Simon’s article was published in F.X. Week, 13 April 2018, Global Investor Group, 20 March 2018, and FTSE Global Markets, 20 March 2018. These can be found here, here and here.

The LIBOR scandal continues to resonate in English courts. The latest case to be heard by the Court of Appeal was brought by Property Alliance Group (PAG) against RBS over allegations that the bank had mis-sold interest rate swaps, entitling it to rescission of the swaps and/or damages. Three Court of Appeal judges, led by the master of the rolls, refused PAG’s appeal.

The case has a long history. PAG alleged that RBS had mis-sold interest rate swaps between 2004 and spring 2008; proceedings were issued in 2013 and the initial judgment was given by the High Court in December 2016. It finally reached the Court of Appeal in January and judgment was handed down earlier this month.

Despite the fact that UK and US regulators have imposed very heavy fines totalling billions of dollars on a series of banks for LIBOR manipulation, civil claims in the UK against those banks – including Barclays, Deutsche, Lloyds, Rabobank, RBS and UBS – have been relatively few and far between. This is largely because proving loss has been extremely complex. The Court of Appeal decision in PAG is therefore ground-breaking because it sets a path to rescission (irrespective of loss) on the basis that there was an implied representation on behalf of a bank that it was not manipulating LIBOR at the same time that bank was entering into a LIBOR related product with a customer.

The Court of Appeal endorsed the following test: “Whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it”.

Although PAG lost its appeal, the judgment potentially opens the floodgates for future litigation by a raft of claimants who may be entitled to unravel their LIBOR related transactions they entered into opposite one of the banks which have either admitted or were found guilty of manipulating LIBOR.

There are three additional ingredients to a potential claim: falsity, fraud and reliance. In terms of falsity, the extensive findings published by US and UK regulatory authorities, together with some admissions from certain of the banks, establish that LIBOR was manipulated in the four major currencies of Pounds (GBP), Dollars (USD), Yen (JPY) and Swiss Francs (CHF) by various of the banks referred to above. In PAG, it was determined that RBS had not manipulated the GBP LIBOR, whereas it has been found that it did manipulate CHF and JPY (but PAG’s claims were based on GBP LIBOR).

Accordingly, claimants may well be in a position to be able to establish a strong case for falsity with little difficulty, based on the regulatory findings. Equally, reliance would seem to follow as a matter of logic, because if the counterparty had known that the bank proposing a transaction to it based on LIBOR was in fact manipulating LIBOR, in the vast majority of cases it would not have concluded the contract.

This brings us to the third element: fraud. Banks engaging in LIBOR manipulation have already been penalised by regulators on both sides of the Atlantic. In addition, a series of trials involving traders at various banks has resulted in criminal convictions for the deliberate manipulation of LIBOR. Despite this, it is not axiomatic that the banks can all be said to have been acting fraudulently. Many of these banks would argue that those responsible for, and with knowledge of the manipulation, did not represent the controlling mind of the banks concerned. However, this begs the question: did those who are incontrovertibly the controlling mind and will of the bank (i.e. its directors) have the requisite knowledge of what was going on beneath them? Knowledge in this context will include actual or “constructive” knowledge, i.e. an awareness of the circumstance or of issues which, if followed up and investigated, would have revealed the wrongdoing. The traders who faced criminal charges were not rogue traders acting in isolation like Nick Leeson – the man who brought down Barings – they have claimed that they were acting with the tacit consent of, or sometimes, the encouragement of their superiors.

As Georgina Philippou, the Financial Conduct Authority director, said when commenting on the fine agreed by Deutsche Bank for Libor manipulation, “This case stands out for the seriousness and duration of the breaches … One division at Deutsche Bank had a culture of generating profits without proper regard to the integrity of the market. This wasn’t limited to a few individuals but, on certain desks, it appeared deeply ingrained.” In April 2015, Deutsche agreed to pay $2.5bn in fines – $2.175bn by US regulators, and a €227m penalty by the FCA.

If all four elements are proved, this leads to rescission, which undoes a contract between parties by unwinding the transaction and restoring the previous position, i.e. the status quo, before the contract was agreed. If interest or other payments were made, they can be restored.

The potential consequences of the PAG decision are far-reaching in scope and scale. Any counterparty that entered into a Libor-related transaction – in GBP, USD, JPY or CHF – has the potential to bring a claim for rescission in the event that the counterparty bank that they contracted with has been found guilty of LIBOR manipulation in the relevant currency.

But claimants will need to act quickly. The relevant limitation period is likely to expire after six years from the point at which fraud or concealment is discovered, or could with reasonable diligence have been discovered. The publication of the various regulatory findings against the relevant banks is likely to be the point from which the six-year period will be counted. In the case of Barclays, the FCA published their Final Notice on 27 June 2012, so potential claimants will need to begin legal proceedings within the next three months. The clock is therefore ticking.