Summary

In this interim application, the Court of Appeal gave permission for claims based on the fixing of LIBOR to proceed to trial. The Court considered two separate appeals; both concerned a derivative linked to LIBOR entered into by a bank with a claimant as part of that claimant’s borrowing arrangements. The Court of Appeal found that it was at least arguable that the banks had impliedly represented that LIBOR was not manipulated and that this representation entitled the claimants to rescind those derivatives. The first of these claims is due to be heard in April 2014.

Although this was only an interim application and the relevant standard was only that the claims were ‘arguable’, the judgment and comments of the Court of Appeal have been examined very closely. Banks have been asking two key questions: Could the claim succeed? If it does, will this open the floodgates to a host of similar claims?

We identify a few key issues that the banks might contest in these cases and which, depending on the outcome, might then have an impact on similar claims.

Misrepresentation

The claims are based on allegation that each bank impliedly represented that it was not attempting to manipulate LIBOR, rather than that it failed to disclose that it was manipulating LIBOR. It seems likely that this is because an omission will only constitute a misrepresentation in certain limited circumstances: for instance, if there is a particular relationship between the parties (such as insurer and insured) or a voluntary assumption of responsibility by the representor in relation to the matters to be disclosed (seeBanque Financière de la Cité SA v Westgate Insurance Co Ltd [1989] 2 All ER 952). Neither of these are apparent in this case.

Therefore, the claimants have put their claims in terms of a positive, implied representation. Assuming that there are no special circumstances – that is, there was no particular discussion of the nature or significance of LIBOR – this amounts to an allegation that merely including LIBOR as the reference rate in the termsheet or in pre-contractual negotiations involves making an (implied) statement that it was not being manipulated.

Longmore LJ appeared to be sympathetic to the argument that particular precontractual conduct may amount to an implied representation. He used the analogy of a restaurant customer sitting down to a meal being an implied representation that he had the means to pay. This is similar to the Court of Appeal decision in Contex Drouzhba Ltd v Wiseman [2007] EWCA Civ 2001, where a director, in signing a supply agreement, impliedly represented that his company would have the means to pay for any goods ordered in the future. However, if the scope of implied representations resulting from pre-contractual conduct is widened significantly, this risks allowing a general duty of disclosure in pre-contract negotiations. This has been firmly resisted by English courts in the past.

A finding in these cases that the inclusion of LIBOR as a reference rate did not by itself constitute an implied representation that LIBOR was not being manipulated would be a compelling precedent in future cases. Although a finding of fact does not strictly bind any future court dealing with a different set of facts, the point is sufficiently generic that judges would be likely to follow the decision in other cases where there was no express discussion about the use of LIBOR.

Conversely, if the court finds that there was an implied representation, without any particular discussion of LIBOR, then this could apply to many derivatives and other contracts linked to LIBOR entered into by banks with their customers.

Fraud and attribution of knowledge

The claimants included allegations that there were misrepresentations about both past and future manipulation of LIBOR. As to past manipulation, it may be challenging for the claimants to show that they relied on this representation and were induced by it to enter into the contract, as it did not directly affect payments to be made under the contracts. As to future manipulation, technically this is an expression of opinion, not fact. Excluding certain special cases, for an opinion to constitute a misrepresentation, the representor must not honestly hold that opinion. In other words, it must be made fraudulently.

Accordingly, the claimants in these cases allege not only that the misrepresentations were false, but that they were fraudulent. In particular, they allege that each bank represented that it did not intend to manipulate LIBOR when it did have that intention.

Furthermore, fraud is not only relevant to show that a statement that LIBOR would not be fixed in the future was a misrepresentation. It also limits the judicial discretion not to award rescission, prevents any exclusion clause from limiting liability, and lowers the burden for showing that the representation induced the claimant to enter into the contract.

This aspect of these cases will depend on a detailed analysis of exactly what each bank did in relation to LIBOR and what it knew about what it and other banks were doing. This in turn raises questions as to the attribution of knowledge of individual employees of the bank to the bank itself. It is likely that the individual bank employee who (allegedly) made the implied representation that LIBOR was not being manipulated was not the same person who it is alleged was actually manipulating LIBOR – fraud requires attributing both the representation and the knowledge simultaneously to the bank, in order to find dishonesty.

Any finding of fraud (or absence of fraud) will be relevant to any other case involving that bank at that particular time. A finding that limits attribution of knowledge could be applicable to other banks and many fact situations.

Rescission

This is the joker in the pack. A claim to rescind the contract is available even if the misrepresentation is not fraudulent. Such a claim avoids any issues as to whether the misrepresentation caused the loss and, if so, how much loss is attributable to the misrepresentation. However, the remedy is subject to various established bars and, where the misrepresentation is not fraudulent, a wide judicial discretion.

Rescission would allow claimants to unwind the contract and reverse all payments made under it, even where the contract has been fully performed. Clearly, the amounts payable may have no connection with the misrepresentation itself or its consequences.

Although these consequences indicate that rescission may not be the appropriate remedy, whether a judge grants rescission for a non-fraudulent misrepresentation will depend on the particular merits of the claim. Any precedent on this issue is unlikely to provide guidance in other cases.

Conclusion

If there are no special features of the pre-contractual negotiations, then these cases may provide guidance as to whether banks will be held to have made implied representations as to the manipulation of LIBOR. Also, any finding of that knowledge as to LIBOR manipulation of a bank employee could be attributed to its employer may definitively resolve this issue for that bank. And legal guidance on attribution of knowledge may help to determine exactly what other banks must prove to avoid liability. If banks lose on these points, and especially if the judge grants rescission, the market can expect an avalanche of LIBORrelated claims to follow, with success in each depending on its particular facts.

Postscript

On 7 April 2014, Barclays announced that it had settled its dispute with Graiseley Properties. It is reported that, in return for Graiseley dropping its claim against Barclays, the bank restructured the £70 million that Graiseley owed under the contested interest rate swap.