The Libyan Investment Authority v Goldman Sachs International

Undue influence is concerned with improper influence, not with rescuing a party from an improvident bargain. Actual undue influence requires influence obtained or exercised by unacceptable means and a causal connection with the transaction. A protected relationship may arise where trust, confidence, reliance or vulnerability places one party under an obligation of candour and fairness, but the relationship is fact-sensitive and need not involve domination or an overborne will.

Presumed undue influence requires both a protected relationship and a transaction calling for explanation. The transaction must be assessed by reference to the parties’ actual characteristics and circumstances. An unconscionable bargain additionally requires serious disadvantage, morally culpable exploitation, and a transaction that is overreaching and oppressive.

The Libyan Investment Authority sought to rescind nine synthetic leveraged derivative trades entered into with Goldman Sachs International between January and April 2008. It alleged actual and presumed undue influence, including that Goldman Sachs had procured the April trades by offering an internship to the brother of a senior LIA executive.

The LIA also alleged that Goldman Sachs had become a trusted adviser or ‘man of affairs’, owed duties of candour and fairness, earned excessive profits, and sold investments unsuitable for a sovereign wealth fund. The central issues were whether an improper influence had been exercised, whether a protected relationship existed, whether the trades called for an explanation, and whether the transactions were unconscionable bargains.

1. Claim dismissed. The offer of an internship to the brother of a senior LIA executive was inappropriate in some respects, but it did not materially influence the decision to enter into the April trades. The court therefore did not decide whether an improper inducement can constitute actual undue influence.
2. Actual undue influence is established by proof that the claimant’s consent was procured by unacceptable means. The claimant need not show that its will was completely overborne or that the impugned conduct was the principal reason for entering the transaction. There must, however, be a causal connection between the undue influence and the decision.
3. A protected relationship is fact-sensitive. It may arise where one party reposes sufficient trust and confidence in another, or is vulnerable to that person’s influence, so that the stronger party owes duties of candour and fairness. Domination, control and an overborne will are not necessary. A normal, cordial and commercially beneficial banking relationship does not, without more, cross that threshold.
4. The relationship between the LIA and Goldman Sachs remained an arm’s-length counterparty relationship. Training, hospitality, research access, personal friendship, a dedicated employee, sales language about strategic partnership, and occasional assistance with other investments did not, cumulatively, make Goldman Sachs the LIA’s adviser or ‘man of affairs’.
5. The presumption of undue influence therefore did not arise. In any event, the trades did not call for an explanation. Their size and speculative character were explained by the LIA’s pressure to invest substantial funds and generate high returns. The profits and mark-ups were not shown to be so unusual or excessive as to support an inference of undue influence.
6. The court found that junior members of the Equity Team were confused about whether shares would ultimately be acquired, and that some Goldman Sachs material was insufficiently clear. But the senior decision-makers understood the essential nature of the synthetic trades, and the confusion did not cause the transactions.
7. The unconscionable bargain claim also failed. The evidence did not establish the required serious disadvantage, morally culpable exploitation, and overreaching and oppressive transaction.

First-instance judgment of the High Court (Chancery Division). No appellate history was stated in the judgment.