On 2 March 2018, the Court of Appeal nailed down the coffin lid on the first LIBOR-related swaps miss-selling case- Property Alliance Group Ltd (“PAG”) v Royal Bank of Scotland plc (“RBS”)  EWCA Civ 355. PAG’s leave to appeal was dismissed.
PAG’s mis-selling claim was articulated on three fronts- misstatement, misrepresentation and a contractual claim- all essentially asserting that swaps sold to PAG by RBS failed to properly protect the claimant from adverse interest rate moves. PAG also claimed rescission with respect to RBS’ alleged misrepresentations over LIBOR and its setting process and related damages. PAG asserted that had they known of RBS’ LIBOR manipulation, they would not have entered the swap trades. In a judgement, widely regarded as a significant victory for the Banks, Mr Justice Asplin DBE found entirely for RBS, wholly dismissing PAG’s claims. As one of the early cases of the recently-formed Financial List, the judgement is worth reading in full- Property Alliance Group Ltd v Royal Bank of Scotland Plc  EWHC 207 (Ch).
Re-stating its case, on appeal PAG claimed:
- RBS negligently breached a duty of care by not illustrating worst-case break costs at the commencement of the trades
- By describing the swaps as “hedges”, RBS misrepresented the swaps as risk-reductive
- RBS had manipulated LIBOR after impliedly representing that it would not do so
In its dismissal, the Court of Appeal found:
- There was no Hedley Byrne breach of duty by RBS. RBS owed no duty to explain the potential effects of the trades
- The term “hedge” did not relate to a reduction in PAG’s interest rate risk, the swap was required by RBS to protect itself from PAG’s exposure to rising rates. PAG did not rely on the term when deciding to enter the trades
- Although there was implied representation that RBS would not manipulate LIBOR, there was no evidence that it had actually done so or intended to do so
In dismissing PAG’s appeal, the Court has re-iterated its support for well-defined basis clauses as a substantive defence against claims for breach of duty. The judgement is a decisive victory for the clear drafting of relationship terms, rather than a victory for the Banks per se. Documentation should accordingly be revisited and refreshed as given relationships develop and progress in terms of customer classification. Increasing market volatility combined with a radically uncertain geo-political climate may lead to significant “hedging” losses and a consequent rise in similar claims; if their documentation is to act as shield, financial institutions should ensure it is fit for purpose.