Summary

In the face of evidence that a bank had made representations to the effect that it had not sought to manipulate LIBOR rates and would not seek to do so, a judge hearing a claim based on losses incurred by the bank's customer as a result of terminating interest rate swap agreements had erred in concluding that no representation could be implied from the bank's conduct in offering the swaps. However, the judge had found as a fact that there was no evidence of actual manipulation by the bank of sterling LIBOR and the appeal court was in no position to form a view of its own on that issue.

Facts

An investment company appealed against the dismissal of its claims against the respondent bank arising out of interest rate swap agreements.

The bank advanced funds to the appellant at interest rates referenced to the London Inter-bank Offered Rate (LIBOR), which was published after receiving submissions from panels of banks on borrowing rates. The funding agreements were subject to the parties entering into an interest rate hedging instrument acceptable to the bank. The bank sold interest rate swaps to the appellant under agreements which provided that break costs might be payable if the appellant brought the swap to an end before maturity and interest rates had declined. It was the bank's practice to make provision for potential default by a swap counterparty by calculating what it might come to be owed on a "worst case scenario" basis (CLU figure). Shortly after the last swap was entered into, the relevant LIBOR reduced dramatically and the appellant terminated the swaps, incurring a substantial break cost. The appellant brought unsuccessful claims on the grounds that the bank was liable under the principle in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465 for failing to illustrate the "worst case scenario" on the potential break costs prior to the making of each swap contract; that it had misrepresented each of the swaps as a "hedge" which would reduce the appellant's interest rate risk; and that false representations could be implied from the bank's conduct in relation to its submissions on LIBOR rates.

Held

HELD: Negligent misstatement - The judge had been correct to reject both the allegation of a breach of the Hedley Byrne duty and the existence of any wider duty that might have included an obligation to disclose the CLU. A bank contracting with another party owed no duty to explain the nature or effect ofthe transaction, Bankers Trust International Plc v PT Dharmala Sakti Sejahtera (No.2) [1996] C.L.C. 518 applied. The bank had not breached its Hedley Byrne duty by failing to present a full and proper explanation of the potential break costs or the CLU, since it was clear that the appellant had been made fully aware that breaking any of the swaps could carry adverse financial consequences, the size of which would depend upon interest rates at the time the swaps were broken, and that the precise calculation of any amount to be paid by the appellant would take into account the extent to which the floating rate payable by the bank under the swaps was lower than the fixed interest payable by the appellant, Hedley Byrne followed. There was no basis for holding that the bank had assumed responsibility for disclosure of the CLU or any indication of the possible size of future break costs, or for holding that it would be fair, just or reasonable to impose on the bank an advisory duty requiring such disclosure, Customs and Excise Commissioners v Barclays Bank Plc [2006] UKHL 28 considered. Moreover, the CLU was the bank's internal assessment of risk inherent in the swaps and was based on subjective criteria (see paras 56, 60, 66, 71-72, 75, 77-81 of judgment).

Misrepresentation - In the factual context in which the term "hedge" was used, the judge had been entitled to reject the appellant's definition of an interest rate hedge as a product which reduced the risk of loss in the event of interest rate changes. The critical factor was that the hedging agreements entered into were to be acceptable to the bank, which meant that their purpose was to protect the appellant from increases in interest rates which might otherwise undermine its ability to pay interest on its loans to the bank. A reasonable representee would not have understood the bank to have used the word "hedge" in the sense contended for by the appellant; thus, there had been no misrepresentation. In any event, the judge had found as a fact that the appellant did not enter into the swaps in reliance on the hedging representations (paras 89-91, 96-97).

LIBOR claim - Between 2006 and 2012, there had been manipulation of LIBOR in the sense that some of the panel banks had made submissions which did not reflect the rate at which they genuinely thought they could borrow funds, but were rather rates which were thought to benefit the banks' trading positions. In relation to the existence of an implied representation, it was a useful test to consider whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it, Geest Plc v Fyffes Plc [1999] 1 All E.R. (Comm) 672 approved; however, that was not to mitigate the requirement that there had to be clear words or conduct of the representor from which the relevant representation could be implied. In the instant case, there was evidence that the bank had made a representation to the effect that it was not itself seeking to manipulate LIBOR. The judge had therefore erred in concluding that no representation could be implied from its conduct in proffering the swaps. However, she had found as a fact that there was no evidence of manipulation by the bank of sterling LIBOR, and the instant court was in no position to form a view of its own on that issue (paras 113, 122-123, 128, 132-134, 143, 151).