A three-judge panel of the U.K. Court of Appeal ruled that investors in an action with global financial institutions involving derivatives agreements could amend their pleading to allege that the firms made implied representations as to the efficiency of or the non-manipulation of LIBOR. The financial institutions did propose the use of LIBOR, said the court, and it is arguable that, at the very least, they were representing that their own participation in the setting of the rate was an honest one. 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 the view of Lord Justice Longmore writing for a unanimous panel, be amenable to a strike out application. (Graisley Properties Limited & ORS v. Barclays Bank PLC and Deutsche Bank PLC, Court of Appeal (Civil Division), EWCA Civ 1372, Nov. 8, 2013.
LIBOR. LIBOR is a benchmark used to gauge the cost of unsecured borrowing in the London interbank market and sets the price for derivatives and other financial contracts worldwide. LIBOR is an integral part of the modern financial system, referenced in a huge number and variety of derivatives and other financial contracts. Although LIBOR is calculated in London, it is based on daily submissions from a number of international banks and is used as a global benchmark.
Swaps agreements. The appeals resulted from the distortion or manipulation of LIBOR in the calculation of interest in the swap agreements. In the appeals, the financial institutions are endeavoring to recover sums due under such agreements and the borrowers sought permission to amend their pleadings to allege that the banks made implied representations as to the efficiency of or the non-manipulation of LIBOR.
The court rejected the idea that doing nothing cannot amount to an implied representation. The banks did not do nothing in that they proposed transactions which were to be governed by LIBOR. The court reasoned that is conduct just as much as a customers’ conduct in sitting down in a restaurant amounts to a representation that they are able to pay for their meal. 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. But in the court’s view, that 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, emphasized the court, and, if in the end it cannot do so, that should only be after a proper trial.