Judge Jeremy Cooke told lawyers assembled in his London courtroom last February he wouldn’t allow Indian property company Unitech Ltd. to add accusations of Libor-rigging to its lawsuit against Deutsche Bank AG.
Realizing he’d contradicted another judge in the U.K.’s only other Libor lawsuit, Cooke explained he disagreed with his colleague. Months earlier, Judge Julian Flaux had given Guardian Care Homes permission to link its swap losses to Barclays Plc’s Libor fixing.
Cooke said Flaux’s interpretation of the law was “no help.”
The Court of Appeal will decide who was right in the rare judicial split following a hearing that is scheduled to start today in London. If the court adopts Flaux’s approach to alleged victims, it could open the door to more suits against lenders accused of manipulating the London interbank offered rate, the baseline for about $300 trillion of contracts worldwide.
“It’s a very unusual situation that two commercial court judges have come to such divergent opinions,” said Tom Hibbert, a London lawyer specializing in bank disputes who isn’t involved in either case.
Regulatory probes across the globe into banks’ attempts to manipulate interest-rate benchmarks have led to fines and settlements totaling about $2.6 billion for Barclays, Royal Bank of Scotland Group Plc, UBS AG and ICAP Plc. E-mails released in the investigations show traders tried to influence rates to boost trading profits.
The Deutsche Bank and Barclays cases are at face value similar -- both started life as claims that banks sold their clients unsuitable interest-rate swaps. Unitech and Guardian sought to add Libor allegations to those suits.
“This started as an alleged mis-selling case which Barclays considers has no merit,” said bank spokesman Jon Laycock. “The addition of a claim based on what happened with Libor does not change the bank’s view.” He said Guardian owes about 70 million pounds ($112 million).
While the appeal court won’t resolve either case, it will determine whether victims can void contracts linked to Libor, or just seek compensation for losses.
Unitech and Guardian will argue the banks’ contracts were based on the assumption they wouldn’t try to manipulate the underlying benchmark, a so-called implied representation. They say they wouldn’t have entered into the deals at all if they had known what was going on.
“If the court of appeal adopts a relaxed approach to implying representations, then that potentially opens the way for many more claims where financial instruments have been pegged to Libor,” said Edward Allen, another lawyer not involved in the cases.
The distinction is important because it means the contracts can be torn up, Hibbert said. Unitech and Guardian “would like to establish an implied representation case so they can seek to rescind the contract, and walk away from it,” he said. Otherwise they would have to prove a loss and seek damages.
Kathryn Hanes, spokeswoman for Frankfurt-based Deutsche Bank, said Unitech’s Libor allegations were an attempt to divert attention from its debt.
“This is a long-standing case of a loan that was made and not paid back,” she said.
Toby Pellew, a spokesman for Guardian, and Unitech lawyer Richard Gwynne declined to comment.
U.K. courts haven’t seen as many Libor-related lawsuits as those in the U.S, where the city of Houston, Virginia-based regulator National Credit Union Administration, and the University of California have sued lenders over manipulation of the benchmark.
Banks haven’t generally disclosed how much they have set aside to cover Libor-related claims.
“There are bigger issues out there, such as proposed regulatory changes over leverage,” said Tom Rayner, a bank analyst at Exane BNP Paribas in London. “The market is aware of the potential for future legal costs, particularly in the U.S.”
The Barclays, Deutsche Bank appeal is scheduled to last four days, with today set aside for judges to read the documents. Public hearings begin tomorrow.
The cases are: Graiseley Properties Ltd & Ors. v. Barclays Bank Plc, High Court of Justice, Queen’s Bench Division, Commercial Court, 12-1259; and Deutsche Bank AG & Ors v. Unitech Global Limited & Anr, High Court of Justice, Queen’s Bench Division, Commercial Court, 11-1199 (X1Q6M1JRB282)