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Court of Appeal gives judgment in bank “test case” on swaps mis-selling, LIBOR and GRG


The Court of Appeal has today (2nd March 2018) given judgment in Property Alliance Group Limited v The Royal Bank of Scotland PLC [2018] EWCA Civ 355, which is set to become the leading modern authority on claims against banks in the context of derivatives. The case will be of particular interest to those bringing claims against banks in relation to LIBOR-rigging, and other market manipulation, as well as in relation to RBS’s controversial Global Restructuring Group (or GRG). RBS itself submitted to the Court of Appeal that this case has implications for a large number of subsequent LIBOR actions against both RBS and other panel banks, and referred to the “profound implications” for English law.

The Appellant, Property Alliance Group (“PAG”), brought proceedings against RBS in 2013 alleging that it had been mis-sold four interest rate Swaps referable to GBP 3 month LIBOR, and placed into and handled within GRG in breach of implied terms in its agreements with the Bank. PAG also alleged that it was entitled to rescind the Swaps on the basis of implied representations concerning the authenticity and integrity of LIBOR, the interest rate benchmark in the contracts.  PAG alleged that such representations were false and fraudulent due to the manipulation of LIBOR as recorded, inter alia, in the Regulatory Findings against RBS.

On the basis of the importance of the issues to financial markets parties generally, the action was transferred to the Financial List as a “test case” by The Chancellor and was tried by Asplin J. Following a 10-week trial in the summer of 2016, PAG’s claims were dismissed: [2016] EWHC 3342 (Ch).  PAG appealed. Patten LJ, when granting permission to appeal, described the appeal as a “vehicle” to determine a number of important issues in banking law. The Master of the Rolls ordered that, given its “test case” status, the appeal be expedited and reserved the 7-day hearing to himself, sitting with Longmore and Newey LJJ.

On PAG’s Swaps Claims, the Court of Appeal has given the first consideration at the appellate level to Mance J’s (often overlooked) decision in Bankers Trust International plc v PT Dharma Sakti Sejahtera [1996] CLC 518. The Court held that the Bankers Trust decision was an orthodox form of Hedley Byrne liability for negligent misstatement.  It was “an elastic duty that is factually sensitive”. The Court went on to state that in exceptional cases, a defendant may assume a responsibility to speak, referring to an earlier Court of Appeal decision in the context of a bank taking upon itself to explain a transaction to a customer (Cornish v Midland Bank [1985] 3 All ER 513). The Court of Appeal also said that the concept of a “mezzanine” duty, coined in the Crestsign v RBS case, is ‘best avoided’. On the facts, however, PAG did not establish breach on the facts.

The Court next considered PAG’s LIBOR claims, which concerned the implied representations previously held to be arguable in Graiseley Properties v Barclays Bank [2013] EWCA Civ 1372. On the question of whether those representations were implied, which RBS itself described as “the most important legal issue in the case”, the Court of Appeal agreed with PAG that there was sufficient conduct on RBS’s part for such a representation to be implied, and thus allowed PAG’s appeal against the Judge’s rejection of any such implied representation. The Court reformulated the implied representation and (at paragraph 133) held it to be “to the effect that RBS was itself not manipulating and did not intend to manipulate LIBOR”.

Of particular legal interest is the Court’s endorsement of the “helpful test” formulated by Colman J in Geest v Fyffes [1999] 1 All ER (Comm) 672, namely that the existence of an implied representation can be tested by whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it. This is the first time that the “helpful test” has been considered at appellate level and may now (having been so endorsed) gain a wider currency in the field of misrepresentation.

The Court went on to hold that the scope of such representation was, however, limited to the currency of the relevant Swap, in this case GBP.  The Judge had found that RBS’s LIBOR manipulation did not extend beyond the admitted misconduct in relation to Swiss Franc and Japanese Yen LIBOR (as recorded in the regulatory findings of the FSA, DoJ and CFTC against RBS). Since the LIBOR Representation RBS had made to PAG (concerning GBP LIBOR) was not false, PAG’s claim for misrepresentation failed at that stage on the facts. The Court left open important questions of law as to the requirements for fraud and reliance in the context of implied representations founded on a party’s assumptions.

Finally, in relation to the GRG part of the appeal, the Court of Appeal held (again, overturning the Judge) that a term did fall to be implied limiting RBS’s right to call for valuations of PAG’s portfolio, namely that it could exercise such contractual right “for a purpose unrelated to [RBS’s] legitimate commercial interests or if doing so could not rationally be thought to advance them”. On the facts, however, the Court held that there was no basis for disturbing the Judge’s conclusion that the valuation called by RBS in 2013 was not in breach. The implication point is likely to be of general legal interest, but particularly so in subsequent GRG cases, not least in light of the publication of the full FCA s.166 “skilled person’s report” into the conduct of this (now disbanded) division of RBS.

The Court of Appeal refused PAG permission to appeal the LIBOR decision to the Supreme Court.

The judgment appears here.

Tim Lord QC and Ben Woolgar appeared for PAG in the Court of Appeal, instructed by Bird & Bird.