The Court of Appeal's ruling, however, could open banks up to other claims of misrepresentation in respect of financial instruments they sold that were referenced against LIBOR, an expert in banking litigation has said.
Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law.com, said last week's Court of Appeal judgment is the highest level authority relating to the ability of customers to get out of contracts where their banks were engaged in the manipulation of the LIBOR rate.
LIBOR rates are the daily reference rates for different currencies and durations based on the interest rates at which banks can borrow unsecured funds from other banks, and those rates are used to underpin the pricing of more than $350 trillion worth of financial instruments around the world. It is one of eight benchmark rates regulated by the UK's Financial Conduct Authority (FCA). LIBOR has been administered by ICE Benchmark Administration (IBA) since February 2014, when it took over the role from the British Banking Association.
In the case before the Court of Appeal, property developer and investment company Property Alliance Group (PAG) was seeking to overturn an earlier ruling by the High Court. PAG's arguments centred on what it believed RBS should be said to have implied at the time it offered to enter into swaps with the company.
PAG argued that, just by offering to sell sterling LIBOR referenced swaps RBS had impliedly said to the company that RBS had not been engaged in any misconduct relating to its LIBOR submissions, and claimed that if it had known about such misconduct then it would not have entered into the swaps with the bank. As a result, it said the swaps executed should be rescinded and that it was entitled to reimbursement of the payments it had made.
However, the Court of Appeal dismissed PAG's claims that although RBS had made an implied representation about its conduct concerning LIBOR, that representation did not apply to LIBOR rates generally, but just to sterling LIBOR rates. This was on the basis that only sterling LIBOR was relevant to the swaps.
The representation which the Court of Appeal found that RBS had impliedly made was that it was not at the date of the swaps manipulating nor intending to manipulate the sterling LIBOR rates. That representation was held to be true, because there have been no adverse regulatory findings against RBS in relation to sterling LIBOR and neither had the company proved the existence of any such conduct.
Mike Hawthorne said that similar cases could go against banks where there have been adverse regulatory findings made against those banks in relation to the specific LIBOR rate they reference against under their contracts with customers.
This assessment is supported by the Court of Appeal's view that a bank selling a LIBOR referenced financial instrument is to be taken to impliedly represent that it is not manipulating or intending to manipulate the LIBOR rates in the relevant currency, he said.
It is possible, though, that standardised terms contained in the master agreement for swaps contracts developed by the International Swaps and Derivatives Association (ISDA), could help banks defeat any future claims brought against them, Hawthorne said. Those 'non-reliance' clauses provide that parties to the contracts cannot rely on representations made that are not expressly set out in the contract. The only exception is where the representations are made fraudulently.
The Court of Appeal did not have to rule on that question in the RBS case.
"The question would turn on whether the implied LIBOR misrepresentation was made fraudulently, and that is a whole other story," Hawthorne said. "There is a serious conceptual question about how the 'intention to mislead' component of a fraudulent misrepresentation could be fitted into an un-said, implied, misrepresentation."
"In the normal case, the sales people who actually spoke to the customer would not have known anything at all about how the bank went about preparing their LIBOR submissions, so it is hard to see how their failure to reveal that there was misconduct in relation to submissions in a particular currency could be held to have been fraudulent. Unsatisfactory as it may be, this rather abstract question about whether silence on the part of someone who does not know the true fact anyway, is likely to be the battleground for the next chapter in the LIBOR litigation saga," he said.