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Libor Scandal Likely to Encourage Commercial Litigation

Wednesday, 30 April 2014

The Libor scandal has seriously rocked a host of financial institutions which have paid around $6 billion in fines over manipulation of the benchmark interest rate.

That may just be the beginning of the banks’ problems stemming from Libor though, as a complex web of inter-related issues makes its way to the courts.

Libor has been used as the benchmark rate for a huge variety of financial products not least, interest rate swaps.

Although a separate scandal has emerged from the mis-selling of interest rate swaps, the Libor scandal may prove a bigger stick for claimants to beat the banks with when it comes to litigating those claims.

A Case in Point: Graisley Properties v Barclays

This case originally related to the mis-selling of interest rate hedging products (derivatives contracts) to Graisley Properties by Barclays in conjunction with loans made to the company. The swaps were supposed to reduce the claimant’s exposure to interest rate fluctuations but they actually ended up costing the company around £12m.

Graisley sought via its original legal proceedings to rescind the contracts on the basis that they had been unsuitable. However in 2013, in the wake of the Libor scandal, the company sought permission to amend their pleadings to include a claim of implied misrepresentation based on allegations that the banks had manipulated the rates that the contracts were linked to.

The Court of Appeal allowed the amendment to the claim and a similar amendment to another derivatives-related claim in Deutsche Bank v Unitech Global, which it dealt with at the same time.

At the beginning of April 2014, only weeks before the main trial was due to be heard, Graisley and Barclays reached an out of court settlement in which the parties agreed to a commercial restructuring of the company’s debt.

Implications of Barclay’s Settlement with Graisley

Observers of this case will certainly have their interest piqued as the settlement may well tempt other parties to leverage the Libor scandal to escape unfavourable derivatives contracts entered into with their banks.

Lawyers may be disappointed on a technical level because the settlement means that no precedent has been set on this issue. There were a number of potential avenues lined with tough legal hurdles through which the claimants would have needed to argue misrepresentation; these arguments will not now be heard. Additionally, Barclays have not admitted wrongdoing.

The affect of the Libor scandal on these types of cases still may be considered in Deutsche Bank v Unitech Global but that remains to be seen.

For specialist advice regarding mis-selling of interest rate swap contracts or Libor-related issues, contact Peter Gourri today by email or telephone 0207 611 4848.

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