Last month saw an important ruling in relation to a benchmark misrepresentation claim which is likely to provide significant comfort for banks. Picken J's judgment of some 250 pages found firmly in favour of Natwest Markets Plc (and other banks), denying the claimant its claim for some €996 million (or alternatively rescission).
The claim arose out of a 2008 Spanish property deal (described as "Europe's largest ever property deal"), for which Marme obtained financing of some €1.5 billion from a syndicate of lenders. Marme agreed to pay interest at a rate referable to EURIBOR and also entered into five interest rate swaps with the five defendant banks.
Unfortunately, only a few days after completion of the transaction in September 2008, Lehman brothers filed for bankruptcy. In the intervening financial crisis, Marme found itself unable to refinance and subsequently to repay the loan when it fell due in September 2013. In 2014 it entered into a Spanish insolvency process, in which the defendant banks brought claims for payments outstanding under the interest rate swaps. That same year, Marme issued these proceedings for rescission of the swaps (and / or damages in lieu) on the basis that Natwest had made untrue representations about the "integrity of the process" by which EURIBOR was set and that it had held itself out as having authority to act as agent of the other banks. But for that misrepresentation, it said, it would have negotiated more favourable finance terms.
The judgment covers a range of issues but of particular note are its findings on implied representations and reliance:
- The test for implied representations is not the same as for implied terms. For an implied representation to be found, "clear words or clear conduct" are required.
- The court will not imply a representation from conduct in terms which are: "vague, uncertain, imprecise or elastic."
- Whether or not a representation is implied is a question of fact, based on an objective determination, in which the natural assumptions of the "reasonable representee" may be a helpful guide. But, the court can also consider what was "reasonably apparent to both the representor and the representee".
- A wide-ranging or complex representation is likely to require "more" in terms of words or conduct.
- The circumstances in which a "duty to speak" arises under English law are limited (and this wasn't such a case).
- Unless it can be proved that the representee "gave any thought" to the representations at the time they were made, it will be impossible to prove reliance.
- To prove reliance, a causal link must be shown as to how the representee would or might (in the case of fraud) have acted differently had the representations not been made.
The representations about EURIBOR alleged here could not be implied, not least because there were no "clear words or conduct" and Marme was not aware of the alleged representations so could not be said to have relied on them.
This decision is likely to be welcomed by financial institutions facing claims arising from historic allegations of benchmark rate manipulation. It makes it clear that for a misrepresentation claim to succeed, the representee must have given some "conscious contemporaneous thought" to the fact that a representation was being made. If that cannot be evidenced, the court will give short shrift to the idea of any reliance on a representation.
What really concerned the court in this case was the sense that the claim had been "contrived" or reverse-engineered to fit within the parameters established in the recent Court of Appeal decision in Property Alliance Group v Royal Bank of Scotland. Effectively, the court was astute to the idea that claimants might seek to recoup market losses by pegging them to the discovery of wrongdoing within the banking systems, without there actually being a connection between the two events. Whether or not savvy claimants will now start testifying to the careful consideration they gave to the reliability and integrity of the benchmark rates they were offered at the time they entered into transactions, remains to be seen.
The decision also provided comfort in that it declined to find that an entity involved in coordinating or arranging financing and interest rate hedging was acting as agent for other banks in the syndicate.