Fraudulent Misrepresentation By A Bank And The ISDA Master Agreement

Aspects of the recent judgment in litigation between UBS, Kommunale Wasserwerke Leipzig GmbH, Depfa Bank plc and Landesbank Baden-Württemberg - [2014] EWHC 3615 (Comm)

Few claims result in judgments as long as that recently handed down by Mr Justice Males (the Judge) in the litigation between UBS, Kommunale Wasserwerke Leipzig GmbH (KWL), Depfa Bank plc and Landesbank Baden-Württemberg (LBBW), but the length of the judgment is proportionate to the complexity of the issues decided by the Judge in the four actions between the parties (all of which were tried together).

This update considers only one of those issues, of particular significance for Depfa, for which this firm acted in the litigation. That issue was whether, in inviting Depfa to intermediate in a swap between it and KWL, UBS made certain implied representations to Depfa in relation to its belief in the honesty of those acting for and advising KWL, and the integrity of the transaction proposed.

The Judge held that UBS had indeed made such representations, which it knew to be false, and that it was liable for fraudulent misrepresentation as a result.

This decision should be noted in particular by banks, but its implications extend beyond the banking sector. While the facts of this case are unusual, and on occasion distinctly unsavoury as regards the conduct of individuals employed both by UBS and KWL, the principle articulated by the Judge in this aspect of his decision is likely to resonate in other scenarios.

Summary of the factual background

UBS needs no introduction. This litigation involved both its investment banking business, which was party to various of the disputed transactions, and its asset management business (accused successfully of negligent management of various CDO portfolios).

KWL is a private company incorporated in Germany. It is responsible for the provision of water and wastewater services (and various ancillary services) in the Leipzig area. All its decisions relevant to the litigation were taken by one of its managing directors, Mr Heininger. KWL was (at least notionally) advised in relation to the transactions which were the subject of the dispute, by a Swiss entity called "Value Partners", specifically by two of its representatives, Messrs Senf and Blatz.

Some years before the relevant transactions took place, KWL entered into various cross-border leasing (or CBL) arrangements in relation to its assets in order to reduce its tax liabilities. It leased those assets out on a long-term basis and leased them back on a short-term basis and was paid a premium for doing so. However, it needed a large sum to be able to re-acquire its assets at the end of the CBL arrangements.

In order to obtain this sum, KWL entered into long-term payment agreements with various financial institutions (referred to in the litigation as Balaba, GECC, MBIA and Merrill Lynch). The exact mechanics of these agreements are not relevant for present purposes, but they involved KWL receiving long-term notes from each entity. That meant that if the institution defaulted, KWL would not receive the money it needed in order to re-acquire its assets.

KWL (at the instigation of Value Partners) started discussions with UBS in early 2006 about restructuring its exposure to Balaba, GECC, MBIA and Merrill Lynch. The scheme which was agreed was broadly as follows. KWL bought credit protection from UBS in relation to a default by the institutions. In exchange, it sold credit protection to UBS in relation to the potential default of a synthetic portfolio of assets. It is the latter part of the arrangement which is now the subject of the dispute.

The intention was for...