An issue which has in recent years been on the agenda of financial regulators globally is the potential manipulation or fixing of the London InterBank Offered Rate (“LIBOR”) and similar rates, by financial institutions. Given that the LIBOR and similar rates are used as interest rate benchmarks for a broad range of financial instruments, the rate-fixing phenomenon has sparked widespread investigation and regulatory action, as well as litigation.
On the litigation front, the UK Court of Appeal has recently allowed parties in two actions to amend their pleadings to include allegations that their opposing parties, being LIBOR panel banks, had made implied representations as to the integrity of the LIBOR. The parties had sought to amend their pleadings following alleged regulatory investigation and (in one case) findings by regulators in relation to the panel banks’ alleged manipulation of the LIBOR.
Although the decision relates to a preliminary matter (amendment of pleadings before trial), it is not a welcome decision for the panel banks in question. The panel bank in one of the actions has since applied for permission to further appeal the decision to the Supreme Court (the final appeal court in the UK). Hence, the legal position remains to be confirmed.
The London InterBank Offered Rate (“LIBOR”)
The LIBOR is defined by the British Bankers’ Association as “[t]he rate at which an individual contributor panel bank could borrow funds, were it to do so by asking for and then accepting interbank offers in reasonable market size, just prior to 11.00am London time”. In broad terms, it is calculated by averaging the rates submitted by the panel banks, after removing the highest 25% and lowest 25% of the rates.
The LIBOR is used as an interest rate benchmark for a wide range of financial instruments. The present actions concern interest rate swaps in connection with loan facilities granted by the LIBOR panel banks in question, which were referenced to the LIBOR.
Decision by the UK Court of Appeal
The Court of Appeal decision resolves two conflicting judgments of the High Court (the first instance court).
- In one case, the High Court allowed a claimant in an interest rate swap mis-selling claim to amend its particulars of claim (which alleged innocent misrepresentation) to include allegations of fraudulent misrepresentation by the defendant panel bank in connection with its manipulation of the LIBOR. The application for amendment was made following findings by regulators of such manipulation.
- In the other case, however, the High Court did not permit the defendant to amend its defence and counterclaim to include similar LIBOR-related allegations, in a claim brought against it by a panel bank for payment under a credit facility.
Both decisions of the High Court were appealed and were jointly heard by the Court of Appeal.
For the purposes of considering whether the proposed amendments should be allowed, the principal question was whether it was arguable that the panel banks had made implied representations as to the integrity of the LIBOR. The threshold was not high and the parties seeking to amend would only need to show that the proposed amendments were sufficiently arguable to have a real prospect of success at trial.
The Court of Appeal held that such threshold was satisfied in both cases, and that it was “dangerous to dismiss summarily an allegation of implied representation in a factual vacuum“. It was for the High Court to determine the merits of the allegation after the full picture of the case was presented at trial.
Although this decision relates to a preliminary matter – that is, whether a claim / defence and counterclaim can be amended to include allegations of implied misrepresentation relating to the integrity of the LIBOR – it is not a welcome decision for the LIBOR panel banks in question, which were seeking to exclude the allegations from the outset. One of the banks has since filed an application for permission to further appeal the decision to the Supreme Court. The outcome of the application is currently pending.
In the event the Court of Appeal decision stands, the parties alleging that implied representations were made by the panel banks are nonetheless likely to face a number of difficulties at trial in establishing liability on the part of the panel banks for substantial damages.
These two cases are the first of their kind in the UK and are being treated as test cases on the ability of claimants to bring private law claims against LIBOR panel banks in connection with LIBOR manipulation. Claims of such nature are yet to arise in Hong Kong.