Barclays’ appeal in ‘LIBOR test case’ dismissed by Court of Appeal

The Court of Appeal has today dismissed Barclays’ appeal in the case of Barclays Bank v Graiseley, which has been referred to as the ‘LIBOR test case’. The case of Deutsche Bank v Unitech was also decided in the favour of the customer. The Court of Appeal judgment will be of significant interest for any bank customer that has a LIBOR pegged derivatives contract (interest rate hedging product or IRHP) with a bank. The judgment makes it clear that banks that manipulated the benchmark are at significant risk in allowing cases where LIBOR fraud is well pleaded to go to trial.

The two appeals resulted from the manipulation of the London Inter-Bank Offered Rate (“LIBOR”) frequently used as a reference rate in the calculation of interest in loan agreements or swap agreements. LIBOR indicates the interest rate that banks charge when lending to each other and is fundamental to the operation of both UK and international financial markets, including markets in interest rate derivatives contracts.

In both the appeals the claimants 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.  In the Graiseley v Barclays case Flaux J on 29th October 2012 gave permission for such amendments to be made.  In the two Deutsche Bank cases Cooke J on 28th February 2013 declined to follow Flaux J and refused permission to make amendments in the two cases but gave permission to appeal.

The Court of Appeal dismissed Barclays’ appeal from the decision of Flaux J [2012] EWHC 3093 (Comm) by which the claimants, Graiseley (members of the Guardian Care Homes group), were granted permission to amend their claim to plead fraudulent LIBOR misrepresentation and LIBOR implied terms against the bank.

Lawyers acting for Barclays argued unsuccessfully that the LIBOR claims amounted to an “obligation to disclose one’s own dishonesty” which was a cause of action unknown to English law. Longmore LJ stated that such submission was inappropriate to an application for permission to amend.

LJ Longmore said at paragraphs 27 and 28 of his judgment (emphasis added):

In the present case, however, the banks did propose the use of LIBOR and it must be arguable that, at the very least, they were representing that their own participation in the setting of the rate was an honest one.  It is, to my mind, surprising that the banks do not appear to be prepared to accept that even that limited proposition is arguable.

It was also submitted that doing nothing cannot amount to an implied representation.  But it is (arguably) the case that the banks did not do nothing in that they proposed transactions which were to be governed by LIBOR.  That is conduct just as much as a customer’s conduct in sitting down in a restaurant amounts to a representation that he is able to pay for his meal.

The learned judge went on to comment at paragraph 30 that (emphasis added):

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.

The Barclays appeal was heard together with the appeal by the claimants in two related cases from the decision of Cooke J in Deutsche Bank AG & Ors v Unitech Global Limited & Or [2013] EWHC 471 (Comm). Unitech’s appeal was also allowed including on LIBOR aspects.

The Graiseley v Barclays case is now set to proceed to a trial before Flaux J in April 2014.

Full Judgment: Court of Appeal: GRAISELEY PROPERTIES LIMITED v BARCLAYS [2013] EWCA Civ 1372