There has been a lot of publicity around the decision of Mr. Justice Flaux to allow Graiseley Properties Limited to argue their pleaded case at trial. What I find interesting about the case is the legal basis on which it has been framed and what this may tell us about D&O coverage battles which may be looming.
The question the judge had to address was whether the pleading was sufficiently arguable that it had a real prospect of success (it should be stressed that at this stage no findings have been made against Barclays in the proceedings).
The case is put on the basis of the tort of deceit based on four implied representations. In essence, these were that:
- LIBOR was indeed what it was supposed to be i.e. : “the rate at which an individual contributor panel bank could borrow funds were it to do so by asking for and then accepting interbank offers in reasonable market size just prior to 11am London time”
- Barclays has no reason to believe that LIBOR was not LIBOR
- Barclays had not made any false or misleading submissions or engaged in the practice of attempting to manipulate LIBOR in any way; and
- Barclays did not intend to make any false or misleading submissions or wrongful manipulations of LIBOR in the future.
Graiseley’s complaint is that it was obliged, as a condition of Barclays granting various loan facilities to enter into two derivative contracts based upon the LIBOR rate and that in doing so it relied on these implied representations.
The Judge considered findings made by the Financial Services Authority (FSA), the Department of Justice in the United States and also by the US Commodities Futures Trading Commission as well as findings by the House of Commons Treasury Select Committee. Having reviewed these findings, the Judge concluded that the activities of Barclays’ derivatives traders led to the conclusion that they understood that their counterparties would or might suffer adverse financial consequences in relation to particular transactions.
He went on: “In my judgment, what holds for the derivative traders as to their knowledge or understanding must at least arguably also hold their senior management at Barclays who were also responsible for manipulation of LIBOR. In those circumstances, the attempt by the defendants to argue that these implied representations do not even reach the level of “real prospect of success” for the purpose of allowing the amendments [to the pleading] is doomed to failure…. It seems to me that it cannot be said that Barclays has an unanswerable case that the implied representations were not made so the matter is quintessentially a factual one for determination at trial.”
Will D&O Policies Respond?
The interesting D&O coverage question to which this conclusion gives rise is whether even the possibility of findings of dishonesty against senior management of a large organisation give a D&O carrier the ability to reserve its position with respect to coverage in relation to all insured persons.
Many D&O policies contain severability language (Here link to Willis D&O dictionary definition) as well as clauses entitled “non-rescission”. The general idea behind these clauses is to deliver the result that the knowledge and information possessed by one insured shall not be imputed to any other insured for the purposes of denying coverage to all insureds. The trap for the unwary in such clauses relates to the breadth of the reservation in cases of fraud or dishonesty.
To be clear, no one (least of all the author) has any problem in denying cover to those guilty of fraud or dishonesty. What can happen though is that the reservation language can (if great care is not taken) be relied on by insurers to deny cover to all insureds on the basis that “fraud unravels all”. In other words, if and to the extent that it is claimed that one or more insureds (possibly including the company itself) is alleged to have been dishonest, the insurers have the right to deny cover to all insureds.
Of course many policies try to remove some of the sting of these clauses by including a commitment to advance until there has been a finding of fraud or dishonesty against individual insureds. I would argue that this is not the whole answer and that such clauses should operate (assuming the law governing the policy allow this) on the basis that the consequences of fraud or dishonest conduct should in all circumstances only be visited on those responsible for such conduct.