Since the settlement of Graiseley Properties Ltd v. Barclays Bank plc, the banner of LIBOR-related claims has been flown by Unitech, in defence of the claims made against it by Deutsche Bank for sums due pursuant both to a credit agreement and an interest rate swap agreement.

The recent judgment of Teare J marks the latest staging post in the advance of these claims towards trial. It is notable less for any advance in understanding how LIBOR-related claims are to progress than for the following:

  • highlighting the Court of Appeal's recent judgment in relation to the effect of novation and other forms of assignment on a claim for rescission;
  • casting light on the court's approach where a bank litigates against a customer who will still owes it a substantial amount, even if that customer succeeds in a claim for rescission; and
  • the unusual example of a judge overturning his own earlier decision.

This update considers the first two of these points.

The disputed transactions

The Deutsche Bank v. Unitech litigation is comprised of two separate but related actions. The first (the Lenders' Action) relates to a credit agreement entered into by Deutsche Bank and other banks with Unitech on 24 September 2007 (the Credit Agreement) pursuant to which some US$ 150 million was advanced. New lenders acceded to the Credit Agreement, two purportedly by a process of novation which will be considered further below.

The second action relates to an interest rate swap entered into by Deutsche Bank and Unitech (the Swap), pursuant to which Deutsche Bank claims some US$ 11 million (the Swap Action). Unitech claims that the Swap was (wrongly) recommended to it as suitable. Unitech also contends that both the Swap and the Credit Agreement formed part of the same package, and that its agreement to both was procured by misrepresentation. Sums payable under both agreements were to be calculated by reference to US dollar LIBOR.

History of the litigation

Unitech sought to amend its defence to include pleas that implied representations were made to it by the Bank as to the integrity of LIBOR and the Bank's own contribution to it. Cooke J refused Unitech permission to make such amendments. He also went on to find that, as the Credit Agreement had been novated on the accession of two of the lenders, rescission was no longer available to Unitech as a remedy, leaving it only with a damages claim. This was significant because Unitech's rescission claim was its only defence to the Bank's claim for money due. A damages claim would only act as a counterclaim, and would not protect Unitech from its obligation to repay the Bank. Unitech therefore appealed both aspects of Cooke J's findings.

Shortly before the Court of Appeal hearing, the parties appeared again before Teare J arguing no fewer than 23 points of dispute. Unitech sought permission to make certain further amendments to its pleaded case. The Bank opposed that application and sought summary judgment in respect of Unitech's existing claim for rescission (in relation to the alleged misrepresentations as to the suitability of the Swap), on the basis that following Cooke J's decision on the effect of the novations, there was an issue estoppel precluding Unitech from seeking rescission at all.

Teare J agreed that Unitech was estopped from claiming rescission as a remedy, and granted summary judgment in that regard. He noted that it would have been open to the parties to delay the hearing before him, pending the outcome of their appearance before the Court of Appeal.

The Court of Appeal's decision (Graiseley Properties and others v. Barclays Bank plc [2013] EWCA Civ 1372)

The Court of Appeal heard the appeal from Cooke J's judgment at the same time as the appeal regarding the (opposite) findings of Flaux J in the Graiseley v. Barclays litigation as to implied representations regarding LIBOR manipulation. The Court of Appeal's decision in that regard (that implied representations regarding LIBOR can properly be argued) has received more attention than its finding in relation to novation.

The Court of Appeal considered whether, on a true construction, there had been novations of the Credit Agreement to include two new lenders, such that any existing equities (the right to rescission among them) were extinguished. It considered this issue only to the extent of establishing whether or not Unitech's case was arguable, and the issue remains to be determined substantively at trial.

The Court of Appeal determined that it was arguable that notwithstanding the use of the term "novation" to describe the process by which two of the new lenders had acquired their interests in the Credit Agreement, that term was not being used with its full legal significance.

The point is an interesting one. The Credit Agreement referred separately to accession by way of novation, and to accession by way of assignment, assumption and release. The drafting of the provisions relating to novation, however, referred to a new lender becoming "… a Lender under this Agreement and [will] be bound by the terms of this Agreement as Lender", rather than to the creation of a new agreement on the same terms. The provisions relating to assignment, assumption and release contained similar drafting, and the Court of Appeal held that it caused one to wonder (in effect) whether there was intended to be any legal difference in consequence between the two methods of transfer. It also held that if there was intended to be such a difference, it was arguable that there was only a partial novation, such that rescission was still available as against the remaining lending banks.

Reversal of Teare J's earlier judgment

The effect of the Court of Appeal's finding in this regard was that the parties appeared back before Teare J, in agreement that his previous finding of an estoppel regarding Unitech's claims for rescission could not stand. Teare J took the unusual step of reversing his own judgment accordingly, rather than insisting that it be dealt with by way of appeal.

The Bank's application for part-payment/payment into court

The majority of Teare J's judgment was, however, taken up with a further application by the Bank. Its argument was, in substance, that even if Unitech succeeded in its claim for rescission of the Credit Agreement, the court would require it to repay to Deutsche Bank the outstanding sum of US$ 120 million which it had drawn down and not repaid. The Bank therefore found itself in a position which can be familiar to banks, whereby even if its opponent won at trial, it would still find itself indebted to the bank for a substantial sum which it might not have the resources to pay. The Bank argued that on that basis, Unitech should be required to pay that amount to it (or pay it into court) before being allowed to proceed with its defence.

Unitech accepted that it would be obliged to repay the US$ 120 million (plus non-contractual interest) if its defence of rescission succeeded. However, it argued that it should not be required to pay that sum now, on the basis that: (a) the Court of Appeal had not required such a payment; (b) there was no provision of the Civil Procedure Rules (CPR) allowing the court to require that such a payment be made; and (c) as Unitech was presently unable to find that sum, its defence would be stifled unfairly were the order sought by the Bank to be made.

Teare J considered the Bank's application by reference to the three provisions of the CPR on which it relied.

CPR Part 24 - Part 24 of the CPR deals with summary judgment applications. It permits the court to make further directions about the management of the case, and refers expressly to CPR 3.1(3) as allowing the court to attach conditions when it makes an order. The Practice Direction to Part 24 provides at 5.1 that the court may make a conditional order, and at 5.2 that a conditional order is one which requires a party to pay a sum of money, or to take a specified step. Paragraph 4 of the Practice Direction states that the court may make such an order where it is possible but improbable that a defence (in this case) will succeed.

The Bank argued that this was just such a case: even if Unitech succeeded in its defence of the Bank's claim under the Credit Agreement, it had no defence to a claim for the return of the US$ 120 million which the Bank had advanced. Teare J did not accept that argument. He held that the Bank had not made a claim for counter-restitution of that sum, it had made a single claim for the entire sum said to be owed under the Credit Agreement. The Bank could not (and did not seek to) maintain an argument that Unitech had no credible defence to that contractual claim, and accordingly a conditional order under Part 24 was not available.

CPR Part 3 - Part 3 deals with the court's case management powers. CPR 3.1(3) provides that the court may make an order subject to conditions, including the payment of money into court, and specify the consequences of failure to comply with such conditions. However, Teare J referred to authority to the effect that CPR Part 3 should not be used as a way to circumvent the provisions of other parts of the CPR. In this case, Teare J held that CPR Part 24 was the part apposite to deal with the Bank's application, and he was unwilling to use the general case management powers in CPR Part 3 in order to produce a different result.

CPR 25.7 - CPR 25.7 lists the circumstances in which the court may order an interim payment to be made, including (at CPR 25.7(1)(c)) where: "it is satisfied that, if the claim went to trial, the claimant would obtain judgment for a substantial amount of money (other than costs) against the defendant from whom he is seeking an order for an interim payment…".

In this case, while he accepted that Unitech would be ordered to pay the Bank US$ 120 million by way of counter-restitution if its defence to the Bank's contractual claim succeeded, he did not accept that the Bank would (in those circumstances) have "obtained judgment" for that sum. His view was that "obtaining judgment" normally means succeeding in a pleaded cause of action. In this scenario, the Bank would have failed. On that basis, he did not consider that the Bank satisfied the conditions for an interim payment to be ordered.

Teare J recognised throughout that his conclusions produced an arguably unsatisfactory result, in that the Bank was being kept out of money which Unitech would be ordered to pay it in any event, and his judgment contemplates the possibility of appeal. It will be interesting to see whether the Bank pursues that avenue. Tactically, the advantages of an order for payment of US$ 120 million are clear: either Unitech would pay and the Bank would have recovered the majority of the sum it seeks, or Unitech would not pay. In those circumstances the Bank would presumably seek an order preventing Unitech from defending its claim unless it complied with the order for payment and, in due course, might proceed to summary judgment, a much swifter and cleaner route than having to defend Unitech's claims substantively.

It would also be understandable if the Bank saw the Judge's conclusions in relation to CPR 25.7 in particular as a triumph of form over substance. If the inevitable outcome of the Bank's claim is that win or lose, Unitech is ordered to pay it at least US$ 120 million, is it an overly formalistic reading of CPR 25.7 to suggest that the Bank will not obtain judgment for at least that sum? Arguably it might be, but the answer to that question is far from obvious.

Whether or not the Bank proceeds to an appeal remains to be seen. Teare J did, however, reject Unitech's additional objections to the Bank's application, holding that it had not discharged the "heavy evidential burden" of showing that its defence would be stifled. He also dismissed Unitech's objection that the Court of Appeal had not ordered any payment to be made, pointing out that no such application had been made to it.

Conclusions

The progress of this litigation will doubtless be the subject of considerable future scrutiny. As well as the general interest which attaches to Unitech's LIBOR-related claims, the future findings of the judge at trial in relation to whether or not there was a novation of the Credit Agreement, at all or in part, will be watched by those involved in drafting such agreements in particular.

For present purposes though, Teare J's judgment is interesting in itself, particularly for those litigating against an opponent with an undoubted liability for part at least of the value of the sum claimed.