The recent decision of the Court of Appeal in Taberna Europe CDO II Plc v Selskabet (formerly Roskilde Bank A/S) (In bankruptcy)  EWCA Civ 1262 provides welcome clarity for issuers on the scope of their potential liability under the Misrepresentation Act 1967 (the "1967 Act") and the use of disclaimers to restrict that scope.
The Court of Appeal held that the publication of an investor presentation in a way that actively invites investors to make use of its contents for a purpose other than the presentation's original purpose could create sufficient proximity to give rise to a duty of care in relation to the content of the presentation. However, potential liability for a misrepresentation in a document can be avoided by a valid disclaimer of liability contained in the same document notwithstanding that the disclaimer itself had no contractual effect (i.e. was merely a non-contractual notice). Further, the Court of Appeal (contrary to the first instance decision) determined that section 2(1) of the 1967 Act applies only to a contract which the representee has been induced to enter into directly by the representor, and does not extend to obligations of a contractual nature which the representee acquires from a third party and in respect of which it would have no right of rescission.
In 2006 Roskilde Bank A/S ("Roskilde"), a Danish regional bank, issued subordinated loan notes with a face value of €80m (the "Notes"). Deutsche Bank acquired €27m worth of the Notes through the offering which, in February 2008, it sold to Taberna Europe CDO II Plc ("Taberna"), an Irish special purpose investment vehicle, for approximately €26.5m. Later that year, the majority of Roskilde's assets and liabilities (but not the Notes) were transferred to a new bank and in February 2009, steps were taken to put Roskilde into bankruptcy. Recognising that it was unlikely to recover anything in the bankruptcy due to the subordinated nature of its claim, Taberna instead pursued a claim for damages for misrepresentation under section 2(1) of the 1967 Act (liability for which had arguably been transferred to the new bank).
Taberna alleged that it had been induced to buy the Notes in part by a misrepresentation by Roskilde as to the amount of non-performing loans ("NPLs") on its books. In particular, Roskilde had produced an "Investor Presentation" which stated that its NPLs totalled DKK57m, whereas the actual amount of its NPLs was said to be in the region of DKK3.5bn. The Investor Presentation was published and available for download on Roskilde's website for the purpose of bringing it to the attention of anyone who might be considering buying its notes on the secondary market. However, the presentation contained a series of disclaimers seeking to establish that no representation was made as to any information including projections and estimates, and no liability was accepted for any errors or misstatements.
At first instance, Mr Justice Eder had found in favour of Taberna on the basis that the Investor Presentation misrepresented the position with regarding to Roskilde's NPLs and that Taberna was entitled to rely on that information notwithstanding the disclaimer language it contained (since it did not have any contractual effect). Moreover, he found that the measure of damages was the more generous measure under s.2(1) of the 1967 Act notwithstanding that the actionable representation was made by a third party (Roskilde) to the contract which it induced (which was the transfer of the notes acquired by Taberna from Deutsche Bank). Roskilde appealed.
The Court of Appeal (Moore-Bick LJ delivering the main judgment) allowed Roskilde's appeal and held that Taberna was not entitled to recover damages under the 1967 Act or otherwise.
(i) Misrepresentation to Taberna
There is of course much case law which confirms that a publication made for a particular purpose does not give risk to duties of care owed to all who happen upon it and who use it for another purpose. So, a prospectus produced to invite investors to purchase shares in a company cannot be used to found a claim in misrepresentation against the issuer of that prospectus by a third party who, after reading the prospectus, buys shares in the market from one of the original allotees (Peek v Gurney (1873) LR 6 HL 377).
The Court of Appeal noted the danger of allowing inroads into this principle, particularly in the digital age. However, it held that where – as here – a company actively invites potential investors to make use of information originally produced for a different purpose, it can "hardly complain" if they do so.
On the facts, Roskilde had directed potential investors to the Investor Presentation on the website in connection with the purchase of its subordinated debt generally. As a result, the Court of Appeal held that the judge was right to find that Taberna, as one such investor, was entitled to rely on representations which the Investor Presentation contained in purchasing the Notes.
(ii) The disclaimer
In circumstances where a party has been induced to enter into a contract by a misrepresentation, liability can only be excluded by agreement. In this case, it was common ground that there was no contract between Roskilde and Taberna which incorporated the disclaimer. On that basis, Eder J held at first instance that the disclaimer language was ineffective, considering it to be no more than an attempt to exclude liability for misrepresentation by non-contractual means.
The Court of Appeal disagreed drawing the important distinction between an attempt to exclude liability which would otherwise arise ("liability-negating clauses") and so-called "duty-negating clauses" which restrict the scope of apparent representations and seek to prevent liability arising in the first place. In this case, the disclaimer was included in the very document which was said to contain the misrepresentation. Taberna was an experienced professional investor and should have reviewed the Investor Presentation in full, including the disclaimer. The Court of Appeal held that it is clear from section 2 of the Unfair Contract Terms Act that, subject to the requirement of reasonableness, a person can in general by suitable notice effectively make it clear that he is not willing to accept liability for statements contained in a document of which it forms a part. In this case, the Court of Appeal found that, read fairly as a whole, the disclaimer sent a clear message: absent fraud, Roskilde was not willing to accept any liability for the accuracy of the Investor Presentation.
The Court of Appeal also considered the application of the contra proferentum rule to the disclaimer. Moore-Bick LJ noted that there has been an increasing willingness in recent years to recognise that parties to commercial contracts are entitled to determine for themselves the terms on which they will do business. Although the contra proferentum rule may be useful in cases of genuine ambiguity, it should not be taken as the starting point. In this case, the disclaimer was couched in language which made it clear that Roskilde accepted no responsibility for the information contained in the Investor Presentation. Absent the course of dealings between the parties overriding the disclaimer, Taberna could be in no better position than the investors to whom the Investor Presentation was originally addressed.
(iii) Scope of section 2(1) of the 1967 Act
Although unnecessary in light of his decision on the disclaimer, Moore-Bick LJ considered the important issue arising from Eder J's decision on the scope of claims that may be pursued under section 2(1) of the 1967 Act, and whether it could include claims where a claimant was induced to enter into a contract with a party other than the maker of the relevant representation.
In a surprising finding Eder J held that section 2(1) of the 1967 Act could apply to such circumstances. His reasoning was as follows:
"I readily accept that the facts of the present case are somewhat unusual. In particular, this is not a simple case of only two parties (A and B) where a representation is made by A to B and, in reliance on such representation, B enters a bilateral contract with A. Here, the position is more complicated. Thus, it is plain that at least certain pre-sale negotiations took place between Deutsche Bank and Taberna; that Taberna entered into a contract with Deutsche Bank; and that it was pursuant to that contract (to which Roskilde was not a party) that Taberna acquired the subordinated notes from Deutsche Bank. However, there is equally no doubt…that the effect of such acquisition was to bring Taberna and Roskilde into a contractual relationship – although the precise mechanism whereby such contract came into existence is not entirely clear to me. It is perhaps also noteworthy that, contrary to a "normal" contract, the consideration for the subordinated notes i.e. the purchase price was paid by Taberna to Deutsche Bank not Roskilde. However, I am unpersuaded that these somewhat unusual features take the present case outside the scope of s.2(1)."
Moore-Bick LJ held in clear terms that this was wrong. In particular, he considered that section 2(1) of the 1967 Act is concerned only with the contract which the representee has been induced to enter directly with the representor (and in respect of which it would have a right of rescission) and does not extend to an obligation of a contractual nature which the representee acquires from a third party. In other words, the 1967 Act is concerned with the loss that the representee has incurred as a result of being induced to enter into a contract with the representor. In this case, Taberna's loss, the price it paid for the Notes, could only have been the subject of a claim under section 2(1) of the 1967 Act if it had been induced to purchase the Notes by the misrepresentation on the part of Deutsche Bank.
The Court of Appeal's decision is particularly welcome because it has clarified the position on the application of section 2(1) of the 1967 Act to secondary market purchases of contractual rights (such as the notes). The first instance decision of Eder J opened the door to arguments that issuers of securities on the secondary market could be liable to an indeterminate class of investors under section 2(1) of the 1967. The Court of Appeal's decision, whilst only obiter on this point, should happily serve to shut this door.
This decision also provides further helpful guidance with respect of the effectiveness of appropriately worded disclaimers which seek to negate the existence of duties in non-contractual documents. However, issuers would still be wise to exercise caution when publishing investor materials on websites or other public forums and recognise that, by doing so, they are exposing themselves to the risk of investors relying on that material for other purposes.