out in the context of a business relationship between a sovereign wealth fund and a bank is novel.


Libya was subject to US and UN sanctions for many years, prohibiting inward and outward investment. During this time, the state’s cash revenue generated by oil sales was stockpiled at the Libyan Central Bank. In 2003 and 2004, the sanctions were finally lifted and the Libyan Investment Authority (LIA) was established as the nation’s sovereign wealth fund in order to invest these revenues. By late 2007, LIA held at least US$30 billion of assets.

The dispute between Goldman Sachs International and LIA centred around nine derivatives trades on which the bank advised. These were entered into between September 2007 and April 2008. LIA paid premiums in relation to each trade, which was linked to the share price of an underlying financial institution or blue-chip corporate (for example, Unicredit, Citigroup, Santander, EDF). If the relevant share price rose, the LIA was ‘in the money’ and would receive payment from Goldmans. If it fell, Goldmans would keep the relevant premium.

LIA paid premiums totalling US$1.2 billion. Share prices fell in the wake of the Lehmans collapse; LIA lost all of its two-way ‘bets’. The quantum of Goldmans’ fees was disputed but the parties agreed that they amounted to at least US$130 million. The bank kept the premiums as well as charging fees.

LIA’s claims

LIA sought rescission of the trades and repayment of the premiums, basing its claim on two equitable causes of action: undue influence and unconscionable bargain.

Undue influence

The leading case for undue influence is RBS v Etridge [2001] UKHL 44. In order for actual undue influence to apply, there must be:

  • some improper threat or improper inducement; or
  • a ‘protected relationship’ has arisen between the parties. It can properly be said that the stronger party has a duty to behave towards the vulnerable party with candour and fairness; to ensure that the weaker party has formed an ‘independent and informed judgment’ on the particular matter.

LIA alleged that Goldmans offered improper inducements in the form of lavish hospitality e.g. the bank offered training in its London office for LIA Equity Team members, and this involved flying them over and putting them up in hotels for two weeks. Goldmans also hosted a dinner for LIA for US$1,000; paid for tickets for shows such as Chicago and Lord of the Rings as well as Championship League football games and so on. Additionally, the brother of the LIA’s deputy chief executive was offered an 11 month internship at the bank which was out of the ordinary, given his previous experience.

  • it was an unsophisticated investor which could not assess the advantages and disadvantages of the trades. LIA believed that it was buying actual shares in companies and financial institutions, not just taking positions in derivative trades. The bank knew of LIA’s inexperience and took advantage of it
  • Goldmans had overstepped the normal boundaries of a banker-client relationship. LIA pointed inter alia to the 180 instances of corporate hospitality offered during the course of the relationship and the fact that its key relationship banker was often based at the LIA’s offices in Tripoli, offering training and advice
  • the trades were so unsuitable for LIA that this raised a presumption of undue influence.

Unconscionable bargain

Millett QC in Alec Lobb (Garages) Ltd v Total Oil GB Ltd [1983] I All ER 944 summarised the three required elements as follows:

  • one party is seriously disadvantaged (e.g. through poverty, ignorance or lack of advice);
  • the weaker party has been exploited in a ‘morally culpable manner’; and
  • the resulting transaction was ‘overreaching and oppressive’, not merely ‘hard or improvident’.

LIA relied on the same matrix of facts, pointing to its lack of sophistication and commercial sense.

It alleged that Goldman’s fees were excessive; the fact that the LIA did not seek to even haggle over these when they were proposed by the bank suggested that ordinary market forces were no longer in play.


LIA’s claim was unsuccessful.

Rose J found that there was no undue influence exerted by the bank. The internship was not an improper inducement and the Judge said that as a matter of fact, this did not induce the LIA to enter into the trades. It was normal for banks to offer corporate hospitality and to give assistance with training.

There was no ‘protected relationship’ of trust and confidence between LIA and the bank.

Rose J found that the relationship between Goldmans and LIA ‘did not go beyond the normal cordial and mutually beneficial relationship that grows up between a bank and a client’.

There was no benchmark or yardstick for measuring the reasonableness of the bank’s profits.


It is unsurprising that the Judge found in favour of the bank. To have decided otherwise would have been to significantly extend the application of the equitable doctrines of undue influence and unconscionable bargain to a sophisticated commercial context, where the alleging party was a state-owned investment fund.

In summary, Rose J made the point that ‘generally speaking, the law will not intervene to save people from making improvident bargains’.