Commercial Court rejects EURIBOR implied representations

The Commercial Court has dismissed claims that a bank made implied representations as to EURIBOR rate-setting in the context of selling an interest rate swap: Marme Inversiones 2007 SL v NatWest Markets plc & Ors [2019] EWHC 366 (Comm).

This is the second civil court trial judgment considering IBOR manipulation, the first being Property Alliance Group Ltd v Royal Bank of Scotland [2018] 1 WLR 3529 in which the claim relating to LIBOR manipulation was also dismissed (see our banking litigation e-bulletin). Together, these decisions are a reminder of the difficulties of proving allegations that IBOR-setting banks made implied representations when selling IBOR-linked products. The combined effect of these judgments suggests:

• The requirement to identify specific conduct which led to the implied representation being made is important (and should not be underestimated). In the context of these transactions, a bank simply entering into an IBOR-linked swap is unlikely to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal in PAG (see below).
• Implied representations must be certain and obvious: if there is "elasticity of possible meaning", this will indicate the absence of an implication.
• The broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.
• Proving reliance on any representations which are implied will be fact-specific and onerous.
• Falsity must be specifically proven: it is not sufficient to draw inferences on the basis of conduct relating to other benchmarks (such as an IBOR in a different currency) or indeed findings of the regulator.

In PAG, the Court of Appeal held that the bank made the narrow implied representation (at the time of entering into the swaps) that it was not itself seeking to manipulate GBP LIBOR and did not intend to do so in the future (however the claimants could not prove that the representation was false). In this case, the court's view was that a similar narrow representation in relation to EURIBOR could theoretically have been implied, but this implied representation was not alleged, and was not shown to be false in any event.

Background

The proceedings arose out of interest rate swaps set by reference to EURIBOR, entered into between Marme Inversiones 2007 SL ("Marme") and the defendant banks (the "Banks"). The Banks sought various declarations that they had lawfully terminated the swaps and that Marme owed them €710 million plus interest.

Marme sought rescission of the swaps ab initio and/or damages of up to €996 million on the basis that one of the Banks (RBS plc, "RBS") negligently/fraudulently made representations regarding the integrity of the process of setting EURIBOR (on its own account and as agent for the other Banks) and that Marme relied upon those representations when entering into the swaps. Marme did not contend that the representations were made expressly, but that they should be implied from the circumstances and RBS's conduct.

Decisions

The court found in favour of the Banks. It granted the declarations sought and held that the alleged representations did not fall to be implied.

The court distilled the following principles from existing authorities considering implied representations:

1. It is possible for a representation to be made expressly or impliedly through words or conduct. For a representation to be implied, silence or mere assumption is not usually enough as there is no general duty of disclosure. It is necessary to view the words or conduct objectively to determine whether an implied representation has been made. The natural assumptions of the reasonable representee will be helpful in assessing whether an implied representation has been made through the conduct of the representor.
2. Whether or not a representation is implied is ultimately a question of fact to be determined in the circumstances of the particular case: see also Deutsche Bank AG v Unitech Global Ltd [2013] EWCA Civ 1372.
3. More may be required, in terms of words or conduct, to prove an implied representation which is wide in meaning or complex.
4. It is less likely that a representation that is vague, uncertain or ambiguous would be objectively understood to have been made from words or conduct.

With these principles in mind, the court considered the representations alleged in the instant proceedings, identifying a number of (legal and factual) difficulties with the case alleged by Marme. The key points which are likely to be of broader interest are summarised below.

• Marme alleged that in the light of PAG, at least some of the alleged representations in this case should be treated as having been "plainly" made by RBS. The court found that in truth PAG provided no support at all for Marme's case. In PAG, the claimants similarly sought rescission of swap agreements and/or damages on the basis of (among other things) alleged implied fraudulent representations. The Court of Appeal in PAG found that the representations as pleaded could not be implied, but decided that a different implied representation would be justified:

"In the present case there were lengthy discussions between PAG and RBS before the swaps were concluded as set out by the judge in the earlier part of her judgment. … RBS was undoubtedly proposing the swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts. In these circumstances we are satisfied that RBS did make some representations to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR. Such a comparatively elementary representation would probably be inferred from a mere proposal of the swap transaction but we need not go as far as that on the facts of this case in the light of the lengthy previous discussions."

• Marme submitted that, in the same way as PAG, the representations in this case should be inferred from a mere proposal of the swaps. However, the court observed that the representations in this case were not the same as the (narrow) implied representations reformulated by the Court of Appeal in PAG.

• The court held that the implied representations were not supported by any other authority, in particular Deutsche Bank v Unitech offered no support. The court emphasised that although the Court of Appeal in Deutsche Bank v Unitech granted permission to amend to include pleas of implied representations about LIBOR, it would be wrong to regard what was decided as having too great a significance (given the appeal related to an interlocutory application to amend statements of claim and merely found that the points advanced were arguable).

• Importantly, the court was concerned that if Marme's case on implication was to succeed, it would inevitably involve a 'watering down' of the requirement that specific conduct be identified from which any alleged representation is said to arise. It said Marme could identify no conduct other than RBS entering into (and allegedly proposing) the swaps to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal PAG. In the court's view, this was an "intractable difficulty" for Marme.

• The court also considered the decision in Geest v Fyffes [1991] 1 All ER (Comm) 672. The court in that case had set out a "helpful test" for evaluating the representor's conduct in cases of implied representations, which is: 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. The Court of Appeal in PAG agreed this test was helpful, but it warned that this should not water down the requirement that there must be clear words or clear conduct of the representor from which the relevant representation can be implied. Here, the court said that invocation of the "helpful test" in Geest was not enough by itself – Marme could not merely rely on an internal assumption on its part that RBS failed to correct.

• The court was concerned about the distinct lack of certainty (and associated lack of obviousness) as to what was entailed in the alleged representations. It said there was the same "elasticity of possible meaning" which had operated against the implication in Raiffeisen Zentralbank Osterreich AG v RBS [2010] EWHC 1392 (Comm).

• The court accepted that passive conduct may sometimes be sufficient for the implication of a representation. However, it said the broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.

• In the court's view, RBS's conduct in going along with the swaps was sufficient for the implication of a much narrower representation: namely that RBS was not itself manipulating, and did not intend to manipulate or attempt to manipulate, EURIBOR. However, that implied representation was not put forward by Marme in the action. The court said that this was probably because Marme recognised that it would be "in no position to establish falsity".

The court therefore rejected the implication of the representations alleged by Marme, the action failed and the court held that the banks were entitled to the declaratory relief sought. In case it was wrong in these conclusions, the court went on to consider questions of falsity and reliance, but this was on an obiter basis given its primary conclusions.

Note: On July 15th 2019, the Court of Appeal refused permission to appeal.