On 2 March 2018 the Court of Appeal handed down judgment in Property Alliance Group Ltd (PAG) v Royal Bank of Scotland plc (RBS)2, on appeal from the judgment of Mrs Justice Asplin (as she then was) dated 21 December 20163.

The decision has been much-awaited by claimant businesses (including some financial institutions) and defendant banks. While, at first blush, the dismissal of PAG's appeal appears as a complete vindication of RBS, the bank having won comprehensively on the facts, there are legal findings that provide a sting in the tail not only for RBS but also for other banks, particularly those involved in the setting of LIBOR.

The Background

PAG, a property investment and development business, entered into four interest rate derivatives with RBS ("Swaps") between 2004 and 2008. In 2011, PAG terminated the Swaps early, incurring break costs of some £8.26 million.

In the period 2010 – 2014, PAG's banking relationship was managed within GRG. At the end of this period, the relationship ended, PAG having repaid RBS and refinanced with another bank.

In 2013, PAG issued proceedings against RBS. The claim included swaps mis-selling claims (involving allegations of misrepresentation, misstatement and breach of contract), the LIBOR claims (relying on RBS's knowledge of, and participation in, LIBOR manipulation) and the GRG claims (involving breaches of contract relating to PAG's transfer to, and treatment by, GRG).

PAG was unsuccessful on all claims at first instance and appealed to the Court of Appeal. The order granting permission to appeal recognised that although PAG's appeal may ultimately fail on the facts, the issues at stake made the claim a test case. Unfortunately PAG did lose the appeal, and as at first instance this was principally on the facts, however PAG succeeded on three important points of law.

The legal findings

A. The LIBOR implied representation

There is now established an implied representation on the part of a LIBOR panel bank made to its counterparty on entering into a LIBOR-referenced product, governed by English law that it was not manipulating and did not intend to manipulate LIBOR in the currency relevant to the product.

This representation was to be implied in PAG's case because of (among other things) the lengthy discussions between the parties in relation to each of the four Swaps entered into between PAG and RBS. However, the Court of Appeal found that such a representation "would probably be inferred from a mere proposal of the swap transaction"4, indicating that through the mere proffering of a swap linked to LIBOR, a LIBOR panel bank was making this implied representation.

The implied representation is limited to LIBOR in the currency of the underlying product entered with the counterparty but it is not limited to the specific tenor referenced in that product. For example, a LIBOR panel bank which has manipulated sterling (and only sterling) 6 month LIBOR, is vulnerable to a claim from a counterparty who entered into an interest rate swap that references sterling LIBOR whether it has a 3 month or 6 month tenor, but is not susceptible to such a claim where the swap referenced only US dollar LIBOR.

Although the PAG case concerned interest rate swaps, the implied representation will apply to any product entered with a LIBOR panel bank that is linked to, or references, LIBOR and whether it is a derivative or debt instrument.

For the panel banks who have admitted, or against whom regulators have already found evidence of, LIBOR manipulation in sterling and other currencies, this finding is likely to have adverse consequences where those panel banks have sold English law governed products. This is because a counterparty to (e.g.) a swap who entered it at a time when the bank's manipulation of LIBOR had not yet come to light will have, on its face, a claim for breach of this implied representation if or when that manipulation becomes known, since the representation will, by those revelations, have been shown to be false.

PAG's LIBOR manipulation case failed because the Judge at first instance found no evidence of RBS having manipulated sterling LIBOR (though RBS had admitted to manipulating CHF and JPY LIBOR). As this was "essentially a question of fact for the Judge who heard many witnesses over many days [i]t would be impossible for [the Court of Appeal] to hold, in the face of her conclusion that PAG had not made out its case on manipulation, that there was in fact such manipulation"5. In the absence of such manipulation, the representations as to sterling LIBOR had not been false. This emphasises that a claimant will need to prove that the (implied) non-manipulation representation was false with evidence that the panel bank in fact manipulated LIBOR in the currency referenced in that claimant's swap (or other LIBOR-referenced product).

Where the claimant seeks rescission of a product on the grounds that the implied representation was false, it is likely to have to show that the bank acted fraudulently and that the claimant relied on the representation. The Court of Appeal judgment gives no assistance on these requirements: having found that RBS's implied representation as to sterling LIBOR was not false, the Court of Appeal did not go on to consider whether the first instance Judge's conclusion - that fraud had not been proved - was correct, nor did it consider her finding that, in any event, PAG had nor relied on any such representation. Instead, the Court of Appeal posed (but did not answer) the question as to whether the normal rule for a finding of fraud (that the representor must have intended to make the representation he knew to be false) can apply to an implied representation. That will have to be determined in another case where the claimant has first proved the implied representation to be false.

B. The valuation implied term

Where a bank has a contractual right or power to commission a valuation of the assets of its customer over which the bank has security, there is an implied term restricting the bank's right; the bank will not exercise that right for a purpose unrelated to its legitimate commercial interests. It follows, therefore, that this power cannot be exercised in order to put unwarranted pressure on a customer.

The Judge at first instance took the view that this contractual right gave RBS "an absolute right to call for the valuation" and accordingly, "the Socimer line of authorities and the necessary implication of terms in order to control the otherwise unfettered exercise of a discretion" did not arise6.

Overturning the Judge's finding, the Court of Appeal held (as PAG had argued) that the contractual power or right was not wholly unfettered and that it can be:

"inferred that the parties intended the power granted [by the relevant clause] to be exercised in pursuit of legitimate commercial aims rather than, say, to vex PAG maliciously… RBS could not commission a valuation [under the clause] for a purpose unrelated to its legitimate commercial interests or if doing so could not rationally be thought to advance them".7

This finding is likely to be of particular interest to those customers or former customers of RBS who were transferred into the bank's Global Restructuring Group (GRG) and where a similar valuation right was included in their contracts with RBS. Those customers are likely to consider carefully, and seek evidence of, the circumstances in which GRG exercised any valuation right to assess whether it was utilised for the bank's legitimate commercial purposes. This is particularly so in the context of the revelations in the recently published s.166, Skilled Persons Report into GRG.

C. Misstatements

The Court of Appeal has provided welcome clarification of the law concerning a bank or financial institution’s liability for statements made in the course of non-advised sales of derivatives and similar products.

A series of first instance decisions (including PAG v RBS itself) had developed the notion of a so-called "advisory spectrum" of duties that a bank might owe to its customer in this context. This type of formulation could, potentially, be of assistance to banks if the word "advisory" could be taken to imply that the duty might fall within ‘no advice’ exclusion clauses and disclaimers, which are commonplace in derivative products. In those circumstances, a bank could argue that it could not be liable for any statement on the advisory end of this spectrum as it fell within the contractual exclusions.

First instance judges and litigants had also referred to there being a "mezzanine" or "intermediate" duty i.e. something "less onerous than a wide duty to give advice but wider than the duty not to misstate"8.

PAG argued, based on the 1996 decision of Mance J in Bankers Trust v Dharmala9, that these types of formulation all missed the point: in reality there was a single, conventional, Hedley Byrne v Heller duty not to misstate which undoubtedly applied in non-advice claims. Given the Hedley Byrne duty’s sensitivity to context, the real question was (once assumption of responsibility had been established) whether, in the circumstances, the duty was breached.

The Court of Appeal essentially endorsed PAG’s approach to the question of duty, holding that "the expression 'mezzanine' duty or intermediate duty… is best avoided" and deprecating "the notion that there is a continuous spectrum of duty, stretching from not misleading … to full advice … Rather, concentration should be on the responsibility assumed in the particular factual context as regards the particular transaction or relationship in issue". 10 11

In conclusion, the Court held that "What amounts to a misstatement in this context will depend upon the factual circumstances of the relationship and identification of the matter for which the defendant has assumed responsibility. It is, therefore, an elastic duty that is factually sensitive. The duty is premised on the voluntary proffering of representations by the defendant, which require further elucidation or the correction of misleading impressions on the claimant." 12

Conclusion

A number of cases involving allegations of LIBOR manipulation have been stayed pending the Court of Appeal's judgment. No doubt also, a number of prospective claimants have been waiting in the wings to assess the outcome of the appeal before commencing claims against LIBOR panel banks.

PAG ultimately lost the appeal on its particular facts. It will be for the parties to other claims together with their legal advisers to assess whether the facts in their cases are distinguishable from those in PAG v RBS. If they are, then the Court of Appeal's clarification of the law in all three of the test areas (as described above) is likely to feature prominently in the progression of those cases:

  • For mis-selling claims, the focus can be on deciding whether, in all the relevant circumstances and context, information which the bank omitted from its explanations rendered those explanations misleading.
  • For valuation claims, the implied fetters on a bank's contractual powers are likely to be of considerable interest, particularly to potential GRG claimants examining the circumstances in which any asset valuations were undertaken.
  • Finally, and perhaps most significantly, for LIBOR manipulation claims RBS itself submitted to the Court of Appeal, that the implication of a non-manipulation representation is likely to have “profound implications … potentially for a very large number of LIBOR referenced transactions". RBS also submitted that if such a representation was to be implied, yet RBS succeeded against PAG (because RBS had not been found to have manipulated sterling LIBOR), that would "not be the end of the story" since there have been findings against other banks in relation to sterling LIBOR; it remains to be seen how prescient the bank's submissions were.