A landmark legal judgement has opened the floodgates to potentially hundreds of millions of pounds in extra compensation claims against banks over mis-sold hedging products.

The Court of Appeal ruled today that two businesses bringing separate cases against Barclays and Deutsche Bank could include allegations about manipulation of the Libor lending benchmark in their cases.

The precedent could be damaging for banks because some, including Royal Bank of Scotland and Barclays, have already admitted they manipulated Libor and others are set to follow with their own settlements.

Businesses fighting for redress over mis-sold interest rate swaps want to use these admissions of guilt to argue that since Libor was fundamentally flawed, their swaps products should automatically be judged to be faulty. In most cases the price of swaps was linked to Libor.

Barclays, which paid £290 million to settle Libor allegations last summer, and Deutsche, which is set to settle in the New Year, have fought two early attempts to link swaps mis-selling to Libor. One case was brought by Guardian Care Homes against Barclays, the other was from Unitech, an Indian property company, against Deutsche.

The banks have argued that the Libor scandal is not directly linked to problems around swaps, and that businesses bringing cases should have to demonstrate losses based on the specific terms of their swaps products. The move would have shifted the burden of proof from the banks to the businesses, making the hurdle for redress much harder to achieve, analysts have said.

The Court of Appeal decided to consider Libor issue in the Deutsche and Barclays cases together this month in order to bring clarity to the thousands of small and large companies which are considering legal action over swaps.

Lord Justice Longmore said: “The banks did propose the use of Libor and it must be arguable that, at the very least, they were representing that their own participation in the setting of the rate was an honest one. It is, to my mind, surprising that the banks do not appear to be prepared to accept that even that limited proposition is arguable.”

Gary Hartland, chief executive of Guardian Care Homes, said: “It is absolutely right that Barclays should face allegations of fraud given the findings against Barclays by regulators that the bank was seeking to manipulate Libor and made profits from its actions.”

The full case between Barclays and Guardian Care Homes will be heard in the High Court in April.

A Barclays spokesman said: “The Court of Appeal’s decision resolves two conflicting legal judgments. With or without the Libor claims, the allegations of mis-selling have no merit. [Guardian Care Homes] had a suite of advisors and a lot of financial experience and skill in-house. They entered into their swap agreements with sufficient understanding to exercise their own judgment as to whether the products would meet their business objectives. Graiseley is a significant business and owes Barclays £70 million.”

Sold alongside loans to help businesses hedge against interest rate rises, swaps have become millstones for many businesses as the ultra-low borrowing costs of the past few years have triggered hefty monthly payments to the banks and punitive break fees.

A flood of small and large businesses are taking or planning legal action against their banks on the grounds that the swaps were mis-sold as the risks were not properly explained.

Abhishek Sachdev, a derivatives expert at Vedanta Hedging, said the Court of Appeal’s decision “is very significant in that the sums involved – no matter how remote -are so large they would destabilise the global economy. A lot of banks will be very concerned by this.”

However, Mr Sachdev pointed out that “all the judge has said is that the claim can be argued in court. There is a huge amount of opportunity for the banks to settle before the trial, and even during the trial if they are concerned enough that the judgement may move against them.”

There is also a separate redress process being run by the Financial Conduct Authority, under which the banks are considering claims by small companies for compensation. The FCA said yesterday banks were acting far too slowly to assess the cases and make compensation offers. Only small companies deemed to be “non sophisticated” can take part.

The banks have so far reserved £3 billion to pay compensation for swaps mis-selling, compared to £8 billion for Lloyds alone over payment protection insurance and £17 billion for all banks over PPI.