English Court of Appeal rejects argument that agreements referencing LIBOR may be void under competition law

10 Mar 2016

It is well established that those who suffer loss from infringement of competition law can sue the infringers for damages. However, given the difficulty in quantifying the effects of LIBOR manipulation, it has in the UK become the preferred option to argue that lossmaking contracts referencing LIBOR can be rescinded or declared void where the counterparty is a bank that participated in the manipulation. One such argument was dealt a severe blow last week.

As many readers will know, Deutsche Bank and other lenders are suing Unitech Limited and Unitech Global Limited (the "Unitech parties") in long-running litigation.

  • All lenders are claiming sums allegedly due under a US$150 million credit facility agreement between them and Unitech Global.
  • Deutsche Bank (alone) is also claiming sums allegedly due to it under a swap contract with Unitech Global which effectively fixed the interest payable under that facility.
  • Unitech Limited is sued as Unitech Global's guarantor under both contracts.

The Unitech parties have advanced various defences against the claims. Last week's Court of Appeal decision concerned their application to add a raft of further defences.

Both contracts were based on a LIBOR interest rate, and the first instance judge permitted the Unitech parties to amend their pleadings to allege an implied term of both contracts to the effect that Deutsche Bank would not seek to manipulate that rate. Breach of the term would entitle the Unitech parties to damages. However, the judge rejected five other amendments, including one in competition law that would have enabled the Unitech parties to tear up the credit facility and guarantee altogether on the basis that they were:

"void as a result of the Bank's breach of the anti-competition provisions of the Treaty on the Functioning of the European Union ("TFEU") and section 2 of the Competition Act 1998."

On 4 March 2016, the Court of Appeal upheld the judge's decision.

Underlying the proposed competition law defence were allegations by the Unitech parties:

  1. that the LIBOR rate referenced in their agreements had been manipulated in violation of Article 101 of the TFEU and the equivalent UK legislation in Section 2 of the Competition Act 1998; and
  2. in a bold argument, that even if there was no manipulation, LIBOR-setting was itself an unlawful information exchange in violation of Article 101 and Section 2 because it required each panel bank to state what rate of interest it believed it could borrow at, thus revealing commercially sensitive information as to its own strength and creditworthiness.

LIBOR manipulation can certainly violate competition law. In December 2013, the European Commission fined several banks (including Deutsche) for infringement of Article 101 in their manipulation of Yen LIBOR; although, as that decision related only to Yen, it is not a finding of direct relevance to Unitech.

However, the Court of Appeal held that, even if Article 101 / Section 2 were infringed by the banks' (horizontal) practices of manipulating LIBOR, or indeed setting it, that would not render void a (vertical) LIBOR-referencing agreement between an infringer bank and a third party.

The Court noted that the Unitech parties cited no authority for the proposition that vertical agreements were void as a result of an infringement of Article 101 / Section 2 in a connected horizontal agreement. Indeed, the Court drew a line of precedent from the landmark case of Courage v Crehan [1999] ECC 455, in which it was held, albeit on structurally different facts, that a connected vertical agreement was not void.

A number of distinctions can be drawn between Unitech and Crehan, and the Court focused on those which it thought made the conclusion even more compelling in the case of Unitech.

  1. Banks uninvolved in LIBOR had become parties to the credit agreement after it was made. The Court noted that any decision that the agreement was void would be highly prejudicial to them.
  2. The voiding of the credit agreement would, in theory, free the Unitech parties even from having to repay the principal sums lent under it. The Court said that such a result would be "absurd", and that the Unitech parties were therefore:

"reduced to arguing that only parts of the agreements relating to interest and swaps were void; but such a pick and mix approach cannot be acceptable."

In a previous appeal, the Unitech parties were granted permission to amend their Defence to allege that, in offering to enter into agreements referencing LIBOR, Deutsche Bank made implied representations as to the integrity of LIBOR, entitling the Unitech parties to rescind the agreements for misrepresentation pursuant to Deutsche Bank's manipulation of LIBOR.

Rescission would put the parties back in the position they would have been in had the agreements not been entered into. It would not permit Unitech Global to retain the principal sums lent under the credit facility, but it would entitle it to repayment of the swap interest; a considerable sum given the collapse of the variable rate after the credit facility was entered into. Last week's ruling has prevented the Unitech parties using competition law as an alternative argument to have the contracts torn up.

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