Flaux J Vindicated: Court of Appeal on Amendment, Implied Representations and the Efficiency of LIBOR

20 01 2014

Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372

The appeals from the High Court in Graiseley Properties Ltd & Ors v Barclays Bank Plc [2012] EWHC 3093 (Comm) (Flaux J, see post here) and Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm) (Cooke J, see post here) were decided by the Court of Appeal (Longmore & Underhill LJJ, Sir Bernard Rix) in Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372. In a robust but concise judgment, the Court unanimously allowed the appeal from Cooke J and dismissed the appeal from Flaux J.

The critical question before the Court of Appeal was, in relation to the two cases mentioned above in which banks were seeking to recover sums due under loan or swap agreements, whether the borrowers should be allowed to amend their pleadings in order to allege that the banks had made implied representations in respect of the efficiency of or the non-manipulation of the London Interbank Offered Rate (LIBOR).

The Court of Appeal held that in cases in which banks were seeking to recover sums due under LIBOR linked loan or swap agreements, the borrowers could amend their pleadings and allege that the banks had made implied representations as to the efficiency of and the non-manipulation of LIBOR. Equally, it was also arguable that lenders who had become parties to a loan agreement had not done so by way of a novation strictly so called, which would have extinguished the borrower’s right to rescind for misrepresentation.

In Graiseley, the borrowers claimed that derivatives contracts, which were linked to LIBOR and which the borrowers had entered into as a condition of obtaining loan facilities, were unsuitable agreements for them to have made, and that Barclays (B) had known that all along. After the regulatory authorities had discovered misconduct in respect of B’s role in the setting of LIBOR, the borrowers applied to amend their particulars of claim to allege that B breached various implied representations about the setting of LIBOR. Flaux J allowed the amendments. In October 2012, Flaux J 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 B to plead false and fraudulent implied representations made by B.

Some months later, in February 2013, in Unitech (U), declining to follow the Graiseley Court, Cooke J decided that despite the low threshold to be applied and the early stage of proceedings in which the amendment was sought, U’s application had to be refused as the amendments sought did not have reasonable prospects of success. In this case, the lenders claimed under a credit facility agreement and an interest rate swap agreement referenced to LIBOR. In response, the borrower tried to plead implied representations about LIBOR. However, Cooke J refused permission to amend because he thought that the pleas had no prospect of success (as in the context of the credit and swap agreements, no representation was being made in relation to the method by which the LIBOR figure was set). The Court also held that a number of the lenders in that case had become parties to the credit agreement by way of novation which would have the effect of extinguishing any right to rescind. Subsequently, the lenders obtained summary judgment in respect of the availability of rescission in relation to the existing pleas of misrepresentation regarding the suitability of the swap transaction.

The difference between Cooke J and Flaux J’s approaches told us a lot 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 G. Flaux J also focused on whether G would be able to establish that the LIBOR representations were made fraudulently.

On the other hand, 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.

As noted in earlier posts, 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 seemingly accorded 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.

In the instant proceedings, the Court of Appeal held (“with great respect to Cooke J”) at para 24 that the proposed pleas of implied representation were arguable in both cases. Longmore LJ explained at para 25 that cases involving implied representation are fact specific and to dismiss summarily an allegation of implied representation in a factual vacuum is “dangerous”; his lordship continued:

If the LIBOR scandal had occurred before these cases were begun and what are now the proposed pleas had been incorporated in original pleadings, they would not, in my view, be amenable to a strike out application and it is not surprising that Barclays did not, at first, seek to appeal Flaux J’s decision.

Moreover, the use of LIBOR was proposed by the banks themselves – it was at least arguable that they were representing that their involvement in setting LIBOR was honest. Longmore LJ found it “surprising” that the banks rejected the idea “that even that limited proposition is arguable”: para 27. In his lordship’s view, the submission that doing nothing cannot amount to an implied representation did not hit its target because the banks proposed transactions that depended on LIBOR and, like a customer in a restaurant represents that he will be able to pay for his meal (DPP v Ray [1974] AC 370), this was a representation: para 28.

In light of the argument that the contracts were induced by fraud, reliance placed in disclaimers and entire agreement clauses by the banks was arguably ill-considered – Cook J had himself at para 19 accepted this and at the very least the point could not summarily be decided in then banks’ favour: para 29. On the other hand, U’s pleading in relation to fraud was imprecisely pleaded and needed to be articulated with greater accuracy after disclosure.

The Court of Appeal also let it be known that:

30. The banks’ submissions boiled down to saying that they were prepared to accept that they would do nothing dishonest or manipulative during the term of the contract and that should be enough for any counterparty. I can only say that, in my view, it is arguably not enough. If the day after the contracts had been made, the banks had told their counterparties that they had been manipulating LIBOR in the past and intended to do so in the future, but would be happy to pay any loss that their borrowers could prove, the borrower would (arguably) be sufficiently horrified so as to think he would be entitled to rescind the deal. The law should strive to uphold the reasonable expectations of honest men and women. If in the end it cannot do so, that should only be after a proper trial.

Equally, although some proposed representations were more powerful than others, ultimately the various alleged representations were best determined by the trial judge after he had the entire picture in sight: para 30. The credit agreement expressly dealt with changes to parties and the applicable provision differentiated between assignment and novation – likewise, the same distinction was also reflected in the transfer certificates by which new lenders became bound: paras 35 – 36. Yet, despite the contractual wording, in either case the effect was arguably identical and no difference had been intended between new lenders who became party to the contract despite the route used – novation was not being used as strictly understood (i.e., requiring the discharge of the old agreement and the making of a new one). On the other hand, if novation was being used as strictly understood under the law:

37. … [T]here must at least be an argument that, on the facts of the present case, there is only a partial novation so that BBK and BMI [the 3rd and 7th claimants, the relevant two new lenders] became parties to a new contract freed of the equity of rescission whereas the other parties (whether the original or the other new lenders) remain bound under “this Agreement” and will be affected by any such equity. That is by no means to say that the concept of partial novation is free from difficulty but an application for permission to amend is not the right time at which all these problems should be addressed.

In the round, the Court of Appeal allowed the proposed amendments that the banks had made implied representations in respect of the efficiency of or the non-manipulation of LIBOR and (i) the lender’s appeal from Flaux J was dismissed and (ii) the borrowers’ appeal from Cooke J was allowed: para 38.

Looks like justice was finally done and Flaux J was vindicated.

As Professor Roger McCormick has commented in the LSE Conduct Costs Project’s Group on Linkedin:

Now we can get on to the substantive case. One to watch!

And, of course, in para 1 of the judgment, Longmore LJ reminded us that in Graiseley v Barclays a trial date of April 2014 has been fixed. That is interesting because, to share its proceedings with the public, the Court of Appeal has recently allowed the cameras in. So we might just be able to watch the case because civil cases can be broadcast almost in real time; Sir John Thomas CJ himself had welcomed the move towards “open justice” by remarking that:

My fellow judges and I welcome the start of broadcasting from the Court of Appeal.



One response

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

[…] 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 court and Barclays appears to […]

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