LIBOR: Misrepresentation and Amendment – Part II

19 10 2013

Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm) (28 February 2013)

This is another judgment about the London Interbank Offered Rate (LIBOR). The instant case, which is interesting to contrast with the Graiseley case highlighted earlier, relates to two actions concerning a credit facility agreement and a related interest rate swap agreement. Cooke J refused the defendants Unitech (U) permission to amend their statements of case – as these had no prospect of success – to plead allegations against the claimants Deutsche Bank (D) that it had manipulated LIBOR and that owing to D’s false representations, U was induced into the agreements. This robust judgment has been appealed and the Court of Appeal is seised of the matter.

The litigation involves D claiming £11 million from U in relation to an interest rate swap agreement and another £150 million under a credit facility agreement. U alleged that D proposed the swap agreement as a hedge against fluctuations in the interest rate and that the swap agreement and the credit facility had been part of a package deal. Aggrieved U thought that it had been induced into the swap agreement by D’s representations that made the agreement appear to be suitable whereas it was not. The interest for the credit facility was linked to LIBOR and U argued that like other banks D had manipulated LIBOR. Therefore, U applied to amend the statements of case to include claims for breach of contractual warranty which were argued to have occurred because of the fact that D was a LIBOR panel bank for the British Bankers’ Association. Similarly, U sought to add common law and statutory claims in respect of misrepresentation.

Cooke J held that notwithstanding the early stage of proceedings in which the amendment was sought and the low threshold to be applied, U’s application had to be refused as the amendments sought did not have reasonable prospects of success. (See paras 19 & 57.)

U knew that D was acting on an arm’s length basis and was not U’s fiduciary or adviser. It was up to U to make an independent assessment of the agreements in question. To allege that D had made a representation purely by virtue of being a LIBOR panel bank was unrealistic because an individual bank could not be burdened with the responsibility of the entire system. (See paras 21 – 24.)

When entering into a transaction on a selected LIBOR rate, there was material difference between an implied term not to manipulate the benchmark contractual rate and a non-contractual representation that LIBOR would not be rigged. On its own, a LIBOR linked payment obligation was insufficient to create a representation in respect of how that LIBOR rate was achieved. Otherwise, every party to an agreement would make a similar representation in the plethora of transactions involving such a reference. In making his decision, Cooke J considered Graiseley Properties Ltd v Barclays Bank Plc [2012] EWHC 3093 (Comm) and Mabanga v Ophir Energy Plc [2012] EWHC 1589. (See paras 27 – 36).

A couple of paragraphs of Cooke J’s decision are worth extracting in full:

27. There is, to my mind, a real difference when entering into a transaction which is based on a particular LIBOR rate, between an implied term of the contract that a party will not manipulate the specific LIBOR rate that is referred to in it, which might well be said to go without saying and, on the other hand, a separate non contractual representation that nothing has been done in the past, or is now being done, to impact on any of the many LIBOR rates calculated in the past or a representation as to intention as to the future. 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. If representations C and D were made, that would effectively impose upon DB AG and any other LIBOR panel bank which entered into a LIBOR linked derivative with the counterparty a positive duty to disclose to the counterparty any information which it had which might undermine the integrity of LIBOR, whatever that expression really means, and a failure to do so would amount to an implied misrepresentation. That does seem a very wide duty to impose.

28. It is plain, in my judgment, that linking a payment obligation to a LIBOR rate cannot be enough to give rise to a representation about how that LIBOR rate was, is, or will be, compiled; otherwise every contracting party on either/or both sides of a contract would make such a representation in the multitude of transactions where such reference is made. How, then, does the fact that one party is a panel bank and contributes to reporting for one or more of such rates in itself give rise to the implied representation? If that party participates in the scheme for assessment of the relevant rate to which the contract refers an implied promise not to fix the rate by reference to extraneous considerations might be inferred since it would specifically relate to proper performance of the contract, but I do not see how representations of fact of the kind suggested can be spelt out just because a bank does have a reporting function.

At paras 30 – 34, Cooke J remarked that in allowing amendments to add claims for fraudulent misrepresentation against Barclays in relation to LIBOR, in Graiseley v Barclays Bank [2012] EWHC 3093 Comm (see earlier post) “Flaux J was conscious of the test to be applied, but his judgment does not record how it was that he applied it to the facts of the case before him.” Therefore, Cooke J gained “no help” from Flaux J’s judgment who “had self-evidently different materials to those which are before me.”

None of the pleas of misrepresentation were capable of being implied warranties. Equally, in the event that there was a breach of warranty, rather than misrepresentation arising in tort, the quantum of damages would be founded on the assumption that the representations were true, rather than them never having been made. Therefore, damages would reflect the difference between any manipulated LIBOR rate applied to the contract, and the LIBOR rate that would have applied had there been no manipulation. So, damages would not give relief from the basic obligation to repay the loan (see paras 40 & 45) and Cooke J said:

45. Moreover, if there is a breach of warranty as opposed to a misrepresentation act or tortious form of misrepresentation, the measure of damages is, ordinarily, based on the assumption that the representations and statements are true as opposed to them never having been made. That gives rise to damages which essentially reflect the difference between any manipulated LIBOR rate applied to the contract and that which would have applied in the absence of such manipulation, not relief from the basic obligation of repayment of the loan.

46. Similarly, repudiation of the agreements is not alleged, but if it was, damages would be of the same kind and the loan of the principal sum of $150 million would then fall to be taken into account, dwarfing, I suspect, any possible damages which could conceivably be alleged …

The difference between Cooke J and Flaux J’s approaches is telling about the way they answered the questions put to them. The latter judge focused on the US Department of Justice’s analysis that traders, submitters and senior management in Barclays knew of the possible consequences manipulating LIBOR would have on counterparties such as Graiseley (G). Flaux J also focused on whether G would be able to establish that the LIBOR representations were made fraudulently.

In contrast, Cooke J held that under the principles established by the authorities the correct legal test to be applied would be whether someone like U would have inferred a representation. Ultimately, the trouble for U was that:

29. No specific precontractual conduct is relied on in the pleading, nor any statements of any kind. It is merely the offer of a product and/or the conclusion of a transaction by a panel member which refers to LIBOR which, in themselves, are said to give rise to the implied statements. In my judgment, that is unsustainable and such a plea has no prospect of success.

The divergence in the judicial approaches taken by Flaux J and Cooke J remained a function of the evidence each judge had sight of. As Cooke J explained, the Graiseley court had not only seen correspondence and documentation lending itself to imply the representations but Flaux J had also taken the FSA’s regulatory notice and the DoJ’s findings against Barclays into consideration. Moreover, since in Graiseley, misrepresentation as to LIBOR had already been pleaded and Flaux J was deciding whether to allow amendment of the particulars to include fraud, the degree of the bank’s awareness was a relevant point. On the other hand, Cooke J’s decision – which accords with the authoritative case law on implied representations (see Primus Telecommunications v MCI WorldCom International [2004] EWCA Civ 957, IFE Fund v Goldman Sachs International [2006] 2 CLC 1056, Mabanga v Ophir Energy [2012] EWHC 1589) – focused more on what someone like U would have inferred from D’s conduct and statements.

This case has resurfaced as Deutsche Bank AG & Ors v Unitech Global Ltd & Anor [2013] EWHC 2793 (Comm) and is examined in the next post in this LIBOR related case law mini-series.


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LIBOR: Misrepresentation and Amendment – Part III | Global Corporate Law

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[…] Barclays Plc [2012] EWHC 3093), here (Graiseley & Ors v Barclays Plc & Ors [2013] EWHC 67), here (Deutsche Bank AG & Ors v Unitech Global Ltd & Anor [2013] EWHC 2793) and here (Graiseley […]

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[…] 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 Dyson said. It […]

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