In its judgment handed down on 8 November 2013, the Court of Appeal unanimously allowed the appeal by Unitech Global Limited (UGL) and Unitech Limited (Unitech) against the decision of Mr Justice Cooke ([2013] EWHC 471 (Comm)), thus permitting UGL and Unitech to proceed to trial with those aspects of their case against Deutsche Bank AG that concern the manipulation of LIBOR (the London Interbank Offered Rate), a key reference rate used in the financial system.
The case involves: (1) a claim by Deutsche Bank and other banks against UGL and Unitech (as guarantor) for repayment of a loan of $150 million made to UGL in 2007, and (2) a claim by Deutsche Bank alone against Unitech (again, as guarantor of UGL’s liabilities) for sums alleged to be due under an interest rate swap agreement entered into by Deutsche Bank and UGL at the same time. UGL and Unitech defend the claims, and make counterclaims, on several grounds, including that they were required to enter both agreements as part of a single package, which they were induced to enter by Deutsche Bank’s misrepresentations as to the suitability of the interest rate swap for UGL and Unitech’s needs.
UGL and Unitech sought to introduce a further aspect to their case, arising from the fixing of LIBOR which has come to light over the past couple of years. LIBOR is (or should be) the average interest rate which a panel of leading banks in London estimate that it would cost to borrow from each other. The new case is that, before the Credit Agreement and interest rate swap were entered into, Deutsche Bank made representations to UGL and Unitech, by its conduct or by implication, to the effect that LIBOR was a genuine average of the panel banks’ good faith estimates of their borrowing costs, and that Deutsche Bank had not acted, was not acting, would not act and had no intention of acting in such a way as would undermine the integrity of LIBOR, and that it was not aware of any conduct on its part or that of any other bank which would do so.
Reversing the decision of Mr Justice Cooke, the Court of Appeal permitted UGL and Unitech to plead this case, which must now proceed to trial. The importance of this decision is that the Court has held that:
- It is arguable that, at the very least, Deutsche Bank was representing that its participation in the setting of LIBOR was an honest one. Lord Justice Longmore commented that any case of implied representation is fact-specific and it is dangerous to dismiss summarily an allegation of implied representation in a factual vacuum.
- It is arguable that the bank’s reliance on disclaimer and entire agreement clauses is misplaced when the allegation is that the contracts were fraudulently induced; this cannot be determined on a summary basis.
- It is not the function of the court at the interim stage of the proceedings to be too selective about the precise representations which the parties wish to advance; these can be considered by the trial judge once he has a full picture of the disputes between the parties.
This, along with Graiseley Properties Limited and ors v. Barclays Bank plc, which was heard by the Court of Appeal at the same time, is now the leading case on the arguability of LIBOR manipulation claims against banks.
Another important aspect of the Court of Appeal’s decision is that it held that:
- It is arguable that the term “novation”, which is commonly used in loan agreements to describe the mechanism by which lenders joining a syndicate can accede to the loan agreement, is not being used in its strict legal sense, under which the existing contract is discharged and replaced by a new one. The interchangeability of this method of accession with the alternative mechanism described as “assignment, assumption and release”, which does not discharge the loan agreement, indicates that the loan agreement may not be discharged even by the mechanism called “novation”. Thus the accession of a new lender would not bar rescission of the loan agreement.
- It is arguable that, even if novation is being used in its strict legal sense, there was only “partial novation”, so that the claimant lenders which took an interest in the loan by this route became parties to a new contract, freed of the equity of rescission, whereas the other parties (whether the original lender, or the other new lenders which had joined the syndicate by “assignment, assumption and release”) remained bound under the original Credit Agreement, which was still capable of being rescinded (on the grounds, for example, that it had been induced by misrepresentation).
This aspect of the Court of Appeal’s decision may have significant implications for the rights of borrowers and lenders under syndicated loan agreements.
Michael d’Arcy is acting for UGL and Unitech. He was led by John Brisby QC and instructed by Stephenson Harwood LLP.
Full text of the Judgment available here.