LIBOR: Misrepresentation and Amendment – Part I

19 10 2013

Graiseley Properties Ltd & Ors v Barclays Bank Plc [2012] EWHC 3093 (Comm) (29 October 2012) also known as “Guardian Care Homes”.

The LIBOR scandal has added a fresh flavour to banking litigation in England and Wales and a handful of judgments, of which this was the first, have already been handed down. Apart from the fact that the decisions are published on BAILIIonly scant Internet information is available on these interesting cases. Spread out over the next four posts, this LIBOR related miniseries sheds light on some of the decisions that the courts have made thus far. 

This widely anticipated LIBOR “test case” was initially scheduled for trial in the Commercial Court in October 2013. But because the Court of Appeal granted Barclays permission to appeal Mr Justice Flaux’s decision, it appears that the trial of the case in the High Court has been postponed until April 2014. Apparently, the quantum arising from this litigation is up to £37 million.

In this judgment, the Court held that, in the light of regulatory authorities’ findings of misconduct and wrongdoing on Barclays’ part in relation to LIBOR manipulation, Graiseley (G) was allowed to amend its claim for financial mis-selling against Barclays (B) to plead false and fraudulent implied representations made by B.

In these proceedings, Flaux J explained that claiming that implied representations (alternatively implied terms) induced it to enter into a series of loan agreements and related hedging transactions, G applied for permission to amend its particulars of claim to plead implied representations/ implied terms by B.

G’s original claim against B was for rescission for innocent misrepresentation concerning two derivatives contracts which G was obliged to enter into as a condition of being granted loan facilities by B. Subsequently, investigations began against B into the setting of and the manipulation of LIBOR (used by banks to lend to each other). Flaux J noted that regulatory authorities in the UK and the US found misconduct and wrongdoing on B’s part in respect of its LIBOR manipulation between 2005 and 2009: para 5.

The FSA’s – as it was prior to legal cutover to the Financial Services Act 2012 on 1st April 2013 – final notice to B spotted two unmistakable episodes of wrongdoing. Firstly, that B submissions to the BBA from 2005 to 2008, influenced by requests by interest rate derivatives traders to the submitters (responsible for submitting the LIBOR rates to the BBA) were motivated by profit. Secondly, from September 2007 until May 2009 (during the financial crisis), in response to negative media comments about the bank (described in the evidence before the Treasury Select Committee as “low-balling”) B’s senior management instructed LIBOR submitters to lower their LIBOR submissions to the BBA.

Understandably, G wanted to pursue a claim in deceit. Therefore, G sought to amend its particulars of claim by pleading that B had proposed that G enter into financial transactions containing obligations calculated by reference to the LIBOR benchmark knowing that those LIBOR representations were or might be false. In the instant proceedings, the issue was whether, looking forward to the date of trial, the proposed amendments to G’s claim were sufficiently arguable as to have a real prospect of success: para 13.

B objected that G’s proposed amendments had no real prospect of success because of questions over whether:

  • There was any basis to imply the alleged representations at all.
  • It could be said that it must have been obvious to the representors that the alleged representations being made were false.
  • B had authorised the alleged representations.

Granting G’s application, the Court made the following observations.

As regards the first objection, the US Department of Justice had found and B accepted that derivative traders and rate submitters who participated in manipulating LIBOR (and EURIBOR) submissions understood the basic features of the derivative products tied to those benchmark interest rates. They knew the degree by which they increased their profits or decreased their losses in particular transactions by manipulating the benchmark, corresponding financial losses would be sustained by their counterparties in relation to the said transactions; para 16. So what held for derivative traders must at least arguably apply to B’s senior management who also bore responsibility for the manipulation of LIBOR and therefore it could not “be said that B has an unanswerable case that the implied representations were not made, so the matter is quintessentially a factual one for determination at trial”: para 17. Therefore, it was impossible to limit the scope of the representations on the basis that they were connected only to Sterling LIBOR (and not Dollar LIBOR and EURIBOR) and it was wholly arguable that the representations were implicitly made to G before it entered into the various agreements: para 19.

“Obviousness” plagued the second objection. The submission that it could not have been obvious to the representors that the alleged representations being made were false had no force whatsoever: para 20. In Cassa di Risparmio della Republica di San Marino v Barclays Bank [2011] EWHC 484 (Comm), at para 211, Hamblen J highlighted the principle that the representor should understand – knowledge/awareness remains key – that he is making the implied representation and that it had the misleading sense alleged. So the objection was “wholly without merit” because it was plainly arguable that B’s senior management was aware that LIBOR based financial products were sold to customers who had the right to assume that B, or any other bank, was not fixing the benchmark “for its own interest or gain”: paras 21 & 22). For Flaux J, the idea that G’s case was unarguable on the basis that the representations made were obvious to B’s personnel allegedly at fault was “is not a suggestion which has any force whatsoever.”

Stating that “artificially” dividing the issues did not help B, the Court rejected the submission that the representations were not authorised: para 23. That the alleged representations were authorised by B “was fully arguable” – paras 25 & 26 – because (a) as a matter of law B remained responsible for those people who had any guilty knowledge that was imputed to B and (b) persons within B, responsible for issuing and negotiating the relevant contracts with G, arguably had sufficient implied or ostensible authority to make the alleged implied representations: para 25. Equally, the FSA had found that B’s senior management knew of and bore responsibility for LIBOR manipulation. Since management knew that B was selling LIBOR linked products, the argument that employees negotiating contracts (containing LIBOR related terms) with third parties (who entered into the said agreements in reliance of such terms) lacked merit: para 24. So the objection that B had not authorised the alleged representations was “not well founded”: para 26.

The relevant legal test in Bowstead & Reynolds on Agency at paragraph 185 confirmed this:

The principal is liable if while not expressly authorising the agent to make the false representation he knew it to be untrue and was guilty of some positive wrongful conduct as by consciously permitting the agent to remain ignorant to the true facts so as to prevent the disclosure of the truth to the third party if the third party should ask the agent for information or in the hope that the agent would make some false representation. The agent’s representation when made would of course require to be within the scope of his actual or apparent authority.

Points raised by B in G’s pleadings about remedies of rescission, repudiation and damages – set out in the original pleading – were not part of the amendments sought: para 27. Ultimately, the issue of remedies, which turned upon the facts established by the Court, needed determination at trial and a “mini-trial” at the interim stage would not suffice. G’s requested amendment to plead implied terms satisfied – fell “fall fairly and squarely”: para 28 – Lord Hoffmann’s test in AG for Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.

Equally, the sought amendment also complied with the test formulated by Aikens LJ in Crema v Cenkos Securities plc [2011] 1 WLR 2066. On proper analysis, the test for implying a contractual term always involved the contract’s correct construction “taking account of what the reasonable person would consider were the terms which should be spelt out in the contract if they are not expressly set out in it”: para 29. It was therefore clearly arguable that the implied terms proposed by G were terms that a reasonable person would imply into the relevant contracts between G and B.

A good comparison in connection to the above can be found in the post on Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm) where Mr Justice Cooke refused Unitech’s application to amend its statements of case to plead that Deutsche Bank manipulated LIBOR and that Unitech was induced into contracts because of Deutsche Bank’s false representations.



6 responses

19 10 2013
LIBOR: Disclosure and Open Justice | Global Corporate Law

[…] this application the Flaux J was confronted with a slightly different set of issues. Following the amendment proceedings, at a Case Management Conference on 13 in November 2012 the issue arose as to the extent of […]

12 04 2014
ICE LIBOR and the Slippery Road Ahead | Global Corporate Law

[…] in the English High Court later this month. The English cases have been covered on this blog here (Graiseley & Ors v Barclays Plc [2012] EWHC 3093), here (Graiseley & Ors v Barclays Plc […]

22 02 2015
Alvi Argument Betrays Work Permit Holder | United Kingdom Immigration Law Blog

[…] fluctuating number (such as the RPI, oil prices, or a manipulated benchmark such as LIBOR, see here, here, here and here) to be laid before Parliament for it to comply with what Lord Hope and Lord […]

15 04 2015
Changing Banking for Good: What is the Cure for Misconduct? | Global Corporate Law

[…] to buy their way out of trouble. On the civil side, the so-called “Guardian Homes” case (see here, here, here, here and here) about mis-selling and fraud in relation to LIBOR was settled out of […]

19 08 2015
Tom Hayes: Trial By Fire | Global Corporate Law

[…] from one another: on the reform of LIBOR see here, for LIBOR related civil litigation, see the mini-series here. Yen LIBOR is the average interest rate at which a large number of banks on the London money market […]

30 03 2016
LIBOR Roundup: Fraud, Misrepresentation and New Directions in Civil Proceedings | Global Corporate Law

[…] Insofar as benchmark rigging from the old days is concerned, after the settlement (2014) in the series of reported judgments in the Graiseley Properties case, new claims have been brought and a series of fresh judgments were […]

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