The Court of Appeal (Sir Terence Etherton MR, Longmore LJ and Newey LJ) handed down judgment in the highly anticipated appeal from Asplin J’s decision in Property Alliance Group Ltd v The Royal Bank of Scotland Plc  EWHC 207 (Ch). The litigation has been viewed as a “test case” by potential Claimants alleging the mis-selling of complex derivatives. This judgment is now the leading authority on claims concerning a customer’s ability to rescind contracts with a bank that has manipulated the London Interbank Offered Rate (LIBOR).
The Court of Appeal dismissed the £30 million appeal brought by Property Alliance Group (PAG) on the sale of interest rate hedging products and the bank’s exercise of its contractual facility rights. Although the Court dismissed all four of PAG’s claims on the facts, two legal principles have been decided that may pave the way for future claims against banks.
It has been reported that it is likely that PAG are likely to seek a direct appeal to the UK Supreme Court.
Court of Appeal decides two legal principles to protect customers from banks
The good news for potential Claimants against banks was two-fold. Firstly, the Court of Appeal found that there was certainly an implied representation that the Royal Bank of Scotland (RBS) was not manipulating and did not intend to manipulate LIBOR when it entered into a Swaps agreement. Although the scope of this representation failed on the facts, the re-formulation of this legal principle by the judiciary in banking law provides welcome encouragement for potential litigants that have been mis-sold LIBOR-linked derivatives and are suing banks that have been at fault for manipulating this key benchmark.
Secondly, it was held that RBS’s (through GRG) contractual facility rights to call for valuations of a customer’s assets was not unfettered but subject to an implied term that it could only be exercised for a purpose related to the bank’s “legitimate commercial interests”. This paves the way for stronger arguments against GRG, especially given the publication of the section 166 skilled person’s report. Future Claimants may be able to rely on this implied term and the evidence in the section 166 report and the “Just Hit Budget” memo to decisively to a Court that GRG did indeed exercise its facility rights not for “legitimate commercial interests”.
PAG v RBS : Summary of the facts
PAG is in the business of property investment and development and has a portfolio of industrial sites, offices, retail and leisure properties. RBS was PAG’s primary source of commercial banking facilities and entered into 11 transactions in derivatives between 2003 and 2014. PAG employed banking specialists and took advice from a leading derivatives advisory firm to consult on strategies including interest rate hedging.
The proceedings focus on four Swaps sold to PAG between 2004 and 2008. The first Swap was a cancellable “Multi Callable Libor Value Collar” for a notional amount of £10 million referenced to 3 month LIBOR. In simple terms, no matter how high the 3 month LIBOR rate went up, PAG would pay interest at no more than 6.25% and if the 3 month LIBOR rate fell below 3.30%, PAG would pay interest at 5.25% and would be liable to pay a break cost. The second Swap was a “Libor Cancellable Discount Swap (Bank)” for a notional amount of £15million for 4 years and then £30million for a further 6 years, referenced to LIBOR. The third Swap was a cancellable “Libor Collar” for a notional amount of 20 years for up to five years. The fourth Swap was a cancellable “Switchable LIBOR to base rate callable Swap” for a notional amount of £15million up to a five year term.
In 2010, RBS transferred PAG to the auspices of its Global Restructuring Group (GRG). GRG proceeded to demand valuations of PAG’s properties over which RBS held security. In 2011, PAG terminated the Swaps and incurred a break cost of over £8 million. In 2014, PAG sought funding elsewhere, securing a facility with HSBC, and completed repayment of all outstanding indebtedness to RBS by July 2014.
PAG v RBS : Summary of the proceedings
In 2013, PAG issued proceedings against RBS and sought rescission of the Swaps and/or damages. In 2016, PAG alleged to the High Court it had been mis-sold four interest rate Swaps referable to GBP 3 month LIBOR. PAG asserted that they were entitled to rescind the Swaps due to the implied representations made by RBS on the authenticity and integrity of LIBOR. PAG alleged that RBS’s representations were both false and fraudulent due to the manipulation of LIBOR, which had been proved by the regulatory findings against RBS. In addition, PAG alleged that GRG breached implied terms in their facility agreement and thereby abused its discretion and acted in bad faith. The Hon. Mrs Justice Asplin dismissed the Swaps, LIBOR and GRG claims in their entirety.
PAG appealed the High Court decision. Lord Justice Patten when granting PAG permission to appeal, described the case as a “vehicle” to determine important issues in banking law. PAG relied on certain points in the Court of Appeal, namely:
- Negligent Misstatement Claim: A claim that RBS is liable in tort for negligent misstatement as a result of its failure to provide PAG with information about potential break costs;
- Misrepresentation Claim: A claim that RBS falsely represented to PAG that each of the Swaps was a “hedge” and, hence, that they would reduce PAG’s interest rate risk;
- LIBOR Claims:A claim that RBS fraudulently made implied representations about LIBOR and how it was set; and
- Valuation Claim:A claim that RBS was wrong to have PAG’s portfolio revalued in August 2013.
Although the Court of Appeal unanimously dismissed PAG’s appeal, the points of law formulated in the LIBOR claims and Valuation claim may pave the way for future claims against banks accused of manipulating LIBOR and who have sold LIBOR-linked derivatives.
Claimants can rely on a banks’ implied representation that it was not and will not manipulate LIBOR when selling a Swap
The question answered by the Court of Appeal on whether the bank’s LIBOR representations could be implied was described by RBS as “the most important legal issue in the case”. RBS lost this legal issue as the Court found that there was enough conduct on RBS’s part for such a representation about LIBOR to be implied. An important principle in banking law has been elucidated at the highest level thus far: a bank which sells a LIBOR referenced derivative will be taken to impliedly represent that it has not and will not manipulate LIBOR. If a Claimant can show that that a bank manipulated LIBOR for the particular currency to which the Swap is referenced, then there are potentially grounds to rescind the contract.
RBS’s “deeply shocking” misconduct undermined the integrity of LIBOR
The importance of the LIBOR claims lies in the fact that RBS has been found guilty of manipulating LIBOR. Between 2006 and 2012, it is widely accepted that on many occasions submissions were made by panel banks which did not reflect the rate at which those banks legitimately believed they could borrow funds but were instead rates which were thought to benefit the banks’ trading position. The Financial Services Authority (FSA) (now known as the FCA) investigated widespread LIBOR manipulation and in particular found that RBS had committed substantial breaches of Principles 3 and 5 of the Principles for Businesses. These breaches resulted in a fine of £87.5 million for RBS in February 2013.
The FSA concluded that RBS’s misconduct undermined the integrity of LIBOR- in particular with the manipulation of rates that formed part of the calculation of Japanese yen and Swiss franc LIBOR. The Court did strongly chastise RBS for its LIBOR manipulation and noted that the admitted manipulation of Japanese yen LIBOR and Swiss franc LIBOR was “deeply shocking”. However, crucially for PAG’s case, no specific findings were made in relation to GBP LIBOR and as such there have been no regulatory findings of misconduct on the part of RBS in connection with GBP LIBOR.
When a bank says nothing about LIBOR there is an implied representation that their role in the setting of LIBOR was an honest one
PAG’s claim was that, if it had realised LIBOR was manipulated, it would never have agreed to enter into the Swaps in the first place and as such, the Swaps should be rescinded. No such representation was expressly made by RBS, so therefore the question was whether this representation could be implied. PAG alleged that 4 representations should be implied from RBS’s conduct in proposing the Swap contracts; however, the Court proceeded on the simpler formulation that “RBS was representing that, at the date of the Swaps, RBS was not itself seeking to manipulate LIBOR and did not intend to do so in the future”.
There has not been a substantial amount of authority on the material required for the making of an implied representation for a banking transaction, The Court considered the interlocutory observations in Graiseley Properties Ltd v Barclays Bank plc  EWCA Civ 1372 and determined that to some extent, these comments should represent the law. In Graiseley, Longmore LJ strongly disagreed with the submission that when nothing was said by a bank in connection with LIBOR, there was no obligation to disclose its own dishonesty:
“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, see DPP v Ray  AC 370, 379D per Lord Reid.”
Graiseley Properties Ltd v Barclays Bank plc  at para 27- 28
The Court assented to Longmore LJ’s reasoning that when a bank says nothing about LIBOR, there is an implied representation that “their own participation in the setting of the rate was an honest one”. Therefore, there was sufficient conduct on the bank’s part for such a representation to be duly implied. The Court rejected RBS’s submission that it would be wrong to hold that any representation should be implied as it “covered ground which would normally be covered by an implied term”. The Court found that a counterparty should be able to rely on misrepresentation:
“We do not accept this submission since the law relating to misrepresentation fulfils a different function from the law relating to implied terms. The former deals with the present not the future and gives potential remedies which may be more appropriate than a claim for damages. A party to a contract containing a Swap needs to be certain of the counterparty’s honesty at the beginning of the deal not just in the future but throughout its course. If a Claimant has suffered no loss, that may be relevant to remedy but should not exclude a right to rely on misrepresentation if any misrepresentation has occurred.”
Property Alliance Group Ltd v The Royal Bank of Scotland Plc  at para 125
Court re-formulated Colman J’s “helpful test” on the existence of an implied representation
As well as accepting the reasoning of Longmore LJ in Graiseley, the Court also considered Geest plc v Fyffes plc  1 All ER (Comm) 672 and endorsed Colman J’s “helpful test”:
“In evaluating the effect of the beneficiary’s conduct a helpful test is whether, having regard to the beneficiary’s conduct in such circumstances, a reasonable potential surety would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it.”
Geest plc v Fyffes plc  at p683
Therefore, the Court endorsed the test that the existence of an implied representation can be found if a reasonable potential surety would naturally assume that the true state of facts did not exist and that if it did, he would necessarily be informed of it. This is the first occasion where this “helpful test” has been considered at this level and may now pave the way for future misrepresentation claims. The approval of the dicta of Colman J is an important win for potential Claimants on this essential point of law, but it must be noted that there must be clear words and/or conduct from a bank from which the representation can be implied.
“RBS did make some representation to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR”
Having reformulated the implied representation test, the Court did find that RBS had indeed made an implied representation to PAG that it was not manipulating LIBOR:
“In the present case there were lengthy discussions between PAG and RBS before the Swaps were concluded as set out by the Judge in the earlier part of her judgment….RBS was undoubtedly proposing the Swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts. In these circumstances we are satisfied that RBS did make some representation to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR.”
Property Alliance Group Ltd v The Royal Bank of Scotland Plc  at para 133
Therefore, the Court disagreed with Asplin J’s judgment that the proffering of Swaps was “not in the context of this case conduct from which any representation could be inferred”. There was an implied representation by RBS that it was not manipulating LIBOR when it sold PAG the Swaps. The door has been opened for misrepresentation claims to be brought by a counter-party to derivative which is linked to LIBOR, where the Swap is with a LIBOR panel bank which has been found to have engaged in the manipulation of LIBOR.
Implied representation cannot extend further than particular transactions induced by representations
PAG’s LIBOR claim failed on the facts because, although the Court found that there was an implied representation that RBS was not manipulating and did not intend to manipulate LIBOR, the manipulation was limited to Swiss franc LIBOR and Japanese yen LIBOR and crucially there was no factual finding that GBP LIBOR had been manipulated and the Swaps in PAG’s case were specifically referenced to the latter.
Representation extends to all tenors of GBP LIBOR but not to LIBOR in other currencies
The Court was unwilling to extend the scope of the representation to a currency to which the Swaps were not referenced. PAG contended that RBS should be held to have made general representations about “LIBOR encompassing every tenor and every currency”, whereas RBS claimed that any such representation should be confined solely to 3 month GBP LIBOR. The Court did not go as far as either contention. It was found that RBS during its discussions with PAG had made an implied representation and this representation extended to all tenors of GBP LIBOR, but not to LIBOR in other currencies.
The approach of Flaux J in Graiseley was raised by PAG, Flaux J having noted that:
“it is a wholly artificial exercise to seek effectively to divide up the various LIBOR fixings or manipulations into separate currencies. It is quite clear that there was fixing not only of sterling LIBOR but also of dollar LIBOR and of EURIBOR, and that, as I said during the course of argument, there is inevitably scope for cross-infection here.”
Graiseley Properties Ltd v Barclays Bank plc  at para 19
The court recognised the issue of “cross infection” but distinguished RBS because the main sterling submitter for RBS was a different person to other currency submitters.
The Court did strongly chastise RBS for its LIBOR manipulation and noted that the admitted manipulation of Japanese yen LIBOR and Swiss franc LIBOR was “deeply shocking”. But decisively, “that is not, of itself, a reason for holding that representations made to PAG should go further than representations about the sterling LIBOR rate.” Although the Court were clear that “any implied representation cannot legitimately extend further than the particular transactions allegedly induced by the representations”, the door was left open to extending the scope of implied representation if the facts of a case so dictate. Future cases may test the boundaries of the scope of implied representation. One such example of when the “cross-infection” argument may become relevant was raised by the court: “If, of course, a submitter in yen or Swiss francs had also made sterling submissions, that might render false the representation about sterling LIBOR”.
The Court’s reformulation of Colman J’s helpful implied representation test failed on the facts of this case because although there was an implied representation, due to the particular derivative sold, this was not misrepresentation. Nevertheless, future Claimants will be assured that the Court left open the possibility of future cases extending the scope of implied representation beyond the particular transactions induced in this case.
RBS’s contractual facility right to call for valuations of security is not unfettered but subject to an implied term that it can only exercise its’ right for “legitimate commercial aims”
Under the provisions of one of the facility agreements with the bank, RBS had the right to require a valuation at PAG’s cost of all of the assets over which it held security. Clause 21.5.1 of the 2011 facility provided as follows:
“The Lender [i.e. RBS] may, at any time, require the Valuer to prepare a Valuation of each Property [i.e. each of the properties over which RBS held security]. The Borrower [i.e. PAG] shall be liable to bear the cost of that valuation once in every 12 month period from the date of this Agreement or where a default is continuing.”
PAG advanced the argument that this contractual right was not unfettered but was subject to an implied term, of the kind found in Socimer International Bank Ltd v. Standard Bank London Ltd  EWCA Civ 116, requiring RBS to act:
“reasonably, in a commercially acceptable or rational way, in good faith, for a proper purpose (i.e. the purpose for which such power or discretion was conferred), not capriciously or arbitrarily and not in a way that no reasonable lender, acting reasonably, would do” (to quote from the Particulars of Claim).
Property Alliance Group Ltd v The Royal Bank of Scotland Plc  at para 162
PAG argued that GRG’s request for valuation was arbitrary and pointless because, according to a witness statement from an RBS manager, RBS had decided by May 2013 against refinancing PAG and clause 21.5.1 was exercised without rational reason after this time in August 2013. Moreover, the convincing argument was advanced that if clause 21.5.1 was not constrained by a Socimer-type implied term, then “there would have been nothing to stop RBS requiring a valuation every week or even every day.”
On the other hand, Mrs Justice Asplin in the High Court agreed with RBS’s submission that a Socimer-type implied term did not arise as clause 21.5.1 had been inserted primarily for RBS’s benefit and RBS was (in her view) not obliged to take account of PAG’s interests when deciding to invoke the provision.
Socimer-type implied terms accepted to limit a bank’s exercise of contractual rights
The Court of Appeal examined the Socimer line of authorities and looked favourably upon the previous authorities submissions on implied terms. Rix LJ in Socimer held:
“It is plain from these authorities that a decision-maker’s discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused.”
Socimer International Bank Ltd v. Standard Bank London Ltd  at para 66
Moreover, in Paragon Finance plc v Nash  EWCA Civ 1466, Dyson LJ submitted that power was not completely unfettered and an “implied term is necessary in order to give effect to the reasonable expectations of the parties.” Jackson LJ agreed in Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd  EWCA Civ 200 that, where there was a one-sided contract under which only one party is permitted to exercise discretion (such as RBS’s right to demand a valuation pursuant to the 2011 facility agreement), there is an implied term “that the relevant party will not exercise its discretion in an arbitrary, capricious or irrational manner”, which is “extremely difficult to exclude”.
The Court of Appeal adapted the Socimer-type implied term. In accepting PAG’s appeal on this point of law, the power conferred by clause 21.5.1 “was not wholly unfettered” and:
“In the circumstances, it seems to us that RBS must have been free to act in its own interests and that it was under no duty to attempt to balance its interests against those of PAG. It can, however, be inferred that the parties intended the power granted by clause 21.5.1 to be exercised in pursuit of legitimate commercial aims rather than, say, to vex PAG maliciously. It appears to us, accordingly, that RBS could not commission a valuation under clause 21.5.1 for a purpose unrelated to its legitimate commercial interests or if doing so could not rationally be thought to advance them.”
Property Alliance Group Ltd v The Royal Bank of Scotland Plc  at para 169
Therefore, the Court has formulated an important principle and accepted Socimer-type implied terms in banking law: contractual facility rights of banks which are one-sided in their application are subject to an implied term that their exercise must not be for a purpose “unrelated to its legitimate commercial interests.” Contractual powers must not be used to “vex [a customer] maliciously”.
On the facts, PAG’s claim failed as “there is no reason to doubt [Asplin J’s] conclusion that RBS was entitled to commission the 2013 valuation and to recover its cost from PAG.” However, although PAG could not prove GRG’s exercise of their contractual facility rights was used to “vex maliciously”, perhaps the overwhelming evidence gathered against GRG will ensure a Court is more likely to accept this submission in the future.
Relevance to those Mis-sold Complex Derivative Products?
Future Claimants may have a stronger case that they were wrongfully transferred to GRG
PAG claimed it was wrongfully put into RBS’s GRG unit at a time when it was trading well. However, PAG can be distinguished from other potential Claimants- especially those indirectly referenced in the section 166 report. PAG were a particularly unworthy Claimant for reasons explained by Asplin J, including rejecting the advice of a leading derivatives advisory firm on the first Swap; leasing a private jet and trading 58 currency forwards to hedge its FX exposure and requesting quotes to convert its debt to Japanese yen and Swiss francs to take advantage of their low interest rates. In PAG’s case, RBS were arguably entitled to act as they did when they transferred the business to GRG as the bank were concerned that the business was incurring exorbitant costs on a private jet and significant entertainment costs whilst it had a very high LTV and market conditions were worsening at the time in 2008. Perhaps future litigants will be deemed a more deserving Claimant by a Court, especially given the publication of the section 166 report.
Opens the door for Claimants to rescind a LIBOR-linked derivatives contract if an implied representation that a bank is not manipulating LIBOR is made out
On the LIBOR claim, the court clarified the interlocutory observations in Graiseley and reformulated Colman J’s “helpful test” in Geest. An important legal principle in banking law has been accepted at the Appellate level: a bank which sells a LIBOR referenced derivative will be taken to impliedly represent that it “was itself not manipulating and did not intend to manipulate LIBOR.” If a Claimant can show that that a bank manipulated LIBOR for the particular currency the Swap is referenced to (e.g. through regulatory findings), then there are grounds to rescind the contract. This ruling opens the door for customers to argue that an implied misrepresentation by a bank is a ground to rescind a derivatives contract.
Publication of section 166 report will add evidence to the principle that a bank cannot exercise its contractual facility rights for a purpose that does not not reflect a “legitimate commercial aim”
The Court’s acceptance of Socimer-type implied terms ensures that a bank cannot exercise its contractual rights in an unfettered away and for a purpose that does not reflect a “legitimate commercial aim”. PAG claimed that GRG had forced them to pay for valuations of property which they felt were unnecessary. Although on the facts, PAG’s claim failed, many customers feel that GRG used such clauses as form of punishment to artificially distress their businesses. A full discussion on RBS GRG’s parasitic treatment of SMEs can be found in our article. The Court’s acceptance that the abuse of a contractual term can be used in an argument against a bank will prove encouraging for former customers of GRG, especially given the publication of section 166 report and other damning evidence such as the “Just Hit Budget” memo, which may go some way in proving the intention that GRG did indeed exercise rights in a way that did not reflect a “legitimate commercial aim”.
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