The rigging of certain LIBOR rates has led to regulatory action in the UK, US and Switzerland and at EU level, and more is yet to come, including antitrust action as well as criminal proceedings against individuals.
LIBOR rates were widely used to set interest rates on loans and in interest rate swaps and other derivatives, effecting between $300 trillion and $800 trillion of transactions per year. It is therefore not surprising that customers of banks are keen to consider whether the rigging might provide defences to claims by banks and even allow the avoidance of liability on hedging that has proved to be costly and unnecessary.
Two cases are currently testing the position in English law. Both began as swaps mis-selling cases, of which there have been many in the UK. They arise out of widespread selling or imposition of swaps that were inappropriate or unnecessary. Small ‘unsophisticated’ customers have an almost automatic right to compensation under a scheme set up by the Financial Services Authority (as was) and imposed on the banks. However, substantial customers often have to resort to the courts or counterclaim if the banks proceed to enforce. In the two current test cases, the defendants sought to amend their counterclaims to add LIBOR claims, for which they needed to apply to the court for permission to amend. Both applications were in the Commercial Court, but the judges were different and the outcomes were not the same.
In October 2012, in Graiseley Properties v Barclays Bank  EWHC 3093 (Comm), Mr Justice Flaux accepted that the requirement for allowing an amendment is that it is sufficiently arguable to have a real prospect of success at trial and, in light of the regulatory findings, that test was satisfied in respect of proposed claims for implied misrepresentation and breach of implied terms. In February 2013, Mr Justice Cooke, in Deutsche Bank v Unitech Global  EWHC 471 (Comm), took a more critical approach and concluded that such claims were without any prospect of success, and refused to allow the amendments. Both decisions are being appealed and will be heard, probably together, sometime between September 2013 and January 2014.
An ideal LIBOR claim would be by a customer who had questioned the bank about LIBOR before the transaction, having had concerns about its reliability and the role of the bank in making its daily submissions in the rate fixing process, and had received false explanations and assurances in response, on the basis of which the customer decided to proceed. It is unlikely that such an ideal claim exists, as such discussions would not have taken place. Instead, it is necessary to formulate implied representations and warranties. In Graiseley they were to the following effect:
In Unitech, Cooke J felt that the use of implied representations, that were not in any way connected to, or to be inferred from, expressed representations, was too artificial and unsustainable. There was also no allegation that Unitech’s obligations under its swap were in fact effected by any manipulation, or that the deal would not have been consummated had the representations not been made. Despite cases of fraud overriding terms and conditions, the disclaimers, entire agreement and non reliance clauses and the like were also prayed in aid. The agreements had referred to LIBOR rates as they appeared on Thomson Reuters’ screens, from which the judge suggested that the rate was merely a matter of fact, however derived, and that was all the parties had in mind.
If the agreements could not be set aside for fraudulent misrepresentation, then that left claims for breach of implied terms and warranties, for which the remedy would be in damages. However, proving that there had been any damage, and determining the amount, would be impossible.
Although Cooke J probably went too far in analysing the amendments, rather than allowing them and later determining the matter at trial, he probably achieved his intention of discouraging LIBOR claims. It remains to be seen what the Court of Appeal will make of it and whether it will be willing to come to grips with the issues in LIBOR claims or merely adopt the approach of Flaux J in allowing the amendments because they are sufficiently arguable.
Paul Howcroft. Partner, Fladgate LLP (email@example.com)