23es

Claims to rescind transactions on the basis of undue influence and / or unconscionable bargain fails

The Libyan Investment Authority v Goldman Sachs International [2016] EWHC 2530 (Ch) (Rose J)

 

In a Judgment handed down on 14 October 2016, Mrs Justice Rose dismissed claims brought by the Libyan Investment Authority (“LIA”) against Goldman Sachs International (“GSI”) to rescind 9 trades which the LIA entered into with GSI between September 2007 and April 2008 and for the return of the premiums paid to GSI on the basis of undue influence and / or that the trades constituted unconscionable bargains.

The Background

Following the lifting of economic sanctions against Libya by the United Nations in September 2003 and by the USA in September 2004 Libya found itself with accrued oil revenues of many billions of dollars, mainly held as cash in the Libyan Central Bank. The Government of Libya decided to set up the Claimant, the Libyan Investment Authority (‘LIA’), as a sovereign wealth fund to start investing this money for the benefit of the present and future citizens of Libya.  Through GSI the LIA invested some USD$1.2 billion. The economic downturn in 2008 saw the value of the investments fall with a consequent loss to the LIA of the amount of premiums paid.

Attempt to rescind

In asserting its claims that undue influence had been exercised the LIA alleged;

(i) that a relationship of trust and confidence had grown up between GSI and the LIA by the time that the trades were concluded and that GSI crossed the boundary of the usual counterparty relationship between a bank and its client and became in effect a trusted confidant or the LIA’s adviser or ‘man of affairs’.

(ii) that the LIA had lacked sophistication when it came to financial investments and products of the type sold to them to the extent that they believed they were acquiring shares in the underlying companies and did not appreciate that the structure of the deals meant they would lose everything if the share price had not risen substantially by the maturity date.

(iii) that the trades were priced unfairly, that Goldman Sachs earned excessive profits from the trades and that the nature of the trades was entirely unsuitable for the needs of the LIA as a sovereign wealth fund.

The legal implications

In terms of the law there is nothing unusual in the approach of the Court.  The court referred to the leading cases on undue influence such as Royal Bank of Scotland v Etridge (AP) [2001] UKHL 44 (‘Etridge’) and the usual principles that determine when a bargain can be set aside as unconscionable which were considered by the Court of Appeal in Portman Building Society v Dusangh [2000] 2 All ER (Comm) 221.

Conclusion

Having considered all the of the evidence presented by both parties Mrs Justice Rose was not satisfied that that GSI had extended undue influence in the first sense defined in Etridge or that it was a case where the relationship that developed between the two parties crossed the line from being a strong, cordial business relationship between a buyer and a seller of financial services to being the kind of relationship of trust and confidence giving rise to a duty of candour and fairness on the part of the bank to its client.  Further the levels of claim as to lack of sophistication of the directors or staff at LIA was not warranted on the facts.

In relation to the pricing of the trades the Judge that even if the trades were, as the LIA contended, unusually lucrative trades, it was not enough to call out for explanation given that the trades were unusual in many respects.  Further, there were no grounds for concluding that the level of profits earned by GSI on the trades was excessive given the nature of the trades and the work that had gone in to winning them. Although they were potentially unsuitable for a sovereign wealth fund, there were other reasons why the LIA wanted to enter into them and, if they were unsuitable, they were no different from many other investments that the LIA made over the period in that regard.

Back to News »