UK & Europe
In a rare case, Mrs Justice Rose considered in detail the relationship between bankers and commercial investors and whether certain banking transactions should be rescinded, on the basis they were procured by the exercise of undue influence or further to an unconscionable bargain.
Mrs Justice Rose's judgment in The Libyan Investment Authority v Goldman Sachs International  EWHC 2530 (Ch) sets out a helpful summary of how the law in these areas operates with regards commercial investors, and highlights that the courts are reluctant to be prescriptive with regard to when it will be appropriate to hold that there has been undue influence, such that the outcome in a particular case will necessarily be heavily dependent on the facts. The starting point remains that the courts will seek to uphold freedom of contract and commercial certainty unless it is clearly demonstrated in a particular case that it would not be fair to do so.
The English courts have, in recent years, considered a variety of arguments on behalf of investors involved in disputes with their bankers concerning the enforceability of rights and obligations in investments where those investors have suffered often very significant losses following the market disruption of the 2007/ 2008 financial crisis, or have otherwise not made the returns for which they had hoped. The starting point for the court in all such cases is to consider whether grounds have been made out by the investor to justify deviating from the general public policy that contractual terms should be upheld and commercial certainty should be protected.
Arguments relying on undue influence are more commonly seen in the context of dealings with individuals and alleged exploitation in a family setting rather than a commercial setting (e.g. bank transactions where a spouse alleges undue influence by their partner or where a child alleges undue influence by their parent or the other way around). This case is by no means the first time an investor has sought to rely on undue influence or analogous arguments outside that context, including arguments concerning breach of fiduciary obligations, abuse of confidence, breach of the fair dealing rule, or exploitation of vulnerability arising from the trust and confidence placed by an investor in his or her banker - see for instance JP Morgan Chase Bank and Others v Springwell Navigation Corporation  EWHC 1186 (Comm). However, it has been some time since such points have been dealt with by the courts in such detail in the context of commercial investors.
The arguments raised by The Libyan Investment Authority (LIA, a sovereign wealth fund) were that it should be permitted to rescind a number of leveraged synthetic derivative trades on which LIA had paid Goldman Sachs approximate premiums of US$1.2 billion. LIA sought rescission of the transactions and repayment of the premiums paid on the basis that Goldman Sachs had allegedly procured the transactions by the exercise of undue influence. LIA claimed that Goldman Sachs had taken advantage of it as a naïve and unsophisticated investor and had pushed it to enter into the transactions. Further, LIA contended that the transactions constituted unconscionable bargains. Goldman Sachs contested the claim.
Mrs Justice Rose commenced her analysis of the legal position with a reminder that, generally speaking, the law will not intervene to save people from making improvident bargains – she quoted Lord Hoffmann's statement in the Privy Council decision in Union Eagle Ltd v Golden Achievement Ltd  AC 514 to the effect that the notion that the court's jurisdiction to grant a party relief from the consequences of its contract is unlimited and unfettered must be rejected as a "beguiling heresy".
Mrs Justice Rose then went on to consider the doctrine of undue influence. One of the key themes which emerges from her analysis of the case law is that the courts repeatedly warn against trying to 'over define' the relevant elements of the doctrine and the situations when equity will intervene to displace a deal that has been done. As a starting point:
Undue influence can be actual (where there are specific instances of unconscionable conduct), or presumed (based on circumstances that have arisen – this is a rebuttable evidential presumption, and requires the existence of a protected relationship between the parties).
In this case, LIA contended there had been actual undue influence, by each of:
Despite finding no relevant protected relationship, Mrs Justice Rose considered whether the transactions still "called out" for an explanation (being the second limb of the test for presumed undue influence). Her considerations included a review of the bank's profits on the trades, how they were priced, and whether they were "suitable" for the LIA to make. She found there was nothing about the nature of the trades which would raise a presumption (even had a relevant protected relationship existed) that they were the result of undue influence.
Mrs Justice Rose also evaluated LIA's argument that there had been an unconscionable bargain. In doing so, she considered Portman Building Society v Dusangh  2 All ER (Comm) 221, which confirms that the basis for such a claim is:
Given her detailed review of arguments and evidence to make her findings on the undue influence claims, Mrs Justice Rose held that it followed without further discussion that the claim to set aside the trades as an unconscionable bargain failed in this particular case.
Even where there is an actual or apparent inequality between an investor and its bank with regards knowledge and understanding of particular products, and even where the bank has invested significant effort in procuring transactions, this will not necessarily be enough for a court to find that it would be unfair to hold the investor to its bargain. It is clear that evidence about the investor's actual understanding of the transactions that it was entering into, and the internal processes that the investor went through when entering into transactions, is key. However, the overriding principle guiding the English court's approach is freedom of contract and holding parties to the bargains they have made unless there is good reason not to do so.