LONDON Barclays became the first bank to be ordered to stand trial in a British court over damages stemming from manipulation of the Libor interest rate after a High Court ruling on Monday.
Guardian Care Homes, a residential care home operator based in Wolverhampton, is suing Barclays for up to 37 million pounds ($59 million) over the alleged mis-selling of interest rate hedging products known as swaps.
"Today is a huge milestone with a trial now going forward to determine whether these financial products should be declared void," Guardian Care Homes' chief executive Gary Hartland said after the ruling.
The case could also lead to new revelations about the Libor scandal after Guardian Care Homes asked for documents relating to the affair to be disclosed.
The company says it should be fully compensated for its losses because the swap rates were based on the London Interbank Offered Rate (Libor). Barclays agreed to pay $450 million in fines to U.S. and British authorities in June to settle allegations that it manipulated Libor and other key interest rates. More than a dozen other banks are also being investigated.
The trial will be a test case for thousands of small British firms who believe they were mis-sold such swaps and raises the prospect of other companies linking future claims to interest rate rigging by banks.
"This legal battle will be watched carefully by the thousands of small businesses affected by mis-selling who may decide to take a similar route," John Walker, chairman of the Federation of Small Businesses, said on Monday.
The country's biggest four banks agreed in June to review past sales of interest-rate hedging products to small businesses and to compensate customers for mis-selling loan insurance after the Financial Services Authority said it had found "serious failings" in the way that they were sold.
However, the compensation scheme subsequently set up by the FSA, which allows banks to appoint an independent arbitrator to assess claims, has been criticized by businesses for being too slow and for lacking transparency. Companies also have the option of bypassing the FSA scheme and pursuing banks directly through the courts.
Guardian Care Homes, which operates 27 homes providing care for 1,000 elderly or vulnerable patients, says it has lost 12 million pounds after being sold two swaps in 2007 and 2008 against two loans it held with the bank that were worth a combined 70 million pounds ($112 million).
The hedging contracts tied in the company for 20 years even though the two loans, of 41 million pounds and 29 million pounds, were taken out for only 10 years and five years, respectively. To get out of the arrangement, Guardian Care Homes would have to pay break fees of 25 million pounds.
Barclays, which has set aside 450 million pounds to compensate customers mis-sold interest rate swaps, said after the decision that it didn't believe the case had merit. It said the company had entered into the swaps with "sufficient understanding" as to whether they met its business objectives.
Britain's financial regulator has estimated that about 44,000 interest rate swaps have been wrongly sold to UK companies since 2001.
The swaps were supposed to protect companies against rates going up by making their future repayments more predictable, but many borrowers didn't realize they would pay far more if lending rates fell significantly and would face substantial fees to get out of the arrangements.
($1 = 0.6241 British pounds)
(Reporting by Matt Scuffham; Editing by Hans-Juergen Peters)