Outside street and metal joints view.

Property Alliance Group Limited v The Royal Bank of Scotland plc – a pyrrhic victory?

04 April 2018. Published by Parham Kouchikali, Partner and Joe Cresswell, Senior Associate

The Court of Appeal handed down its much anticipated judgment on the misselling and LIBOR manipulation test case in March. Whilst the appeal was dismissed in full, the Court of Appeal's decision clarified a number of aspects of the law in this area and, in particular, the circumstances in which an implied representation in respect of LIBOR would arise.


Property Alliance Group (PAG) Limited is a property investment and development company based in Manchester. The company contracted with the Royal Bank of Scotland (RBS) plc on a number of loan facilities between May 2003 and July 2014. Several facilities, which were utilised to finance income-producing property assets, were referenced to a margin over the London Interbank Offered Rate (Libor).

During this period, PAG also entered into a number of derivatives transactions, including four swaps which were placed between October 2004 and April 2008. These swaps were referenced to the three-month British pound sterling Libor interest rate (GBP Libor).

In 2010 PAG's banking management was transferred from the bank's Manchester office to the London-based Global Restructuring Group (GRG), which specialised in managing RBS's relationships with financially distressed borrowers.

PAG eventually broke its swaps on June 7 2011. Given the mark-to-market value of the swaps on that date, it incurred break costs of £8.261 million. Subsequently, a new facility agreement was executed. Pursuant to Paragraph 21.5.1 of this facility, GRG began the process of preparing valuations of the PAG properties secured against RBS lending in 2010 and 2013; such valuations were at PAG's cost.

Proceedings were filed against RBS in September 2013 and were subsequently dismissed by the High Court in 2016. However, the courts recognised the importance of a number of the claims made. While acknowledging that many of the grounds of appeal were sensitive, in 2017 Patten LJ granted leave to appeal on the basis that consideration by the Court of Appeal would provide "a useful vehicle for determining what are likely to be central issues in most similar cases". The Court of Appeal considered the following claims.

Negligent misstatement claim

PAG claimed that RBS was in breach of duty in tort through its failure to provide the claimant with sufficient explanations in relation to each of the swaps. In particular, PAG submitted that RBS had not at any time furnished the claimant with the bank's internal estimation of the cost of breaking the swaps during their lifetime on a 'worst case scenario' calculation (known as the credit line utilisation figure at RBS). Further, it had not provided any worked examples of the various potential permutations of break costs which may have been payable if the swaps were terminated.

As a secondary line of argument, PAG contended that the bank had acted in breach of an additional duty to take reasonable care to ensure that any explanation of financial products given to potential customers was full, accurate and fit for purpose. Such a duty was held to exist in Bankers Trust International plc v PT Dharmala Sakti Sejahtera and has been advanced since the decision in Crestsign Ltd v National Westminster Bank plc as a mezzanine or intermediate duty.

The High Court held that RBS had no duty of care of the kind advanced by the claimants. It was found that PAG had been aware of the potential for break costs which fluctuated in accordance with market conditions and had at least been aware of the necessity of the bank's internal credit line. Further, it was found that no requests for information regarding the existing break cost position on a given day (known as mark-to-market) had been made at any time. The view that PAG had been sufficiently aware of the risks involved in the transactions was compounded by the fact that the company had enlisted derivatives advisers JC Rathbone Associates Ltd to opine on the first swap and had subsequently rejected their advice.

However, the High Court did accept that, in principle, a mezzanine duty may arise in certain claims, but that each case would turn on its facts.

Misrepresentation claim

PAG alleged that RBS had misrepresented that each swap entered into was a genuine hedge against the risk of unfavourable interest rate fluctuations. The claim was made on the basis that the swaps had not, on balance, reduced the claimant's interest rate risk exposure.

This claim was dismissed by the High Court on the basis that the reasonable representee would not have understood the references made to a hedge in the way contended by the claimant. Further, it was held that PAG representatives responsible for entering into the swap agreements had not understood the representations to have been made in the way that they were pleaded. In any event, the representations were found to fall clearly within the remit of the non-reliance clauses of documentation governing the swaps and therefore the doctrine of contractual estoppel was a sufficient defence to defeat any claim regarding PAG's understanding of the representations.

Libor claim

PAG claimed for recission based on a series of implied misrepresentations as to Libor. RBS was alleged to have represented that:

  • on any given date, Libor represented the British Banker's Association (BBA) defined rate;
  • RBS had no reason to believe Libor represented anything other than the BBA defined rate on any given date;
  • RBS had not made false or misleading submissions to the BBA or attempted to or engaged in the manipulation of Libor; and
  • RBS had not intended to make or made any false or misleading submissions to the BBA or attempt to engage in the manipulation of Libor.

The High Court found that there were no sufficient words or conduct on the part of RBS from which representations could be inferred and that any inference which may have been drawn from the "mere proffering of draft swaps referable to the 3 month GBP LIBOR rate" would not consequently give rise to an implied representation.

Further, it was found that:

  • PAG was unable to establish the falsity of any of the four representations in respect of the tenor and currency of Libor to which it had contractually agreed; and
  • as the claimants had accepted in evidence that at the time their principals had known nothing of the BBA definition or the way in which submissions were made by panel banks, nor had it ever occurred to them that the rate was capable of manipulation, there were no grounds to rely on any misrepresentations made, as they could not be understood.

Valuation claim

PAG claimed that, in relation to the aforementioned valuation of secured properties (conducted by Lambert Smith Hampton on instruction from GRG) there was an implied term that RBS would act "reasonably, in a commercially acceptable or rational way, in good faith, for a proper purpose".

The High Court again dismissed this claim, finding that the relevant clause (21.5.1) had been inserted for the benefit of RBS and that, as it involved no discretion or optionality, it allowed no scope for any implied term to arise in respect of PAG's interests.

Court of Appeal decision

All claims against the defendant bank were dismissed by the Court of Appeal.

Negligent misstatement claim

The Court of Appeal agreed with the High Court's view in relation to negligent misstatement and the duty to disclose the credit limit utilisation figure or working scenarios.

The secondary line of argument concerning the wider duty to advise fully and properly was also dismissed. It was stated that "the idea of a "mezzanine" or intermediate duty is best avoided", because 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. The court stated that the correct approach is that "concentration should be on the responsibility assumed in the particular factual context regarding the particular transaction or relationship in issue". This was a reassertion of the orthodox position on duties of care, effectively consistent with the Hedley Byrne v Heller duty not to misstate, including by omission.

Misrepresentation claim

In the absence of evidence to show that PAG's principals understood that 'hedge' bore the narrow meaning contended in their pleadings, the Court of Appeal dismissed the claim for fraudulent misrepresentation on its facts.

Libor claim

While this claim was also dismissed on the facts of the case, the Court of Appeal (disagreeing with the first-instance judge) decided that, on the facts, RBS had made an implied representation that it "was not manipulating and did not intend to manipulate sterling LIBOR". In relation to whether an implied representation had been made, the Court of Appeal further stated that:

"(1) there must be clear words or conduct of the representor from which the relevant representation can be implied; and

(2) a helpful test is to ask "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 conduct which gave rise to the implied representation was "the lengthy discussions between PAG and RBS before the Swaps were concluded", during which "RBS was undoubtedly proposing the swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts".

Notably, although it did not decide the point, the Court of Appeal stated that such a representation "would probably be inferred from a mere proposal of the swap transaction".

Despite persuading the Court of Appeal to find such a representation, PAG was unsuccessful given the factual difficulties that it faced with respect of demonstrating that the GBP Libor (the currency of the transaction) had been manipulated and demonstrating reliance.

Valuation claim

Despite upholding the High Court judgment and dismissing the claim (again on the facts), the Court of Appeal emphasised that that the right conferred by the relevant clause of the 2011 facility was not wholly unfettered. It stated that contractual power must be exercised only in advancement of legitimate commercial aims and is not to be used to vex the counterparty maliciously.


PAG's appeal largely failed on the previous findings of fact by the High Court. However, the Court of Appeal's willingness to find a simple, more high-level implied representation with respect to Libor suggests that sophisticated investors and customers of banks found to have manipulated Libor for the relevant currency of the transaction in question may have more meritorious claims than was previously thought to be the case.

 First published on the 20th March 2018, on International Law Office:

Property Alliance Group Limited v The Royal Bank of Scotland PLC [2018] WLR(D) 160

Stay connected and subscribe to our latest insights and views 

Subscribe Here