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Bankers Trust International Plc v Pt Dharmala Sakti Sejahtera [QBD (Comm)]

Commercial Law Cases Cited authorities 14 Cited in 35 Precedent Map Related
Vincent
JurisdictionEngland & Wales
JudgeMance J.
Judgment Date01 December 1995
CourtQueen's Bench Division (Commercial Court)
Date01 December 1995

Queen's Bench Division (Commercial Court)

Mance J.

Bankers Trust International Plc
and
Pt Dharmala Sakti Sejahtera & Related Action

Iain Milligan QC and David Owen (instructed by Linklaters & Paines) for BTI.

Stuart Isaacs QC, Sam Aaron and Christopher Pymont (instructed by Ince & Co) for DSS.

The following cases were referred to in the judgment;

Barclays Bank plc v KhairaWLR [1992] 1 WLR 623.

Box v Midland Bank LtdUNK [1979] 2 Ll Rep 391.

Cornish v Midland Bank plcUNK [1985] 3 All ER 513.

Esso Petroleum Co Ltd v MardonELR [1976] QB 801.

Hazell v Hammersmith & Fulham London Borough CouncilELR [1990] 2 QB 697 (CA); [1992] 2 AC 1 (HL).

Low v BouverieELR [1891] 3 Ch 82.

McNally v WelltradeInternational Ltd [1978] I RLR 497.

Morris v KanssenELR [1946] AC 459.

Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co LtdELR [1972] AC 741.

Banking — Derivatives — Interest rate swaps — Counterparty alleged lack of authority and misrepresentation — Swap based on LIBOR replaced by agreement to avoid losses — Second swap amended when interest rates rose and repudiated after further rise — Counterparty's officers lacked authority to enter into transactions — Whether transactions avoided — Alleged misrepresentation as to nature and suitability of swap — Whether collateral contract — Whether bank owed duty of care to advise company — Whether any inaccurate information provided by bank caused company's loss.

1.This was an action and a counterclaim arising out of transactions in derivatives. The issues were whether the transactions were not binding for lack of authority or had been validly avoided, and whether damages ought to be awarded for misrepresentation, breach of contract or breach of a duty of care.

The plaintiffs, Bankers Trust International plc (“BTI”), entered into transactions in derivatives in 1994 with the defendants, PT Dharmala Sakti Sejahtera (“DSS”), an Indonesian company, through the Singapore branch office of Bankers Trust Co (“BTCo”). The transactions involved reference to an index and imposed on the parties financial obligations which depended on the level or movements of that index at or between specified dates.

In negotiating the swaps with BTCo the DSS officers, the finance director and the group financial controller, held themselves out as capable of understanding the nature of the swaps proposals and of evaluating them without BTCo's advice. DSS entered into the swaps transactions not to hedge its exposure to interest rate movements but to profit by taking a view on future rates.

Swap 1 was effected in January 1994 for a nominal amount of US$50m and was “time-dependent”. It was for two years, and based on the rate for deposits in US dollars for six months (“six-month LIBOR”). When projected forward rates for six-month LIBOR rose, to avoid large losses swap 1 was replaced by agreement by swap 2. The time period and the amount were the same but it was divided into two tranches, and it was a “LIBOR barrier swap” plus “spread”. The differences between the two swaps were favourable to DSS, including different trigger rates and an advance payment to DSS. A further rise in US interest rates, however, in March and April led to a negative value for swap 2 on 21 April of about $34.5m. On 6 May swap 2 was amended to increase the barrier interest rates. By 10 May the negative value had increased to over $45m. On 13 May DSS informed BTCo that it did not wish to proceed with swap 2 as amended, asserting that there had been misrepresentation in that the high rewards of the swap had been highlighted but not the high risks.

On 18 August 1994 BTI issued a writ claiming that DSS was not entitled to damages for misrepresentation or other relief. In December BTI served notice of default under the ISDA agreement and issued a writ claiming US$64,702,981. The proceedings were consolidated.

DSS maintained that the transactions were entered into without authority in that under art. 10(2)(c) of DSS's deed of incorporation the board of directors were required to authorise such transactions, whereas the swaps were negotiated by the finance director and the group financial controller. Alternatively, DSS argued that BTI through BTCo represented that swaps 1 and 2 would be replaced “at no cost”, which was a misrepresentation of the intention of BTI when entering into the transaction. DSS was therefore entitled to rescind the contract. Alternatively, DSS relied on breach of contract, deceit, misrepresentation and a breach of duty of care to ground a claim for damages in the amounts DSS would have to pay if the swaps were held to be valid.

Held, giving judgment for BTI:

1.Article 10(2)(c) of DSS's deed of incorporation, which required the board of directors to act in relation to the receiving of a loan of money from whomsoever, was limited to loans of money in an ordinary legal sense falling within Ch. 13 of the Indonesian Civil Code. The swaps transactions in question fell outside the scope of art. 10(2)(c), and therefore the defence of want of authority failed.

2.The officers of DSS who negotiated with BTCo in 1994 held themselves out both as capable of evaluating proposals for swaps and as concerned to do so for themselves, independently of any recommendation or advice from BTCo. BTCo therefore concluded that they were dealing with sophisticated people able to evaluate the risks, merits and implications of any proposal for themselves. There was no evidence that BTCo or BTI represented that swap 1 was suitable or safe for DSS, or that it was intended to replace swap 1 at no cost if the interest rate barrier was reached. The only representation made, as to the economic forecast concerning six-month LIBOR, was a reasonable forecast. The allegation of misrepresentation in relation to swap 1 accordingly failed.

3.Similarly DSS failed to establish any contractual undertaking or collateral contract to the effect that swap 1 was safe and could be replaced at no cost to DSS, or a duty of care owed by BTCo or BTI to explain fully and properly the meaning and effect of swap 1.

4.Whether or not BTI and BTCo misrepresented the position in relation to swap 2, or merely presented it inadequately, DSS was not in fact misled because it was capable of evaluating and safeguarding its own position and did in fact do so. The claim based on misrepresentation in respect of swap 2 accordingly also failed.

5.Although BTI and BTCo were under a duty to present carefully the financial implications of the proposals regarding the nature or risks of swap 2, DSS had not established that those aspects of the presentation which were inadequate had caused DSS to enter into the transaction. Even if BIT or BTCo were in breach of duty, any such breach was not causative of the loss suffered by DSS in relation to swap 2.

6.A duty of care to advise should not readily be inferred in a commercial relationship. BTI and BTCo owed a general duty of care to DSS to represent fairly and accurately the facts in relation to swap 2. They were not under a broader duty to advise DSS, which held itself out as having the expertise and capacity to understand derivatives transactions.

7.It followed that BTI's claims in relation to both swaps succeeded, and DSS's defence and counterclaim against BTI and BTCo failed.

JUDGMENT

Mance J:

I. Introduction

This litigation arises from transactions in derivatives purportedly entered into in the first half of 1994 between the plaintiffs, Bankers Trust International plc (“BTI”), a company incorporated in England and the defendants, PT Dharmala Sakti Sejahtera (“DSS”), an Indonesian company. BTI acted through the Singapore branch office of Bankers Trust Company (“BTCo”), a company incorporated in the US. Transactions in derivatives means in this case transactions entered into with reference to an index and imposing on the parties financial obligations which would or might depend on the level or movements of that index at (or between) a specified date or dates. I refer to the transactions as purportedly entered into because one issue is whether the individuals who held themselves out as acting for DSS had any authority to bind DSS. I leave this aside for the meantime, and speak simply of transactions.

The transactions have been referred to as swap 1, swap 2 and amended swap 2. Swap 1 was effected following a meeting on 19 January 1994 and a letter bearing the same date, and was the subject of a signed confirmation dated 27 January 1994. It was “time-dependent” in nature. Its nominal amount was US$50m. Its period was two years. It was based on LIBOR, defined in terms of the rate for deposits in US dollars for a period of six months (“the six-month LIBOR rate”) appearing on the Telerate page 3750 as of 11 a.m. London time on each London Business Day. It had two parts. Under one, DSS was to pay interest in each year at this six-month LIBOR rate, while BTI was to pay the same rate plus 1.25 per cent, thus giving DSS a 1.25 per cent margin per annum. Under the other, DSS was to pay interest at five per cent per annum, while BTI was to pay interest at five per cent per annum multiplied by N over 183. “N” was defined as “the actual number of days in a six month reference (or ‘look’) period commencing with 15 August 1994, during which the LIBOR rate was determined to be less than 4.125 per cent, up to 183.” If the LIBOR rate exceeded 4.125 per cent on every day during the reference period, DSS would thus receive no interest and suffer a loss of five per cent per annum under this part of the transaction. Its net loss taking the two parts together would then be 3.75 per cent per annum on US$50m in each of the two years, that is a total of $3.75m which would represent the maximum loss under swap 1. At the time of this swap, the six-month LIBOR rate stood at 3.625 per cent per annum.

The terms of swap 1 provided for the parties to execute an ISDA (International Swaps and Derivatives Associations...

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