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Borrower Can Pursue LIBOR Manipulation Damages Claim

In a ruling of crucial significance to the banking industry, a commercial borrower has been granted permission to pursue a damages claim in respect of transactions worth more than $160 million on the basis that they were infected by manipulation of the London Interbank Offered Rate (LIBOR).

In two conjoined actions, the borrower was being sued by a major bank for recovery of a loan in excess of $150 million and in respect of an interest rate swap agreement for a sum in excess of $11 million. The bank had applied for summary judgment on both claims on the basis that none of the borrower’s defences had any prospect of success.

The Commercial Court rejected the borrower’s plea that, due to the bank’s alleged manipulation of LIBOR, the loan agreement was illegal, void and unenforceable by virtue of the Competition Act 1988.  Observing that countless financial transactions worldwide are based upon LIBOR, the Court noted that, if the borrower’s argument on that point had succeeded, the consequences for the banking industry would have been vast.

The Court acknowledged that there was a link between alleged unlawful fixing of LIBOR by financial institutions and the rates of interest charged to borrowers, but ruled that that did not mean that loan agreements between banks and their customers were automatically void. For that and other reasons, a number of the borrower’s defences to the bank’s claims were unviable.

However, crucially, the Court permitted the borrower to pursue a counter- claim for damages or restitution from the bank on the basis that its manipulation of LIBOR, if proved, amounted to a repudiatory breach of an implied term in both the loan and interest rate swap agreements.

Although it was not open to the borrower to seek rescission of the credit agreement, and any damages awarded could not be set off or used as a partial defence to the bank’s claims, the Court also allowed the borrower to rely upon the bank’s alleged manipulation of LIBOR in support of its plea that the interest rate swap product supplied to it was unsuitable.