Last roll of the dice for PAG’s mis-selling test case against RBS

18 April 2018

The long awaited Court of Appeal judgment was handed down in the test case of PAG v RBS in early March. We have previously commented on this extensive litigation and a link to our detailed blog following the High Court judgment can be found here.

Following a 10-week trial in the summer of 2016, the High Court found in favour of RBS on all three claims brought by Property Alliance Group (PAG).  Mrs Justice Asplin dismissed PAG’s application to appeal on the basis that the decision on each head of claim turned on the facts pertaining to the reliance on representations. However, the Court of Appeal granted permission in May 2017 on the basis that it was a test case, which would help determine important issues in similar financial mis-selling cases.

The much anticipated judgment was handed down on 2 March where PAG’s appeal was again dismissed in its entirety. It is not the end of the road for PAG though as we understand that they now seek leave to appeal to the Supreme Court. In the meantime, the Court of Appeal judgment provides helpful clarification on a number of points including the test for implied representations.


PAG is a property investment and development business operating in the North West of England.  Proceedings arose primarily out of four interest rate derivative products (Swaps). The Swaps agreements were entered into with the bank between 2004 and 2008 using the GBP London Interbank Offered Rate (LIBOR) as a reference rate. In 2010 the customer relationship was transferred from the personnel in Manchester to RBS’ controversial internal Global Restructuring Group (GRG) in London.

PAG subsequently terminated the Swaps incurring mark-to-market (MTM) break costs of over £8 million. By 2015 the parties’ relationship had broken down and PAG refinanced its entire lending with another bank. The multi-million pound claim followed revelations that RBS traders had manipulated LIBOR rates and it was investigated by a number of regulators including the FCA.

The proceedings against RBS fell into three categories:

  • The Swaps mis-selling claims involving allegations of misrepresentation, misstatement and breach of contract on the part of the bank in connection with its proposal and sale of the Swaps to PAG.
  • The LIBOR claims where PAG claimed for rescission of the Swaps, damages for misrepresentation (including fraudulent misrepresentation) and/or breach of contract arising out of RBS’ alleged knowledge of and participation in manipulation of LIBOR rates.
  • The GRG claims in which PAG claimed damages for breach of contract arising out of its transfer to GRG, and its subsequent management within GRG.

The Court of Appeal Decision

PAG’s grounds of appeal included all three categories of claim narrowed to the following specific issues:

  • Negligent misstatements on the SWAPS on a conventional Hedley Byrne basis regarding the failure to give information on the MTM break costs
  • Misrepresentations by RBS in describing the SWAPs as hedges
  • The implied misrepresentation that LIBOR was not manipulated by the bank
  • Breach of an implied term that the bank could not be capricious in the exercise of the GRG valuations.

Although the Court of Appeal dismissed all of PAG’s claims, it clarified the law in a number of respects including the test for an implied representation. We consider below the Court of Appeal’s judgment but focus, in particular, on the significant findings on the LIBOR claims.

Swaps negligent misstatement claims

PAG claimed that RBS was liable in tort for negligent misstatement due to its failure to provide PAG with information about the potential MTM break costs. These claims failed in the High Court which declined to follow the decision in Crestsign and considered that the duty of care pleaded by PAG fell on the advisory spectrum. A duty to advise had been expressly excluded by the contractual agreements and taking into account foreseeability, proximity and fairness, justice and reasonableness in the context of the PAG/RBS relationship, there was no duty of care of the kind contended for.

The court held that the bank did not owe a full advisory or ‘mezzanine’ duty of care contended for by PAG. There was no duty on RBS to reveal the extent of the break costs or the MTM but in any event, PAG did not enter the Swaps as a result of the information being withheld.

In the Court of Appeal, PAG submitted that the trial judge had fundamentally misunderstood that their primary case was that RBS was liable for breach of the classic Hedley Byrne duty not carelessly to misstate, by giving only a partial and so misleading and inaccurate explanation. The Court of Appeal found that there was no breach of the Hedley Byrne duty not to misstate. Previous decisions referred to a mezzanine duty but the Court of Appeal agreed with the High Court and went as far as to say that the “expression of a mezzanine duty or intermediate duty, first coined in Crestsign, is best avoided. It appears to reflect the notion that there is a continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end. Rather, concentration should be on the responsibility assumed in the particular factual context as regards the particular transaction or relationship in issue.”

Swaps Misrepresentation claims

PAG alleged that the bank made numerous fraudulent representations which PAG relied on when entering the Swaps. This included representations that the Swaps were hedges. PAG’s case was that the Swaps did not act as a hedge against the risk of adverse movements in interest rates because they did not overall reduce the interest rate risk exposure.

The Court of Appeal dismissed the Swaps hedge misrepresentation claim on the basis that the documentary and witness evidence did not provide a foundation for such claims. The High Court concluded that a reasonable representee would have considered the term ‘hedge’ to be generic and not a representation as to the quality of the transaction in the way PAG contended. This was more so because of the contractual terms agreed between the parties which made clear that explanations on the terms of the Swaps could not be relied upon as investment advice or recommendations. The Court of Appeal concluded that it was impossible to say that the trial judge was not entitled to reach her factual conclusion of non-reliance.

Although not strictly necessary, the Court of Appeal addressed the trial judge’s finding of fraud in view of the seriousness of the finding. It disagreed with the finding of fraud. The trial judge was not entitled to conclude that if the expression ‘hedge’ was to be understood in the sense for which PAG contended, RBS’s misrepresentation about the Swaps being a hedge was fraudulent.

LIBOR claims

PAG claimed that RBS had made misrepresentations about LIBOR and therefore the Swaps should be rescinded and the payments reimbursed. The trial court decided that RBS did not make any representation about LIBOR merely by proferring to enter into Swaps products based on 3M GBP LIBOR. It was held that there may be an implied term in the Swaps contracts that the relevant 3M GBP LIBOR rate would be calculated in accordance with the British Bankers’ Association (BBA) definition of LIBOR.

However, the court rejected the claim that RBS had been involved in manipulation of GBP LIBOR and in any event, the factual evidence did not support PAG’s claim that it had entered into the Swaps in reliance on the LIBOR representations.  There had been no representation as alleged and even if there had, it was not proved to be false.

The Court of Appeal considered that the pleaded representations were unnecessarily complex and therefore endeavoured to simplify matters. The most feasible formulation was that RBS was “representing that, at the date of the Swaps, RBS was not itself seeking to manipulate LIBOR and did not intend to do so in the future.” No such representation was made expressly nor would one expect it to be. The question was therefore whether such a representation could be implied (though the court should not be too ready to find an implied representation).

The Court of Appeal approved the dicta in Geest plc v Fyffes plc (1999)  which formulated that the test was  “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 emphasised that this does 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.

Contrary to the findings of the High Court, the Court of Appeal accepted that representations were made. It was held that RBS impliedly represented that it was not at the date of the Swaps manipulating or intending to manipulate GBP LIBOR rates. Such an elementary representation would probably be inferred from a mere proposal of the Swap transaction, but the court did not need to go as far as that in the light of the lengthy previous discussions between the parties. The court did however limit the scope of the implied representation to the currency of the transactions, i.e. GBP LIBOR not LIBOR rates generally, on the basis that only GBP LIBOR was relevant to the Swaps. It decided that it would however be too narrow to limit the tenor of GBP LIBOR specifically to 3M GBP LIBOR.

Despite finding that there was an implied representation that RBS was not seeking to manipulate LIBOR and did not intend to do so in the future, PAG was unsuccessful because the court found that on the facts, the representation was not false. At trial PAG had relied on alleged instances of trader manipulation, lowballing and financial crisis manipulation all of which were rejected by the judge. The burden of proof was on PAG but the documentary and witness evidence adduced at trial failed to make out its case of manipulation. The trial judge also commented that she found the expert evidence of little assistance (re low-balling).

The Court of Appeal said that it would be impossible for it to hold, in the face of Asplin J’s conclusion that PAG had not made out its case on manipulation, that there was in fact such manipulation. The court also noted that most of the alleged instances of misconduct post-dated the Swaps and it was therefore a slender foundation for alleging falsity of a representation at the time the Swaps were concluded.

In the light of the Court of Appeal’s conclusion that the implied representation was not false, it was not necessary to consider whether the trial judge correctly concluded that fraud had not been proved. If the implied representation was false, it would be necessary to decide how the normal rule can apply when the implication is not in the representor’s mind. (For a finding of fraud, the representor must have intended to make a representation he knew to be false). The court did not need to resolve this question but commented that it may be the case that an implied representation of this kind can never (or rarely) be fraudulent; on the other hand decisions about dishonesty, such as Barlow Clowes International Ltd v Eurotrust International Ltd (2005) and Ivey v Genting Casinos UK Ltd (2017)  may be relevant.  (For more details of the Genting Supreme Court case where Kingsley Napley represented the successful defendant, please see our earlier blogs – here).

Valuation claim

PAG claimed that RBS breached implied terms of its customer agreement that it would not act in bad faith or in a commercially unacceptable or unconscionable manner.

The High Court held that RBS had an absolute right, rather than discretion, to call for valuations of PAG’s property portfolio under the loan agreement. The Court of Appeal overturned the High Court’s finding that RBS had an absolute contractual right to call for the valuations. The bank’s contractual power was not completely unfettered, as it could be inferred that the parties intended the power granted by the contractual agreement to be exercised in pursuit of legitimate commercial aims rather than, say, to vex PAG maliciously. However, PAG failed on the facts because it could not be proven that RBS called for the valuations for reasons unrelated to its legitimate commercial aims.  


Despite the dismissal of the entirety of PAG’s claims, the Court of Appeal judgment provides some welcome clarity for potential claimants particularly in relation to LIBOR referenced transactions and FX hedging products.  Claimants may have a chance of succeeding in cases where they can distinguish their claims from those of PAG. For instance, where there have been adverse regulatory findings against the potential defendant bank and the same benchmark LIBOR reference rate is used in the customer agreement, claimants may have a better chance of proving the falsity of representations.

However, the claimant will need to specifically prove the falsity of the implied representation that the potential defendant bank was not at the date of agreement, manipulating or intending to manipulate LIBOR rates.  PAG were frustrated that they were not able to cross-examine those responsible at trial. In the Court of Appeal PAG sought to reiterate the significance of the absence from RBS’s evidence of any senior management personnel to explain (and be cross-examined about) their knowledge of the way the LIBOR submitters were making their submissions. The question of whether a particular Panel Bank has manipulated LIBOR will essentially be a question of fact. Potential claimants will also need to ensure they have good evidence on the expectations or assumptions of the parties at the time the representations were made.

The Court of Appeal accepted the possibility of cross-contamination between benchmarks but evidence of manipulation of one currency is not sufficient to infer manipulation in another currency. In Graisely Properties, Flaux J said: “It seems to me that it is a wholly artificial exercise to seek to divide up the various LIBOR fixings or manipulations into separate currencies. It is quite clear that there was fixing not only of Sterling LIBOR but also of dollar LIBOR and of EURIBOR, and that … there is inevitably scope for cross-infection here.” Ideally, evidence of bank personnel manipulating the same benchmark LIBOR reference rate as that in the customer agreement should be adduced. However, in certain circumstances factual evidence of adverse conduct of a LIBOR submitter in another currency, may be sufficient if cross-contamination can be proved.

Although PAG lost, the case has provided clarity as to the evidential hurdles claimants may need to overcome. The Court of Appeal’s findings of:  (i) a narrow implied representation that the bank would not manipulate LIBOR and (ii) an implied limitation on the bank’s contractual discretion, may be significant for other claimants with strong factual evidence in support.

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