Earlier this year, the High Court handed down judgment in Marme Inversiones 2007 SL v NatWest Markets plc & Ors  EWHC 366 (Comm) (the Judgment), dismissing a claim based on allegations of implied misrepresentations concerning the manipulation of EURIBOR, and granted declaratory relief to five banks in relation to the validity of the termination of five swaps. The Judgment provides a wealth of detailed arguments of relevance to a broad range of contractual disputes, in particular those involving misrepresentation claims and implied terms.
These proceedings arose out of interest rate swaps entered into between Marme Inversiones 2007 SL (Marme) and RBS plc (RBS), and four other banks (the Non-RBS Banks) (together the Defendants) on September 12, 2008 (the Swaps).
The Swaps were entered into by Marme in connection with a Senior Loan of €1.575 billion from a syndicate of eight lenders (including the Defendants) to enable Marme to purchase Banco Santander SA’s headquarters, ‘Cuidad Financiera’. The interest rate payable under the Senior Loan (hedged under the Swaps) was set by reference to the Euro Interbank Offered Rate (EURIBOR).
Marme sought rescission of the Swaps and/or damages of up to €996 million on the basis that RBS, fraudulently or otherwise, impliedly made various untrue representations (on its own account and as agent for the Non-RBS Banks) regarding the integrity of the process of setting EURIBOR, including that it had not sought to manipulate EURIBOR (the EURIBOR Representations).
Marme’s case relied on the conduct of Philippe Moryoussef, who was convicted in July 2018 (in his absence) of conspiracy to defraud in respect of EURIBOR whilst he was employed by Barclays (between 2005 and 2017). Mr Moryoussef was employed by RBS as Head of European Interest Rate Derivatives between August 2007 and September 2009. Marme argued that RBS, at least through Mr Moryoussef, knew about the attempted manipulation of EURIBOR.
Marme did not contend that the Non-RBS Banks were complicit in, or indeed aware of, any actual or attempted manipulation. Marme’s case was that RBS acted as agent with ostensible authority to make the alleged EURIBOR Representations on behalf of the Non-RBS Banks.
The Defendants argued that the EURIBOR Representations failed for several reasons, but most fundamentally on the grounds that they were too wide-ranging and ambiguous to be capable of implication into the Swaps. Marme argued it had accepted RBS’s repudiatory breaches, which brought the Swaps to an end. However, both RBS and the Non-RBS Banks sought declarations that each of the Swaps were lawfully terminated with sums arising for payment by Marme of approximately €710 million plus interest.
In the Judgment, Picken J reiterated the following principles for implied representations:
- A representation may be made impliedly by words or conduct. Silence is not usually enough as there is no general duty of disclosure. The natural assumptions of the representee can be taken into account in determining the objective meaning of words or conduct.
- Whether a representation is implied is a question of fact.
- The wider or more complex the alleged representation, the more that is required in terms of words and conduct.
- It is less likely that a vague or uncertain representation would be objectively understood to have been made.
Picken J found that the EURIBOR Representations sought by Marme were “simply not obvious” and “contrived”. In particular, Marme did not, as a matter of fact, consider that the EURIBOR Representations were made at the time the transaction was entered into. Whilst Picken J held that the EURIBOR Representations as pleaded could not be implied, he did consider that RBS’s conduct in proceeding with the Swaps would have been sufficient for the implication of a much narrower representation, namely that RBS was not itself manipulating, and did not intend to manipulate or attempt to manipulate, EURIBOR. However, this was not one of the EURIBOR Representations contended by Marme.
Although Picken J concluded that none of the EURIBOR Representations were made, he held that, had they been implied, they would have been false. Picken J added that there was no falsity in respect of the limited implied representation he would have held was made as there was no evidence that RBS itself was manipulating or attempting to manipulate EURIBOR after Mr Moryoussef joined RBS.
Attribution of knowledge
Picken J concluded that the threshold for imputing fraud to RBS would have been met through Mr Moryoussef’s knowledge of EURIBOR-related misconduct, even though he was not the person with RBS directly negotiating the Swap with Marme. It was unnecessary, as Marme had attempted to do, to show that other people within RBS also had relevant knowledge.
Picken J also considered, obiter, that fraudulent representation requires both the knowledge that the representation is false and the intention that the deceived party rely on the representation to enter into the contract.
Picken J followed the reasoning of Asplin J in Property Alliance Group v Royal Bank of Scotland plc  EWHC 3342 (Ch) and found that as Marme’s key factual witness merely made certain assumptions concerning EURIBOR without giving thought to the EURIBOR Representations, reliance could not be established. In addition, as to causation, Picken J rejected Marme’s reliance claim in part because Marme had failed to show what it either would, or might, have done differently had the EURIBOR Representations not been made. This also formed part of Picken J’s reasoning in ultimately dismissing Marme’s claim for damages.
Picken J held that payments made under the Swaps in February 2014, which was some two months after the EU Commission had published a press release fining various banks (including RBS) for participating in cartels in the derivatives industry, amounted to affirmation of the contract. Marme would have known by then of the circumstances giving rise to a right to rescind but nevertheless have chosen to meet the payment obligations under the Swaps.
The alleged mis-selling did not take place through a bilateral arrangement. Rather, the counterparties were a consortium of banks, comprising both RBS and the Non-RBS Banks. Marme argued that RBS has apparent authority (it was agreed no actual authority arose) to make the EURIBOR Representations on behalf of the Non-RBS Banks. But Picken J held that there was no relevant holding out of RBS by the Non-RBS Banks and, in any event, the scope of any apparent authority was insufficient to encompass the making of the EURIBOR Representations.
In a very thorough Judgment, Picken J dealt with multiple hypotheticals and counterfactuals which will yield a welcome result for financial institutions, particularly those with potentially large exposure from manipulation cases on their books. That Picken J upheld the existence of a narrow representation found by the Court of Appeal in Property Alliance Group Limited v Royal Bank of Scotland  1 WLR 3529 (PAG) is perhaps unsurprising, but it retains some significance given this is only the second case to raise issues around benchmark manipulation in which a final judgment has been handed down. The finding that the narrow representation was made means that the Judgment does not provide an answer for institutions in all manipulation cases.
Perhaps more significant than support of the Court of Appeal’s position in PAG is Picken J’s support for the view of Asplin J in the High Court in that case, namely that in cases of implied representation, it is still necessary to show that the claimant was aware that the representation had been made. This will continue to present a substantial hurdle for those seeking to claim against financial institutions.
In relation to Picken J’s obiter comment in respect of fraudulent representation, there is an inherent tension between the requirement for both knowledge of the false representation and the intention that the deceived party will act on that representation to enter a contract. What if, for example, the two requirements both exist within a company, but through different individuals? Picken J opined that it might be appropriate for the fraudulent representation to be based on the combined knowledge of the different individuals. However, whilst such an approach may be permissible, it remains to be seen how cases following Marme approach this tension when dealing with an implied representation where it is unclear who is making the representation.
Separately, the Judgment contains something of an “easter egg” for those looking for guidance on the interpretation of ISDA Master Agreements. Picken J considered the submission that the termination provisions within the ISDA (Cross-Border) Master Agreements provided a comprehensive code for termination (ie an Event of Default regime) and so it was not possible to bring the Swaps to an end by acceptance of a repudiatory breach.
Picken J stated that an ISDA Master Agreement does not remove a party’s right to complain that there has been a repudiatory breach but, instead, if the party wishes to raise such a complaint and to bring the contract to an end (whether under the relevant contract or under the general law) then it must follow the ISDA Master Agreement procedure for termination with the agreed consequences under those provisions. In the ordinary course this means complying with the contractual notice period within the ISDA. It is interesting that Picken J, in quoting Simon Firth, Derivatives Law and Practice, appears to adopt the position that such an approach would apply equally to the 1992 ISDA Master Agreement as it would to the 2002 ISDA Master Agreement.