On 2 March 2018 the Court of Appeal handed down its much-awaited judgment in Property Alliance Group Ltd (PAG) v Royal Bank of Scotland plc (RBS)  EWCA Civ 355, on appeal from the judgment of Asplin J (as she then was) dated 21 December 2016 ( EWHC 3342 (Ch)). The decision is essential reading for all those involved in banking and finance work, as well as for commercial litigators more generally.
The case concerned three claims:
- claims of misstatement and misrepresentation by RBS in its sale of four complex LIBOR-referenced derivatives (the “Swaps”) to PAG;
- claims in misrepresentation for rescission of the Swaps based on RBS’s manipulation of the London Interbank Offered Rate (“LIBOR”); and
- claims relating to the alleged mistreatment of PAG by RBS’s “Global Restructuring Group” (“GRG”) – the ‘turnaround’ division that has been much in the news lately as a result of ongoing inquiries by the Treasury Select Committee and the FCA.
The (then) Chancellor Sir Terence Etherton had transferred the case into the Financial List as “a test or lead case”, noting that it “involve[d] important issues of general market significance” (see  1 WLR 2783) – sentiments echoed by Patten LJ who, when granting permission to appeal, noted that the case would be “a useful vehicle for determining what are likely to be central issues in most similar cases”. The appeal was heard over 7 days by Sir Terence Etherton MR and Longmore and Newey LJJ.
As is now well known, between about 2006 and 2012 there was widespread manipulation of LIBOR by various of the ‘panel banks’ which made the submissions necessary for the calculation of LIBOR – submissions which “on some and perhaps many occasions… did not reflect the rate at which those banks genuinely thought they could borrow finds but were rather rates which were thought to benefit the banks’ trading position and/or individual traders’ bonuses” ().
A number of panel banks, including RBS, have either admitted to engaging in, or been found by worldwide regulators to have engaged in, such manipulation, resulting in the payment of large fines. There have also been actual, and deferred prosecutions, against institutions and individuals involved. PAG v RBS essentially addresses the civil consequences of the LIBOR manipulation scandal.
In summary, PAG’s case was that if it had realised that LIBOR had been manipulated, and was not truly set in accordance with the “BBA Definition” governing LIBOR, it would never have entered into the Swaps in the first place. More particularly PAG argued that, in selling the Swaps to PAG, RBS made false implied representations as to the integrity of, and its part in setting, LIBOR. Asplin J held that no representations were to be implied, on the basis that there was no sufficient words or conduct from which they could be inferred.
However, the Court of Appeal disagreed, holding that, in selling the Swaps to PAG, 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” (see  and ). This representation was to be implied because of (inter alia) the “lengthy discussions” between the parties in relation to each of the Swaps – although the Court found that such a representation “would probably be inferred from a mere proposal of the swap transaction”.
In implying the representations the Court expressly approved Colman J’s “helpful test” for implied representations (see Geest v Fyffes plc  1 All ER (Comm) 972) namely “whether having regard to the [representor’s] conduct in such circumstances, a reasonable [representee] 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”.
RBS had argued that at most the Swaps should be subject to an implied term that RBS would not manipulate GBP 3m LIBOR (the particular LIBOR currency/tenor combination in the Swaps) so as to cause loss to PAG during the term of the Swaps. The court rejected that submission (see ), observing that the law of misrepresentation and the law of implied terms fulfil different functions. As the Court put it: “A party to a contract continuing 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”.
However the Court went on to find that the implicit representation was limited in scope to the currency, albeit not the tenor, of the particular LIBOR rate referenced in the Swaps i.e. GBP (see -). Given that the Court was unwilling to interfere with the Judge’s conclusion that PAG had not proved that RBS had engaged in manipulation of GBP LIBOR rates (-), it therefore found that the representation was not falsified on the facts of the case such that the LIBOR claim failed in the result.
By the time of the appeal, the GRG claims were limited to PAG’s allegation that RBS had improperly forced it to undergo, pursuant to the bank’s standard valuation clause in the facility agreement, a revaluation of its property portfolio for no legitimate purpose.
While this aspect failed on the facts, because the Court was unwilling to overturn the Judge’s finding that the bank’s purpose was not illegitimate (and, therefore, there would be no breach of any relevant duty), the judgment is of more general interest for the Court’s findings on the scope of RBS’s duties.
PAG had argued that the bank’s revaluation power was subject to Socimer-style implicit limitations, essentially of reasonableness and rationality etc (see Socimer Int’l Bank Ltd v Standard Bank London Ltd  Bus LR 1304). However, Asplin J had held that RBS’s power was not subject to any implicit limits, but was rather an “absolute contractual right” to be exercised however RBS desired.
The Court overturned the Judge’s finding, holding (at ) that, while RBS was “free to act in its own interests” RBS’s power could only be “exercised in pursuit of legitimate commercial aims rather than, say, to vex PAG maliciously” and that, accordingly, “RBS could not commission a valuation… for a purpose unrelated to its legitimate commercial interests or if doing so could not rationally be thought to advance them”. Although this formulation differs somewhat in its wording from the usual rationality and reasonableness implied terms developed in the case law (see e.g. the Supreme Court decision in Braganza v BP Shipping Ltd  1 WLR 1661) it is difficult to see how the Court’s test would operate much differently in practice.
Misstatement / Misselling
Finally, PAG argued that RBS had made (negligent) misstatements in the explanations it gave when selling the four derivatives to PAG – in particular by giving extensive explanations of the benefits, disadvantages and operation of the instruments which omitted any indication of the actual scale of the potential ‘mark-to-market’ (or ‘MTM’) liabilities, and therefore the potential scale of break costs which crystallised on termination, under them. The Court of Appeal held that such omission did not amount to any breach of duty on the facts (see -). However, the judgment provides some useful analysis of the nature of the duty imposed on banks (and other institutions) selling complex derivatives and similar instruments to corporate/commercial clients albeit on a ‘non-advised’ basis.
Claimants in a number of previous cases in this field had developed the notion of a so-called “mezzanine” or “intermediate” duty i.e. a duty that was “less onerous than a wide duty to give advice but wider than the duty not to misstate” (). This in turn led a number of first instance judges – including in PAG itself – to speak in terms of an “advisory spectrum” of duties that might be owed in this context. (Perhaps paradoxically, this formulation was rather welcomed by the banks – the idea of a spectrum which is “advisory” fitting helpfully with banks’ standard-form ‘no advice’ exclusion clauses.)
By contrast, PAG argued, basing itself on the decision of Mance J in Bankers Trust International plc v PT Dharmala Sakti Sejahtera (No 2)  CLC 518, that there is in reality only one duty – the conventional duty of a bank not to misstate, including by way of misleading partial explanation, first and seminally described in Hedley Byrne v Heller & Partners Ltd  AC 465.
In essence, the Court accepted PAG’s submission, holding (at ) that “the expression ‘mezzanine’ or intermediate duty… is best avoided” and that “Rather, concentration should be on the responsibility assumed in the particular factual context as regards the particular transaction or relationship in issue”. Thus, the Court explained (at ) that
“What amounts to a misstatement in this context will depend upon the factual circumstances of the relationship and identification of the matter for which the defendant has assumed responsibility. It is, therefore, an elastic duty that is factually sensitive. The duty is premised on the voluntary proffering of representations by the defendant, which require further elucidation or the correction of misleading impressions on the claimant.”
Although PAG ultimately lost the appeal on the facts, the Court provided clarification of the law in all three areas, which should prove useful for both litigants and first instance judges in the various claims that have been stayed pending the outcome in PAG, as well as those that have yet to be issued.
The Court’s finding of the LIBOR implied representations in PAG v RBS will obviously be welcomed by claimants, particularly those who at the relevant time transacted LIBOR derivatives (and other instruments) with banks who have admitted manipulation in, or have been found by regulators to have manipulated LIBOR in, the relevant currency of the transaction. RBS had submitted to the Court of Appeal that the implication of such representations would have “profound implications” for it and other panel banks, and it will be interesting to see how the PAG implied representations play out in future cases.
Potential GRG claimants will similarly welcome the Court’s finding that a bank’s power in a facility agreement is subject to implied fetters. Finally, those dealing with misselling claims can now eschew the semantic contortions involved in taxonimizing the relevant duties, and instead focus on deciding whether in all the circumstances matters which the bank omitted from its explanations rendered what said misleading in context.
XXIV’s Adam Cloherty acts for PAG, instructed by Bird & Bird LLP partner Michael Brown.
If your firm would be interested in a seminar on the issues arising from PAG v RBS, or on connected fields, please contact James Ladbrook.