Summary: The judgment in PAG v RBS is the first concerning LIBOR manipulation, and arguably the most significant judgment yet delivered by the Financial List. The bank’s success demonstrates the value of accurate contract terms, which clearly define the scope and terms of a customer relationship. A properly drafted basis clause provides compelling evidence against any claims for an alleged duty of good faith, or advisory duty, towards a client.
What was the case about?
PAG was a property investment group whose primary banker was RBS until 2015. PAG commenced proceedings in September 2013, alleging mis-selling, breach of an alleged duty of good faith, and misrepresentation in relation to the purchase of four interest rate swaps between 2004 and 2008. The claim also contained claims relating to the alleged mis-selling of interest rate hedging products and the breach of implied terms when the claimant’s business was transferred into RBS’ Global Restructuring Group for refinancing.
In a judgment that will be warmly welcomed by the banks, Mrs Justice Asplin DBE found wholly in favour of RBS and dismissed all of PAG’s claims. The judgment itself (Property Alliance Group Ltd v Royal Bank of Scotland Plc  EWHC 207 (Ch)) is well worth the time to read in detail, and it is an endorsement of the creation of the Financial List to deal with complex financial claims such as these. The key findings in respect of the three claims are summarised below.
The Swap Mis-Selling Claim
PAG’s claim for mis-selling was put in three ways: a misstatement claim, a misrepresentation claim and a claim under the contracts, but it can be encapsulated in all three forms as a claim that the swaps did not protect PAG properly from its interest rate risk.
PAG asserted that RBS owed a wider duty of care than the accepted duty in Bankers Trust v Dharmala to take reasonable care not to misstate facts. The court rejected this in these circumstances and affirmed the exclusion clauses in the contracts that excluded the duty to advise. The court noted that here PAG was a professional and substantial client of the bank with access to experienced advisers. The court also noted that it was not standard market practice to provide information such as break costs at the start of a relationship and the court would not find wrongdoing on RBS’ behalf where it was following market practice.
PAG asserted that RBS had misrepresented that the swaps would “hedge”, “protect” or “de-risk” the interest rate risk and that these statements induced PAG to enter into the swaps. The Court dismissed this, holding that a reasonable person would not have understood the statements in the way PAG submitted and that the contractual documents contained express non-reliance language that assisted RBS.
Finally, PAG asserted that the swaps were sold in breach of an implied term that the swaps were suitable. The Court held that the contractual documents were sufficiently clear and coherent so there was no need to imply any terms and the Court could not imply terms in respect of good faith or fair-dealing, particularly in light of the exclusion clauses in the contracts.
The Global Restructuring Group Claim
PAG claimed that the transfer from the normal RBS management team to its Global Restructuring Group (for distressed businesses) and the management within GRG was in breach of implied terms of good faith and restrictions on how to exercise discretionary contractual rights.
The Court held that there was no general duty of good faith in English contracts and none of the specific circumstances required to imply such a duty applied here. The Court also held that the contracts did not contain any element of discretion so there could be no implied terms over how any discretion should be exercised. Despite not needing to do so, the Court also held that, even if the clauses had been implied, there would have been no breach of them given the bank’s conduct when the relationship was moved to GRG.
The LIBOR Claims
PAG claimed alternatively (i) rescission on the basis RBS had made misrepresentations over LIBOR and how it was set and (ii) damages for breach of implied terms similar to the form of the alleged misrepresentations. PAG’s case was that it would never have entered into the swaps if it had known that the bank was manipulating LIBOR.
The Court again dismissed all the LIBOR claims. It held that a transaction that proffers LIBOR as a reference rate does not make any implied representation over how LIBOR was set. The Court found that the implied representations that PAG asserted had been made to it had not, in fact, been understood by PAG’s witnesses to mean what PAG said they meant.
The Court also held that, although there was an implied term that the relevant LIBOR rate would be the BBA LIBOR rate, it only extended to RBS’ conduct and not the conduct of the other panel banks. The Court also rejected the allegation that RBS had been involved in the manipulation of GBP LIBOR and held that you could not infer misconduct in respect of other currencies to GBP LIBOR submissions.
One theme that runs consistently throughout the judgment is that the Court upheld and respected the bank’s contractual documentation with its customer, including the clauses that excluded any advisory or fiduciary duties. This judicial support for clear, well-defined basis clauses has been seen repeatedly over the past couple of years, as disappointed investors have sought to recover losses incurred in the aftermath of the 2008 crash.
Financial institutions should be heartened, but not complacent, about the courts’ consistent backing for clearly drafted relationship terms. It is quite possible that we will see increasing market volatility in 2017, given the current political climate. Such volatility clearly increases the risk of claims against banks who have facilitated financial transactions ending up on the wrong side of the market. Banks should to revisit and refresh their standard terms regularly and to ensure that all customers are appropriately classified, particularly as their business develops and becomes more sophisticated.