Court dismisses strike-out application in mis-selling and LIBOR manipulation claim

Court dismisses strike-out application in mis-selling and LIBOR manipulation claim

What were the key issues raised in Hockin and others v Royal Bank of Scotland and another, in which the Chancery Division heard an application to strike-out key parts of a claim relating to allegations of LIBOR manipulation and the mis-selling of swaps made against the Royal Bank of Scotland?

Original news

Hockin and others v Royal Bank of Scotland and another [2016] EWHC 925 (Ch)

What were the facts of the case?

The claimants in this case were Mr and Mrs Hockin, who are in the process of bringing substantial claims alleging mis-selling of interest rate products and interest rate fixing against the Royal Bank of Scotland and National Westminster Bank (the Banks). The claimants were the ultimate owners of a company called London & West Country Estates (LWE), which is now in administration, and LWE's claims against the Banks were assigned to the claimants in March 2014 pursuant to a deed of assignment. LWE owned and managed a number of commercial business parks in Somerset and Devon. In 2008, it borrowed a £55m loan facility from the Banks, which it was required to repay over three years with interest referable to LIBOR (the 2008 Facility). It was a precondition of the 2008 Facility that the borrower hedge its interest exposure and as a result the parties also agreed a ten-year bank callable interest rate swap (the Swap). In or around October 2009, LWE was placed into the Bank’s global restructuring group (GRG). After a period, the 2008 Facility was assigned to a company referred to as Isobel, a joint venture owned by the Banks and the Blackstone private equity group, at a significant discount, despite what were alleged to have been substantial offers made by LWE to refinance the 2008 Facility. This was as part of the high-profile 'Project Isobel', a £1.36bn property loan portfolio sale which was completed in 2011. Isobel subsequently placed LWE into administration.

The case at hand consists of an attempt by the Banks to strike out key parts of the claimants' particulars of claim, along with an application from the claimants to amend the particulars it has submitted. We discuss these applications and the court's judgments on them below. However, the facts of the larger claim, to be heard in January 2017, are of interest to banking and finance lawyers as they concern allegations of LIBOR-fixing and the mis-selling of financial instruments and relate to a large portfolio disposal by the Banks following the 2008 financial crisis.

The main claim was transferred to the Financial List in February 2016. The claimants have advanced the following four heads of claim:

  • the 'Advisory Claim' under which it is alleged that the Banks owed a duty of care to properly advise LWE in relation to the Swap and breached that duty
  • the 'Swap Representation Claim' pursuant to which it is alleged that the Swap was induced by misrepresentations made to LWE
  • the 'LIBOR Claims' which allege the Banks impliedly made representations to LWE about LIBOR which were untrue and known to be untrue at the time, and
  • the 'GRG Claim' pursuant to which it is alleged that the Banks, and in particular the GRG, acted in breach of an implied term to act in good faith in its performance of the terms of the 2008 Facility—it is stated that as a result of the alleged breaches of duty, LWE was forced into administration by Isobel and suffered substantial loss and damage as a result

What were the issues in the case and what did the court decide?

In this case, the Banks' application to strike out the GRG Claim was based on the following arguments:

  • the claimants did not have legal standing to bring the GRG Claim, as it did not fall within the ambit of the deed of assignment between LWE and the claimants. The argument turned on the proper construction of this document and the court discussed the interpretation of clauses in contracts which include the words ‘arising out of or in connection with’ and the case law on this (paras 14–31). The court rejected this argument based on the meaning it considered the deed of assignment would convey to the reasonable reader having all the background knowledge which would reasonably having been available when the deed was executed. It also considered the 'ordinary and natural meaning of the words' used
  • the loan agreement provision which stated that the bank 'may assign' all of its rights or benefits under the loan agreement did not, as the claimants alleged, create a discretionary right for the Banks in relation to which it might be possible to argue that an implied duty of good faith could arise with regard to its exercise. The court reviewed the authorities relating to the implication of terms into commercial contracts (paras 35–48). The court rejected this argument, stating that the threshold for the implication of a term into a commercial contract of this kind was high, and that the provision needed to be considered against the background of the 2008 Facility as a whole and the relevant factual matrix. To consider the issue in isolation would be impermissible and the question should be heard with full supporting evidence at trial, and
  • the inclusion of the GRG Claim had no proper basis and amounted to an abuse of process, and ought to be struck out under CPR 3.4(2)(b) (the bad law argument). The defendants submitted that, in a response to a request for further information in September 2015, the claimants had admitted that they were unable to articulate a claim for breach of the alleged implied duty of good faith, and that they had included the claim in the hope that disclosure might provide material for it. The court rejected this argument on the basis that the application could easily have been submitted before the disclosure had taken place, and that the disclosure would in any event have been necessary for other elements of the claim to be heard

However, the claimants' application to amend the particulars of claim were largely successful. The claimants sought to add, among other things, a claim of unlawful means conspiracy and further allegations of deceit or negligent misrepresentation on the part of the Banks, in defence of which the Banks submitted that the proposed amendments rendered the pleading 'prolix, unclear and lacking in particularity'. In particular, an alleged breach of the implied term of good faith, the conspiracy claim and the further particulars of alleged falsity of the LIBOR representations made unacceptably vague and un-particularised allegations of bad faith, dishonesty and fraud. Further, they submitted that the proposed amendments violated the principle in Tchenguiz and others v Grant Thornton LLP and others [2015] EWHC 1864 (Comm), [2015] All ER (D) 36 (Jul) that statements of case should be concise and should contain only material facts necessary for the purposes of formulating a cause of action and not background facts or evidence, and certainly not argument reasons or rhetoric.

The court concluded there were no reasonable grounds for it to intervene—on the evidence presented, the LIBOR claims were arguable, and there was no question of the pleading containing rhetoric or other irrelevant and unhelpful information. The court did however amend the particulars of the claim (as requested by the Banks) so that the conspiracy claim should refer only to the named individuals at the Banks who had been employed by it at the time and for whom it could be held vicariously liable.

Why is the case of interest for banking and finance lawyers?

This initial hearing does not contain any significant legal developments for banking and finance lawyers as it was largely decided on its facts. However, the case as a whole is of interest because of its facts and the parties involved—it involves allegations of mis-selling of interest rate swaps and LIBOR manipulation on the part of the Banks, as well as being relevant to the high-profile 'Project Isobel', a £1.36bn property loan portfolio sale. A number of UK retail banks have sought to dispose of non-performing loans on a portfolio basis in the aftermath of the financial crisis and this case illustrates some of the types of claims that can result from disgruntled borrowers and investors.

The main claim also has a potentially significant value and has garnered some press attention, with the claimants' lawyers alleging that this claim represents the tip of 'an iceberg' of similar cases relating to LIBOR manipulation, and estimating the value of the claim at £33m. Banking and finance lawyers will watch the further developments in this case, and in particular the full trial in January 2017, with interest.

Kate Edwards, solicitor in the LexisPSL Banking & Finance team.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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