English High Court provides important guidance on approach to LIBOR mis-selling claims

In brief

Written by Senior Associate Sarah Burgemeister

The English High Court has handed down its judgment on the first major case following the global regulatory investigations into alleged LIBOR manipulation. This is an important decision in providing guidance as to the court's approach to LIBOR mis-selling claims. It is likely to have ramifications for claimants looking to advance similar mis-selling claims against banks that have been caught up in various regulatory investigations pertaining to benchmark manipulations.

Introduction

On 21 December 2016, the English High Court handed down its judgment in Property Alliance Group v RBS [2016] EWHC 3342. This case featured Property Alliance Group (PAG), a property investment group, advancing three types of claims against the Royal Bank of Scotland (RBS), its primary banker:

• alleged mis-selling by RBS to PAG of four interest rate derivative products (Swaps) that referenced the GBP three-month LIBOR rate (Swap claims);
• allegations of bad faith and abuse of discretion by RBS in its management of the financial arrangements by its restructuring group (GRG claims); and
• mis-representations and breaches of certain implied terms by RBS pertaining to LIBOR and the manner in which it was set (LIBOR claims).

Swap claims

Briefly, the court dismissed all these claims, finding that, while RBS had a duty to take reasonable care to not mis-state facts, this duty did not go any wider. It further held that RBS did not have a duty to provide full scenario modelling for each Swap or details of potential break costs and mark to market value.

GRG claims

In short, the court found the contractual documents had no implied terms of good faith or imposed limits on the alleged contractual discretions enjoyed by RBS. Even if such terms had been implied, the court found that RBS would not have been in breach.

LIBOR claims

The claimant asserted two alternative claims with respect to LIBOR. Firstly, a rescission claim based on fraudulent and negligent misrepresentations made by RBS about LIBOR and the setting process. Secondly, a claim for damages based on RBS breaching a number of implied terms regarding LIBOR and the setting process.

The claimant identified five representations that it said could be implied from RBS' words and conduct in proposing and entering the LIBOR referenced Swaps:

1. 'On any given day and including the date of each of the Swaps were entered into, 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 11am on that date';
2. 'RBS had no reason to believe that on any given date LIBOR has represented anything other than the interest rate defined by the BBA, being the average rate at which an individual contributory panel bank could borrow funds by asking for and accepting interbank offers in reasonable market size just prior to 11am on that date';
3. 'RBS had not made false or misleading LIBOR submissions to the BBA and/or had not engaged in the practice of attempting to manipulate LIBOR such that it represented a different rate from that defined by the BBA…';
4. 'RBS did not intend in the future and would not in the future: make false or misleading LIBOR submissions to the BBA; and/or engage in the practice of attempting to manipulate LIBOR such that it represented a different rate from that defined by the BBA …'; and
5. 'LIBOR was a rate which represented or was a proxy for the cost of funds on the interbank market for panel banks such as RBS'.

The court rejected PAG's claim that RBS' offering of a transaction which referenced LIBOR gave rise to these implied representations about how LIBOR was set. The court considered each representation and concluded, with regard to RBS' conduct and words, that a reasonable representee would not have drawn the inferences contained in these five alleged representations. Further, the court found that the alleged implied representations had not been understood by the relevant personnel at PAG and, as such, could not have been relied upon.

The court also rejected the claims that RBS' traders had been manipulating GBP LIBOR (although RBS acknowledged trader manipulation of other LIBOR currencies, there had been no adverse regulatory decision regarding RBS with respect to GBP LIBOR) or been engaging in lowballing the GBP LIBOR rate. Further, even if the representations were made, relied upon and were false, the court found that there was no basis for these representations being made fraudulently.

The claimant also alleged that certain terms had been implied into the contractual documents relating to the setting of LIBOR being:

1. 'The floating rate payable by or to RBS under each of the Swaps would be calculated by reference to LIBOR as defined by the BBA i.e. the interest rate as defined by the BBA namely 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 11am on that date';
2. 'If RBS had reason to believe that on a given date LIBOR represented or might represent anything other than the interest rate defined by the BBA (i.e. 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 11am on that date), it would not withhold or conceal that information from PAG'; and
3. 'RBS would not make false or misleading LIBOR submissions to the BBA and/or engage in any practice of attempting to manipulate LIBOR such that it deviated from the rate as 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)'.

The court found that the only implied term of the Swaps to be that the LIBOR rate payable under them would be the LIBOR rate as defined by the BBA i.e. the average rate at which an individual panel bank could borrow funds on the interbank market. This term, however, only applied to the conduct of RBS and did not extend to a promise about the conduct of other banks in setting LIBOR. As such, RBS had not breached this implied term.

In conclusion, the court rejected all the claims made by the claimant. This was a comprehensive victory by RBS and, more importantly, provides guidance for future similar claims advanced against financial institutions following the global benchmark regulatory investigations.

Before this judgment, a number of important procedural decisions were issued by the court, including RBS' right to claim legal privilege over high-level documents addressing the LIBOR regulatory investigations. These will be discussed in a future edition of Unravelled.