The High Court has rejected the argument that dealings between Goldman Sachs ("GSI") and the Libyan Investment Authority ("LIA") crossed the line from an ordinary arm's length bank-client relationship to a relationship which gave rise to duties of candour and fairness. It held that, in the absence of any such protected relationship, (i) GSI did not exercise undue influence over the LIA and (ii) the derivative trades sold to the LIA did not constitute an unconscionable bargain.
Although Rose J's judgment does not rule out undue influence and unconscionable bargain as a possible avenue for a client claim against a bank, it made clear that only in the most exceptional of circumstances could they succeed. It therefore provides no encouragement to those who might seek to use this route to overcome difficulties caused by the limited nature of the relationship between banks and their clients in recent mis-selling claims. This robust decision should therefore provide comfort to banks fearing that these grounds of claim may be used as a new avenue for making claims for rescission.
Grounds of claim and the existence of a special relationship
The LIA based its claim on two causes of action: (1) GSI was able to procure the LIA to enter into the trades by the exercise of undue influence by taking advantage of the LIA's lack of sophistication, and (2) the trades constituted unconscionable bargains.
The first ground relies on the argument that the bank "crossed the line" from a normal counterparty relationship and had instead become a trusted confidant and advisor to the LIA as a result of various factors, including:
- The use of terms like "strategic partnership" and "unique relationship"
- Lack of financial sophistication on the part of LIA employees
- The provision of training, research, corporate hospitality and informal advice about stocks and the market.
It was the contention of the LIA that GSI took unfair of advantage of this special relationship to exercise undue influence over the LIA and sell the trades.
Rejection of special relationship
Rose J rejected this argument. She was unwilling to find that the behaviour of GSI had given rise to anything beyond an ordinary bank-client relationship and, therefore, that GSI did not exercise undue influence in procuring the trades.
The grounds on which she rejected the argument may serve as useful indicators of the approach the courts will take in the future where a claimant seeks to suggest that the relationship between itself and a bank differs from an ordinary arm's length bank-client relationship. These include the following:
- References in presentations and sales pitches to "strategic partnership" and "unique relationship" were neither surprising nor sufficient to show that the relationship went beyond that which normally exists between bank and client. Many banks and institutions use "warm words" about developing a partnership, about trust and about strategic relationships when trying to sell products. Use of such terminology does not mean that a bank is proposing a fundamental shift in the nature of its relationship with the client.
- The Court took into account the fact that a bank will be eager to establish itself as bank of choice for a client, which does not in itself involve the bank "crossing the line" into an advisory relationship.
- The provision of training, research and general assistance is not sufficient to show that there is a special relationship between bank and client.
- A bank may provide corporate hospitality (including "expensive entertainment") without giving rise to the presumption that it has moved from an ordinary arm's length relationship to something stronger and it was hopelessly naïve to suggest otherwise.
- The courts will be less likely to find a protected relationship or undue influence where the client is capable of assessing and rejecting deals proposed by the bank.
- The courts will be less likely to find a protected relationship where the client has entered into similar relationships or transactions with other banks.
- Rose J held that it is critical to distinguish between a situation where a bank gives advice on stock market opportunities going beyond the normal remit of a counterparty bank and situations where senior executives of the bank and the client have general discussions in an informal setting about how individuals see the markets developing and about prospects for particular stocks or sectors. The latter may take place within an ordinary bank-client relationship (as was the case here).
Other points to note
Much emphasis was placed by the LIA on the suggestion that it was, at the time of the Disputed Trades, a nascent, unsophisticated and naïve Sovereign Wealth Fund in a country with an under-developed financial sector. Banks generally, and those with significant emerging market businesses in particular, will therefore welcome the robust refusal to set a precedent for emerging market investors to argue that they were subject to the undue influence of the bank.
More generally, this decision should be seen in the context of the difficulties faced by claimants in recent mis-selling claims. See for example the case of Mark Thomas Raymond Bailey v Barclays Bank Plc  EWHC 2882 (QB), in which the claim was dismissed on the grounds that a fiduciary relationship between bank and client will only be found in exceptional circumstances. A further example of the courts' stringent approach to mis-selling claims can be found in Thornbridge Limited v Barclays Bank plc  EWHC 3430 (QB), in which the High Court found that the claimant was contractually estopped, as a result of standard form contractual representations as to the basis of the relationship, from alleging that the bank provided investment advice and recommendations.
It is also important to note that the pragmatic and realistic approach taken by Rose J in this judgment suggests a healthy future for the Financial List. This is the specialist list recently introduced to address the particular business needs of parties litigating on financial matters, with the objective of ensuring that cases which would benefit from being heard by judges with suitable expertise and experience.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020