What you Need to Know
There were a number of reports in the UK press last weekend that a UK Court of Appeal ruling could “…spur more LIBOR-linked mis-selling cases…” against banks. These reports were provoked by a Court of Appeal decision handed down on Friday, 8 November¹. This decision ruled that it is “arguable” that, in LIBOR-based lending arrangements with corporate borrowers, there are implied representations by the lending banks (in this case, Barclays and Deutsche) that, essentially, LIBOR was reliable, and was not being manipulated.
Although this has been seen by some as a set-back for banks, the decision by the Court of Appeal is unsurprising in the context of procedural applications by the borrowers to amend their pleadings so that they could argue the implied representations. Whether or not any representation should be implied into contractual arrangements is, in English law, almost always heavily dependent on the facts. Where the facts are disputed, the court will typically allow the allegations to proceed to a full trial where the facts can be properly tested.
That is exactly what has happened here. The Court of Appeal has merely allowed the borrowers to amend their pleadings, to argue the implied representations. Whether or not they will succeed in establishing that these representations should, in fact, be implied into the contractual arrangements (and, if so, whether they can go on to show that those representations were false such that the borrowers can evade their obligations under the applicable finance documents) will be decided at trial.
In More Depth
The Court of Appeal decision addresses almost identical issues that have arisen in two separate proceedings. One set of proceedings involves a corporate borrower (Graiseley Properties Limited) and Barclays Bank plc (known as the Guardian Care Homes case). The other involves a corporate borrower (Unitech Global Limited) and Deutsche Bank AG.
In both cases, the banks are endeavouring to recover sums due under LIBOR-based loan agreements and related interest rate swap agreements; and, in defending these claims, the relevant corporate borrowers wish to argue that the court should imply representations as to the efficiency, or non-manipulation, of LIBOR into the relevant finance documents.
In each claim, the implied representations that the corporate borrowers wish to introduce are spelled out in detail. These include representations by the relevant bank that:
In the Graiseley v Barclays case, the High Court had given permission for Graiseley to amend its pleadings, to allow arguments that there were such implied representations. However, in a later decision in the Unitech v Deutsche case, a different High Court Judge reached the opposite conclusion, namely that it was not even arguable that these representations were made and therefore the relevant amendments to the pleadings should not be allowed.
The Court of Appeal heard appeals from both first instance judgments together.
In giving the overall conclusion of the Court of Appeal, Lord Justice Longmore held that “... any case of implied representation is fact specific and it is dangerous to dismiss summarily an allegation of implied representation in a factual vacuum…The banks did propose the use of LIBOR and it must be arguable that, at the very least, they were representing that their own participation in the setting of the rate was an honest one.”
In the course of reaching this conclusion, the court rejected a submission by the banks that doing nothing cannot, as a matter of law, amount to an implied representation, on the basis that (arguably at least) the banks did not “do nothing” since they proposed transactions which were to be governed by LIBOR. Lord Justice Longmore drew the following analogy: “That is conduct just as much as a customer’s conduct in sitting down in a restaurant amounts to a representation that he is able to pay for his meal…”.
As noted in the introductory comments, the Court of Appeal’s conclusion is hardly surprising; and is certainly not ground-breaking. Nevertheless, it is an unhelpful development for the banks in the context of these cases, which will be amongst the first to hear LIBOR-related claims. The banks in question will be unhappy that the factual detail, including the extensive disclosure required to argue these implied representations, will be fully aired in a public trial, the first of which is currently scheduled to take place in the Spring of 2014. It also keeps alive the possibility of the borrowers arguing that the lending arrangements should be rescinded, which is a much more attractive remedy for the borrowers as it avoids the difficulties of quantifying loss in a damages claim. It has been reported that at least one of the banks intends to seek permission to appeal the decision to the UK Supreme Court.
Of some interest also is that, in the course of submissions, the Court of Appeal had to deal with a related issue arising in the Deutsche case. It appears that Deutsche, together with a number of other lenders, had acceded to the underlying credit facility by the operation of (what appeared to be) fairly standard LMA provisions governing changes to the parties to the lending arrangements. The Court of Appeal had to decide whether it was at least arguable that the change of parties involved an assignment of rights, as opposed to a novation. The key difference between the two, for the purposes of this case, is that if the relevant banks had acquired their interest by a novation, this would operate to extinguish any previous contract and create a new contract between lender and borrower; from this it would follow that the banks in question could not be held responsible for representations that might be implied into the original agreement.
The Court of Appeal held that, despite the use of the word “novation” in several of the relevant documents (including the use of Transfer Certificates with “novation” in their headings), it would look to the substance of the actual transaction; and, in this case, decided that it was at least arguable that the expression “novation” was not being used in its strict legal sense, and therefore the arrangements should be treated as an assignment of the original contractual arrangements.
The practical relevance of this is that, if the borrowers eventually establish that the implied representations were made, and were false, it is open to them to argue that the original credit facility agreements and related swap agreements should be rescinded, with the result that each borrower will be discharged from its obligations under those contracts.
This article was originally published by Bingham McCutchen LLP.