The English Court of Appeal handed down a significant judgment in what was designated as a test case on misrepresentation concerning LIBOR referenced interest rate hedging swaps. In Property Alliance Group ("PAG") v Royal Bank of Scotland ("RBS") [2016] EWHC 3342 (Ch) the Court of Appeal dismissed all of PAG's grounds of appeal and overturned a finding of fraudulent misrepresentation against RBS. The Court of Appeal decision provides clarity, in particular for LIBOR setting banks, and will affect current mis-selling claims.

The case concerned LIBOR-referenced finance agreements PAG executed with RBS which required that PAG enter into interest rate hedging instrument(s) deemed acceptable by RBS. The proceedings concerned four such swap transactions entered into between 2004 and 2008 (the "Swaps"). When interest rates fell dramatically between 2007-2008, the level of interest that PAG was paying under the Swaps substantially exceeded what it was receiving under them. This impacted the break costs, which, when PAG terminated the Swaps in 2011, amounted to £8.261 million. RBS had earlier transferred its relationship with PAG to GRG in 2010, who then instigated valuations of the properties held by PAG over which RBS held security. PAG sought rescission of the Swaps and/or damages. PAG was unsuccessful at trial. On appeal, four key issues were considered by the Court of Appeal, namely whether:

  • RBS fraudulently made implied representations about LIBOR;
  • RBS acted wrongly by having PAG's portfolio revalued in August 2013;
  • RBS may be liable in tort for negligent misstatement as a result of an alleged failure to provide PAG with information about potential break costs; and
  • RBS falsely represented to PAG that each of the Swaps was a "hedge" and would reduce PAG's interest rate risk.

In a memorandum, Cadwalader attorneys analyzed the Court of Appeal's findings with respect to these four issues.

The decision provides important clarification on the law of negligent misstatement and, in particular, whether a broader duty beyond a duty not to misstate is owed. The Court rejected the concept of a mezzanine duty which some, (but not all) first instance judgments had suggested may sit between the separate duties to give full advice and to not misstate. Consequently, the case reflects a confirmation of the orthodox view, namely that, in a non advisory relationship, a bank owes a duty not to misstate but is not required to explain the effect of a transaction.

Of likely significance to the broader market is the identification of an implied representation as to LIBOR where a bank has proposed a transaction based on LIBOR – provided that the proposed currency denominated LIBOR rate is that in which there is a finding or admission of manipulation. Claimants will still need to prove reliance on the representation, that the representations were false (in light of likely contractual exemptions or qualifications), and that the relevant institution intended to make a representation it knew to be false.

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