LIBOR: Misrepresentation and Amendment – Part III

Deutsche Bank AG & Ors v Unitech Global Ltd & Anor [2013] EWHC 2793 (Comm) (20 September 2013)

This case follows on from the last post in this miniseries and shares the facts discussed there. In this judgment, Mr Justice Teare observed that there were as many as 23 issues for him to rule on. In respect of the application that was refused by Cooke J in February 2013, the instant court noted that an appeal against that decision was listed for October 2013. Teare J was invited to rule on whether the claimants, Deutsche Bank and others (D) were entitled to summary judgment and the defendants, Unitech (U), could amend their Defence to plead a number of other defences.

Out of a total of 23 issues, some of the key issues in the case included whether:

• U were entitled to claim rescission of the credit agreement for misrepresentation despite Cooke J’s February 2013 judgment reported as Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm)?

• U could plead that the credit and swap agreements were void for breaches of competition law (Article 101 of the Treaty on the Functioning of the European Union and section 2 (agreements etc. preventing, restricting or distorting competition) of the Competition Act 1998)?

• Interest based on a manipulated LIBOR was irrecoverable by D (because of profiting from their wrong) on grounds of public policy and whether U were entitled to repayment of certain interest that has already been paid to DB?

• It was open to U to plead a repudiatory breach of an implied term that D would not manipulate LIBOR and counterclaim damages caused by it?

• U’s existing defences had a reasonable prospect of success?

In summary Teare J held that U were permitted to plead a repudiatory breach of an implied term that D would not manipulate LIBOR, by which interest rates in the credit facility and swap agreements were set, although that could not discharge U’s liability for sums payable before they purported to accept the alleged repudiation as terminating the agreements. Moreover, the court held that damages recoverable could only be counterclaimed and because of the “no set-off” provisions in the agreements the defendants were precluded setting off the counterclaim. The existing defences negating liability for most of the claims had no reasonable prospect of success and accordingly the claimants were entitled to summary judgment on them.

Some of the reasons behind Teare J’s decision are set out below.

An estoppel issue arose as to the non-availability of rescission as a remedy under Cooke J’s February 2013 decision which was binding on the parties. Teare J held:

11. I therefore consider that Cooke J.’s decision gives rise to an issue estoppel as to the non-availability of rescission as a remedy. It follows that the Defendants are estopped from alleging rescission of the Credit Agreement based upon misrepresentation.

15. The decision of Cooke J. that the remedy of rescission is not available to the Defendants is binding upon the parties unless it is overturned by the Court of Appeal. I must therefore deal with the application to amend the Defence on that basis. If an appeal is allowed from the decision of Cooke J. on this point then my decision refusing permission to amend will be similarly open to appeal and the parties will no doubt agree upon the outcome of any such appeal.

Teare J also refused U permission to amend on the basis that, in light of LIBOR manipulation, there was a real prospect that the swap and credit agreements would be void, unenforceable or illegal because of competition law pursuant to Article 101 of the Treaty on the Functioning of the European Union and section 2 of the Competition Act 1998 (by virtue of which agreements between undertakings which breach competition law are void). He held that:

33. I have therefore concluded that there is no real prospect that the Credit Agreement and Swap Agreement will be void on account of the alleged (and for this purpose assumed) breach of competition law. Permission to amend must therefore be refused.

To say that interest payments to D were irrecoverable on public policy grounds, and that D should be excluded from profiting from its wrong by manipulating LIBOR, was inconclusive. Because U had an obligation to pay interest based on the BBA’s screen rate, there was a countervailing public policy reason “that parties are held to their bargain”: para 62. By enforcing the obligation to pay interest at the screen rate and allowing U a counterclaim for the damage, if any, caused by the alleged manipulation of LIBOR, it was possible to give effect to both public policies: para 62. In Teare J’s view the public policy consideration that parties must adhere to their bargain outweighed U’s argument that interest was irrecoverable because of LIBOR manipulation. The matter could not be dealt with in interim proceedings and there was no real prospect that U’s plea would succeed at trial: para 63.

It was common ground that a LIBOR based implied term, that D would neither alone nor in concert with anyone else try manipulate LIBOR, had scope: para 65. Teare J therefore granted U permission to amend and plead a repudiatory breach of the alleged implied term and to counterclaim for damages caused by that breach: paras 71 & 176. Whether or not the breach was repudiatory was a matter to be determined at trial: para 70.

On the other hand, Teare J did not grant U permission to plead that because of the repudiatory breach they were discharged from paying sums payable before they purported to accept the alleged repudiation as terminating the agreements.

In relation to the “no set-off” provisions, Mance J’s (as he then was) treatment of such a clause in Skipskreditt v Emperor Navigation [1998] 1 Lloyd’s Reports 66 had been followed by Hamblen J in Deutsche Bank v Gulzar Ahmed Khan and others [2013] EWHC 482 (Comm) where he said:

329. … The clause fulfils a legitimate commercial function by entitling the creditor to prompt payment of monies due and payable so that cross-claims (which may or may not have merit) cannot be used to withhold or delay payment.

So it was well established that the “no-set off” provisions in the agreements “disabled” U from setting off the counterclaim based upon fraud in defence of D’s claims (U had no real prospect of establishing the contrary): paras 75 – 77.

The principle in Ralli Brothers v Compania Naviera Sota y Aznar [1920] 1 KB 614 – that the court would not enforce performance of a contract where performance would be illegal in the place of performance – was the foundation of U’s defence to making payments. U was incorporated in India and argued that the performance of its obligations by transferring funds to New York was illegal in India and thus unenforceable under the New York law of conflicts. That, however, was different from the English law of conflicts which was “clear” that the principle in the Ralli case did not apply because performance was in New York and therefore U’s defence had no prospect of success: paras 113 – 115.

Overall, the defences for the majority of the claims in the case had no reasonable prospects of success and Teare J granted D summary judgment on them: para 176.

The last few posts have explored aspects of banking litigation subsequent to the eruption of the LIBOR scandal and regulatory findings which confirmed that banks were aware of and indeed chose to manipulate LIBOR. Interestingly, for parties relying on the scandal’s fallout in their quest for justice, the utility of making allegations linked to LIBOR manipulation as a device to bolster existing claims remains a function of whose view one takes seriously. The large international firms acting for the banks think that those claiming against their clients have an uphill task whereas as the solicitors litigating against the banks do fancy their chances rather more.