Following regulatory investigations into LIBOR rate rigging and the fining of Barclays Bank by the Financial Services Authority (FSA) last summer, the claimants in Graiseley Properties Ltd and Others v Barclays Bank were permitted to amend their claim to include allegations relating to LIBOR manipulation. However, more recently in Deutsche Bank and Others v Unitech and Another permission to amend on a similar basis was refused, highlighting the difficulties claimants may encounter in bringing LIBOR manipulation claims against the banks.
Deutsche Bank sued Unitech under an interest rate swap, alleging it owed $11 million and had not repaid a $150 million loan to the lending group. Unitech countersued, claiming that the rate swap was represented and recommended to it as a suitable product when it was not and that it had been induced to enter into the agreements with Deutsche Bank by misrepresentations. Emphasis was placed on the loan facility agreement, which provided for payment of interest by reference to LIBOR, defined in the definitions section by reference to the applicable screen rate as displayed for the relevant currency and term, or overdue amount, on the appropriate page of the Reuters or Telerate screens.
While Deutsche Bank is one of the LIBOR panel members being investigated in relation to LIBOR manipulation by the regulators and has suspended seven of its employees, unlike Barclays Bank it has not been publicly censured by the regulators for any wrongdoing or had any fines imposed upon it.
The LIBOR manipulation claim
Four representations were relied upon as false or implied terms that were breached:
- LIBOR was a genuine average of the estimated rates at which the panel banks could borrow.
- LIBOR was based on submissions that were made in good faith.
- Deutsche Bank had not itself acted and was not acting and had no intention of acting in a way that would undermine the integrity and accuracy of LIBOR.
- Deutsche Bank was not aware of any conduct, either its own or that of another panel bank, which would, or would be likely to, undermine the integrity of LIBOR.
Cooke J’s judgment
Cooke J was not persuaded that any of the allegations could be made out by reliance upon Deutsche Bank’s membership of the LIBOR panel and linking the payment obligation in the loan to LIBOR. He pointed out that it was not alleged that Unitech’s obligations under the swap were affected by any manipulation of LIBOR by Deutsche Bank or any other entity, or that specific loss had been suffered from the misrepresentations. It was significant that the contractual documentation included an entire agreement clause and a disclaimer of responsibility for any representations about information provided. The transaction had also been described as being at arms length.
Cooke J acknowledged that representations three and four might be more promising. However, he felt that if they were made out, the duty imposed (that any panel bank which entered into a
LIBOR linked derivative with a counterparty had a positive duty to disclose to the counterparty any information it had that might undermine the integrity of LIBOR and any failure to do so amounting to an implied misrepresentation) would be a very wide duty. An additional complication was that other lenders who were party to the transaction were not LIBOR panel members.
Cooke J acknowledged that a different decision had been reached in Graiseley Properties Ltd, but stated that every case would turn on its own facts. In that case, innocent and negligent misrepresentation had already been alleged in relation to representations made by agents of the bank managers and staff in the local branches. The allegations of misrepresentation were amended to include a plea of fraudulent misrepresentation following the FSA’s Final Notice and fine of Barclays Bank last summer.
Both this case and Graiseley Properties Ltd are to be heard by the Court of Appeal in October. While it is hoped that some clarification will be provided by the Court of Appeal, Cooke J’s decision highlights the difficulties that claimants will face in bringing LIBOR manipulation claims simply by virtue of a bank’s membership of the LIBOR panel and payment obligations calculated by reference to LIBOR. The decision also highlights the difficulty in demonstrating loss, given the size of the loan versus any impact of the LIBOR rates on the payment obligations. Even if reformulated pleas of misrepresentation are permitted, it seems that, to succeed in such pleas, much will turn on unravelling the nature of each panel bank’s involvement and actions, and that remains to be uncovered.