5 June 2017

BANKERS BEWARE: The Libyan Investment Authority v Goldman Sachs International

Summary

The Libyan Investment Authority (LIA) sought to argue that it was unduly influenced by Goldman Sachs to enter into transactions which amounted to unconscionable bargains.  This case emphasises that the threshold for proving undue influence and unconscionable bargains remains high, as the courts are reluctant to stifle freedom of contract and commercial certainty.  The principles of undue influence and unconscionable bargain serve the purpose of protecting parties from being wronged or exploited in the event that they are genuinely disadvantaged.

Facts

The LIA was set up for the benefit of the citizens of Libya following the Libyan government’s accrual of vast oil revenues.  Goldman Sachs pitched investment proposals to the LIA following which LIA entered into investments of disputed trades (designed to give exposure to different equities) from 2007 to 2008.  The investment was structured whereby if share prices rose by the maturity date, Goldman Sachs would pay the LIA the amount of the increase times the total notional number of shares.  If the shares did not rise by the maturity date, Goldman Sachs would keep the premium resulting in the LIA receiving no return.  LIA paid a premium of $1.2 billion, which was later lost due to the investment.

Issues arising

Protected relationship

The LIA argued that a protected relationship existed as they expected Goldman Sachs to act in their best interests due to a relationship of trust and confidence.  This was based on the facts that an employee from Goldman Sachs was seconded to the LIA; training and informal advice was also provided, together with extensive corporate hospitality.  The court found that the actions of Goldman Sachs in building the relationship with LIA did not cross the link into an exceptional or consultative relationship.  Goldman Sachs merely built the relationship to win the work.

The Goldman Sachs internship / undue Influence

The LIA contested that Goldman Sachs’ offering of an internship to a relative of the Deputy Chairman of the LIA amounted to undue influence.  It was found that it would be unrealistic to expect that an internship would result in the Deputy Chairman of the LIA committing to invest billions of dollars with Goldman Sachs in exchange for this. The court found that the offer of the position did not amount to undue influence.  It was merely to form a strong link with someone who might be leading the LIA London office in the future.

Presumption of undue influence?

It was submitted that the synthetic structured leveraged investment products were so unsuitable for the LIA, as a sovereign wealth fund, that this raised a presumption of undue influence.  However, even if a ‘protected relationship’ was established, a finding of presumed undue influence could not be found as the level of Goldman Sachs’ profits were equal with the nature of the trades and the work that had gone into winning them.  Therefore, there could be no presumption of undue influence.  Consequently, the claim for unconscionable bargain also failed.

Avoiding liability

It can be seen that the courts are willing to uphold freedom of contract and commercial certainty unless deemed unfair.

However, the key factors which determine whether a contract should be set aside are the investor’s understanding of the transactions it was entering into, and the internal processes the investor undertakes when entering into the transactions.

Points to consider

  • Internal policies on internships or corporate hospitality should be adhered to and any compliance issues considered carefully.
  • The court accepts that banks need to market their services which will involve relationship building. Using specific terminology such as ‘unique relationships’ or ‘strategic partnership’ may not carry excessive weight if the substance of the relationship was of a typical bank customer.
  • Care should be taken when discussing general market conditions with a counter party.
  • Where a counter party is dealing with other banks on comparable terms or analogous dealings, a ‘protected relationship’ is less likely to be found.

(The case’s full title is The Libyan Investment Authority v Goldman Sachs International [[2016] EWHC 2530 (Ch)].)

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About the Author
Adam Finch, Partner
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