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LIBOR Cases – a return to normality?

No reasonable prospect of success, no amendment allowed.

Deutsche BankAG & ors v Unitech Global Ltd & ors. (2013) v Graiseley Properties Limited and others v Barclays Bank plc (2012)

Introduction

Last year I discussed Mr Justice Flaux’s  decision in Graiseley Properties Limited and others v Barclays Bank plc [2012] EWHC 3093 (Comm) (see Littleton Comment on 4 December 2012).  In that case Flaux J. had allowed amendments to plead fraudulent misrepresentation and breach of implied terms in relation to LIBOR which smoothed the path to claims which were, in essence, that the Bank had sold LIBOR-related products when it knew that its employees were attempting to “rig” LIBOR rates for their own purposes (i.e. making their trades profitable) and that such conduct would disadvantage clients who relied on the Bank not attempting to manipulate LIBOR rates. Although I pointed out that allowing the amendments, which lacked the particularity to be expected, was unusual, I also observed that “This is a welcome and realistic approach to the difficulties faced by customers in claims against banks.”

The Case

In the recent decision in Deutsche BankAG & ors v Unitech Global Ltd & ors [2013] EWHC 471(Comm) (5 April 2013), Mr Justice Cooke adopted a far more rigorous approach and concluded that the proposed amendments to the claim against the Bank had no reasonable prospects of success even though the threshold is low. These proposed amendments were somewhat similar to those allowed by Flaux J. Why the difference in approach?

Analysis

First, in a 30 page judgment Cooke J adopted a far more analytical approach to the problem. He subjected each proposed amendment to careful scrutiny rather than adopting the broad brush approach of Flaux J who considered the Bank’s attacks on lack of particularity  in  Graiseley Properties to be “essentially shadow boxing” since the Bank was “well aware of the case that it had to meet”.  For example, Cooke J. asked these penetrating rhetorical questions of the broad brush allegation that the bank had undermined “the integrity” of LIBOR:

“How many panel banks must be involved before integrity is undermined? How many submissions must be made, other than in good faith for that to occur? Does the conduct have actually to affect the published rate for it to undermine the integrity of LIBOR, and would manipulation on a single day be sufficient? Furthermore, if a submission was made other than in good faith that related to yen LIBOR or Australian dollar LIBOR would that undermine the integrity of LIBOR for the purposes of the representation?”

According to Cooke J. it was unrealistic to allege that the Bank had made a representation simply by being a LIBOR panel member; an individual participating bank could not be held responsible for representing the overall integrity of the system (§§ 21-24).

There was a real difference, when entering into a transaction based on a particular LIBOR rate, between an implied term not to manipulate the specified contractual rate, and a separate non-contractual representation that nothing had been, or was being, done to impact upon calculation of LIBOR rates. Linking a payment obligation to a LIBOR rate could not be enough to give rise to a representation about how that LIBOR rate was compiled otherwise every contracting party would make such a representation in the multitude of transactions where such a reference was made.

“A promise to do nothing that would jeopardise the ordinary and proper assessment of the relevant particular LIBOR rate to which the transaction is linked can, it seems to me, albeit without hearing argument, be readily spelt out of the existing provisions in the contract, but an implied representation of fact when no representation relevant to it is expressly made, whether in the contract or elsewhere, and when disclaimers or other clauses in the agreement militate against such implication, cannot be found simply on the basis of the two features upon which UGL and Unitech alone rely, namely that DB AG was a panel bank and entered into a financial transaction linked to LIBOR.”  (§27).

Second, Cooke J. pointed out that in Graiseley Properties there was “some material which was expressly pleaded, whereas there was none in the present case beyond the two features to which I have referred.”  (§31).  However, his judgment is by no means an endorsement of Flaux J.’s approach. On the contrary, Cooke J. trenchantly criticised Flaux J’s reliance on the state of mind of the alleged representor:

“In my judgment, the awareness of the representor of the consequences of manipulating LIBOR on contracts that refer to it has no bearing on the test to be applied…”  (§34)

Moreover, the alleged misrepresentations could not stand as implied warranties.  Even if there was a breach of warranty rather than a tortious form of misrepresentation, the measure of damages was contractual and based on the assumption that the representations were true, not on the tort measure of damages basis that they had never been made.  The result was that any damages would have to represent the difference between (i) any manipulated LIBOR rate applied to the contract and (ii) that which would have applied in the absence of any such manipulation.  That could not lead to the rescission of the agreement nor afford any relief from the basic obligation to repay the loan. (§§40 and 56)

Conclusions

• The rigorous scrutiny of the proposed amendments was inevitable in this case.  They appear to have been a valiant attempt to exploit Flaux J’s judgment in Graiseley Properties without the necessary ammunition to do so effectively. Cooke J described them as:

“… a plea of representation by conduct or implication unattached to any plea of any express representation of any kind. It is not a plea of an implied promise not to manipulate the LIBOR rate in the future, which if broken could result in alteration of the interest payable under the loan, or the operation of the interest rate swap payment obligations.” (§12)

• Cooke J specifically contemplated that there were other amendments that might be put forward with more chance of success:

“A promise to do nothing that would jeopardise the ordinary and proper assessment of the relevant particular LIBOR rate to which the transaction is linked can, it seems to me, albeit without hearing argument, be readily spelt out of the existing provisions in the contract.” [emphasis added]

• However, such an amendment would  run into a number of practical difficulties:

(i) Proving that there was a manipulation of the relevant particular LIBOR rate and any loss caused by it would only give rise to damages which might be relatively modest;

(ii) The whole benefit of rescission (with the obligation being to restore the status quo ante so that all the claimant would have to do was repay capital) would be lost;

(iii) The difficulties posed by the exclusion clauses in the contract itself  would have to be considered and might negate any claim at all.

• In common with the trend of recent mis-selling cases, Cooke J. found, even at this preliminary stage, that it had been made clear to Unitech that the Bank was acting at arm’s length and was not acting as its advisor or fiduciary and that Unitech was responsible for making an independent assessment of the appropriateness to its needs of any swap product the Bank was selling. Such a finding necessarily severely limits (if not entirely extinguishes) any duty of care owed by the Bank to Unitech and inevitably constrains  the ability to claim in negligence.
• The rigour of Cooke J’s approach may be laudable, but one cannot help but feel that Flaux J’s approach is the fairer in redressing the imbalance between banks and even substantial clients who have fallen foul of technically complex products that contain hidden traps and are beyond the understanding of even the so-called “sophisticated investor”. These cases are about escaping from the consequences of such products, not trimming the interest rates and charges attached to them.
• However, it may well prove that allowing amendments to proceed when at trial the claims will fail for the reasons that Cooke J’s analysis discloses will do claimants no favours,  beyond the faint hope of a negotiated settlement of a claim perceived as having little more than nuisance value.