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LIBOR – Has Mr Justice Flaux opened the Floodgates?

Are the forces of Hell about to be unleashed on the LIBOR-rigging banks?

Quite possibly, if Mr Justice Flaux’s decision in Graiseley Properties Limited and others v Barclays Bank plc [2012] EWHC 3093 (Comm) is anything to go by.

Although this was only an application by the claimants to amend their Particulars of Claim, it was an amendment which made allegations of fraudulent misrepresentation and implied fraudulent misrepresentation at that; not something lightly allowed.

The case

Implied misrepresentations were said to have been made to induce the claimants to enter into a series of loan agreements and associated hedging transactions.  The case concerns, in effect, two derivatives contracts which the claimants were obliged to enter into as a condition of Barclays granting the relevant loan facilities. They had cost the claimants dear and bring into focus not only the LIBOR issue, but the use of unsuitable hedging products.

There was a claim for rescission for innocent misrepresentation in the original pleading, but , since the pleading was originally drafted and served, the various conclusions and findings of the regulatory authorities on LIBOR-rigging, both in this jurisdiction and in the United States of America against Barclays, had been published.  This provided the launch-pad for the amendments both as to misrepresentation and, in the alternative,  that similar terms were to be implied into the contracts.

The proposed amendments were as follows:

“(1) On any given date up to and including the date of the Swap and the date of the Collar, LIBOR represented the interest rate as defined by the BBA, being the average rate at which an individual contributor panel bank could borrow funds by asking for and accepting interbank offers in reasonable market size just prior to 11.00 am on that date.

(2)  Barclays had no reason to believe that on any given date, LIBOR had represented, or might in the future represent, anything other than the interest rate defined by the BBA, being the average rate at which an individual contributor panel bank could borrow funds by asking for and accepting interbank offers in reasonable market size just prior to 11.00 am on that date.

(3) Barclays had not on any given date, up to and including the date of the Swap and the Collar, (a), made false or misleading LIBOR submissions to the BBA and/or (b), engaged in the practice of attempting to manipulate LIBOR, such that it represented a different rate from that defined by the BBA, viz a rate measured at least in part by reference to choices made by panel banks as to the rate that would best suit them in their dealings with third parties; and

(4)  Barclays did not intend in the future to

(a) make false or misleading LIBOR submissions to the BBA and/or

(b), engage in the practice of attempting to manipulate LIBOR, such that it represented a different rate from that defined by the BBA”.

Given the importance that the court attaches to proper particularisation of allegations of misrepresentations (see CPR 16 PD.8.2)and, especially, fraudulent ones, it is not surprising that lack of particularity was the bank’s main line of attack as the judge summarised their submissions at §12:

“The objections raised by the bank to the granting of permission to amend fall essentially into three categories.  First, whether there is any basis for implication at all; secondly, whether or not it can be said that it must have been obvious to the people who are alleged to have had the relevant knowledge that the representations were being made and were false, and thirdly, there is an objection related to the issue of authority or authorisation to make the representations.”

In rejecting these submissions Flaux J. took a robust line:-

1. All he had to decide was whether or not the proposed amendments had a real prospect of success at trial;
2. He was prepared to rely on the findings of  the US Department of Justice as to the knowledge of derivative traders (expressly accepted as accurate by the Bank) that they were aware  that attempted manipulation of LIBOR in particular transactions would cause counterparties to suffer adverse financial consequences;
3. What held for derivative traders as to their knowledge and understanding  must “at least arguably”   also hold for  those senior management  of the Bank who were also responsible for the manipulation of LIBOR;
4. It could not be said that Barclays had an unanswerable case that the implied representations were not made, so the matter is quintessentially a factual one for determination at trial.
5. The complaint about the implied representations being too wide and for too long a period was “essentially shadow boxing”: the Bank was “well aware of the case that it had to meet”;
6. The application in relation to implied terms would be allowed. All were fairly and squarely within the tests to be applied.   

Conclusions

1. This is a welcome and realistic approach to the difficulties faced by customers in claims against banks. It signifies a notable culture change away from the suspicion with which the courts were wont to treat customers seeking to avoid paying their debts or raising claims for huge damages. Recent history has shown that banks, like the police before them, can no longer be assumed to be squeaky clean;
2. The ability to plead fraudulent implied misrepresentations on comparatively limited specific information is the key to possible success at trial:

• It will sidestep the reliance of the Bank on exclusion and limitation clauses because liability for fraudulent misstatement cannot be excluded;

• It will probably negate the Bank’s ability to rely on “risk” statements signed by clients;
• It will avoid the difficult problems that arise in relation to so-called “sophisticated investors”;
• Even standard disclosure, now that it will be referable to the new allegations, is likely to inflict serious pain on the Bank and risk very unwelcome information finding its way into the public domain at trial.

3. Taking this case to trial is likely to be very expensive. For relatively small claims, wait and see what happens may be a sensible approach if there are no limitation issues. But, in every case, it is going to be in the client’s interest to start gathering information and evidence to support any prospective claim as early as possible.

4. Getting preliminary advice from counsel at an early stage to assist in:

1.  taking a realistic view of the merits and the available remedies;
2. establishing the parameters for investigation; and
3. making sure that there are no problems over limitation periods  is just common sense.

Related link:  Profile of Richard Perkoff