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SBTi opens consultation on the Corporate Net-Zero Standard V2
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Global | Publication | February 2017
The High Court rejected the Libyan Investment Authority’s (LIA) claims that Goldman Sachs had exercised undue influence to procure the LIA to enter into a series of derivatives transactions or that the trades otherwise amounted to an unconscionable bargain.
Bank counterparties face increasingly high barriers to success in claims to exit financial transactions. Contractual estoppel is often an insuperable obstacle – a pleading of fraud may circumvent contractual estoppel, but will rarely be supported by the facts.
In this case, the claimant employed a new argument, based on equitable wrongs. LIA argued that Goldman Sachs had unduly influenced it to enter into the transactions (the ‘Disputed Trades’) and that the Disputed Trades amounted to unconscionable bargains.
While largely depending on its facts, the case gives useful guidance as to how far a bank counterparty can rely on undue influence and unconscionable bargain claims to set aside their contracts.
Economic sanctions were lifted against Libya between 2003 and September 2004. The Libyan government had accrued oil revenues of many billions of dollars and following the sanctions set up the LIA as a fund to invest its assets for the benefit of the citizens of Libya.
Many investment banks pitched investment proposals to the LIA. One of these was Goldman Sachs. As a result, Goldman Sachs entered into the Disputed Trades with the LIA between September 2007 and April 2008.
The Disputed Trades were designed to give the LIA exposure to different equities (including those of Citigroup, EdF, Allianz, Banco Santander, ENI and Unicredit). Under the structure of the Disputed Trades, LIA did not invest in the shares directly. All the Disputed Trades were synthetic derivatives comprising a put option and a forward. The LIA paid a premium to Goldman Sachs in return for exposure to the equities. If the share price rose by the maturity date of the Disputed Trades, Goldman Sachs would pay the LIA the amount of the increase multiplied by the total notional number of shares. Otherwise, Goldman Sachs kept the premium and the LIA received nothing. The total premium paid by the LIA was US$1.2 billion.
The LIA argued that
The LIA asserted that the above factors gave rise to two causes of action
Rose J held that the actions of Goldman Sachs in building the relationship with LIA did not cross the line into a special or advisory relationship. Goldman Sachs did what they could to win the work and build the relationship. This did not place them into a different category from the other banks that the LIA were trading with.
Rose J held that the offer of the internship did not lead to undue influence. Goldman Sachs’s motivation in offering the internship was the chance to form a strong link with someone who might be leading the LIA London office in the future. It was also unrealistic to expect that the Deputy Chairman of the LIA would be influenced to commit the LIA investing over a billion dollars on the basis of a few months’ internship for his brother. All the internship did was to create a friendly atmosphere between Goldman Sachs and the LIA.
Although there was no ‘protected relationship’ necessary for a finding of presumed undue influence, in any event there was no feature of the Disputed Trades that would call out for explanation and therefore lead to a presumption of undue influence. The level of Goldman Sachs profits were commensurate with the nature of the trades and the work that had gone into winning them. Even if the Disputed Trades were unsuitable, the LIA entered into similar trades with other counterparties and it was found that the LIA had its own reasons for entering into the Disputed Trades. Accordingly, the claim for unconscionable bargain also failed.
Although the case was not argued as a misrepresentation claim, many of the classic elements of such a claim feature in the attempt to frame the Disputed Trades as having been entered into as a result of undue influence. These include allegations that Goldman Sachs assumed an advisory relationship, that the products were not suitable, that the profits that Goldman Sachs were making were excessive and that the LIA was naïve and unsophisticated.
On the face of it, an undue influence claim appears no more fruitful a way of using these types of argument to assert that a contract should be set aside than a claim in misrepresentation. The courts will still be mindful not to let a contractual party escape a bad bargain and will be likely to consider matters from that viewpoint.
However, there were other features of the case which would not ordinarily arise in a typical misrepresentation claim. The secondment of a Goldman Sachs employee to the LIA, training, informal advice and corporate hospitality were all relied on by the LIA to assert that the relationship had become something more than one merely that between a bank and counterparty. The court rejected these arguments firmly and this will provide comfort for banks marketing to sovereign wealth funds in the emerging markets.
Finally, it is worth noting that although Goldman Sachs won the case, there are risk factors for banks to be mindful of in these situations
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