In the context of alleged LIBOR-related fraudulent misrepresentations, the High Court has considered the test for reliance and, in particular, whether awareness of the representation is a necessary ingredient.

In Leeds City Council and others v Barclays Bank [2021] EWHC 363, Mrs Justice Cockerill struck out claims against Barclays, ruling that to establish misrepresentation, the claimants had to establish they were aware of the representation; its absence would be fatal to the claim.

The background

The claims arose from long-term loans provided by Barclays Bank plc (the Bank) to various local authorities (the Local Authorities). There were various loan agreements, and LIBOR was used not only as the reference rate for the interest rate payable but also for calculating breakage costs for the agreements. In consequence of the “LIBOR rigging affair”, which had led to fines, prosecutions and reforms on both sides of the Atlantic, the Local Authorities brought claims seeking rescission. This effectively meant cancelling the loans and putting the parties back in the position before the loans were made such that the Local Authorities would not need to pay any interest or costs.

The essence of the claims was that the Bank had impliedly or by conduct made fraudulent misrepresentations as to LIBOR, and these alleged representations tainted the loans. The representations were to the effect that the LIBOR rates were (at any rate so far as the Bank knew) being honestly and properly set, and that the Bank was not (and had no intention of) engaging in any improper conduct in connection with its participation in the LIBOR panel. While the Bank contested many aspects of the claim, including the allegation that it had made the alleged representations, for the purposes of the strike-out application only it was agreed that it should be assumed that the representations had been made, that they were false and had been made fraudulently.

The reliance issue

The Bank argued that none of the Local Authorities had alleged awareness of the alleged representations about LIBOR, nor had they actively/consciously appreciated that the alleged representations were being made when the loans were entered into. Accordingly, they could not satisfy the reliance test. The Bank maintained that awareness is not satisfied by an assumption as to these representations; there must be some form of active appreciation of the representation being made. In support, the Bank referred to Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm) [2019] EWHC 366 (Comm), in which the judge stated that “a claimant […] should have given some contemporaneous conscious thought to the fact that some representations were being impliedly made.”

In contrast, the Local Authorities alleged that the Bank had misunderstood the law. They did not need to allege awareness in the terms put forward by the Bank. This would have required the misrepresentee to have consciously asked themselves the question: “Is the representor making an implied representation to me and if so, what are the terms of that representation?” Awareness could not be separated from inducement (an essential requirement to establish misrepresentation), and it was not an independent pre-condition that had to be satisfied on its own merits. If that were the case, it would amount to a rogue’s charter letting misrepresentators get away with wrongdoing.

Awareness

While both parties had urged the judge to find that that previous cases opposing their stance were wrongly decided, having reviewed a number of these decisions,, Mrs Justice Cockerill pointed out that misrepresentation can occur in a huge range of factual circumstances. As a result, it was important to recognise that differing lines of authority can co-exist without needing to conclude that previous cases were wrongly decided. The judge made the following points:

  • Generally, and specifically in the context of interest rate rigging, to bring a claim for misrepresentation, the representee has to prove he had been materially influenced by the representation in the sense that it was “actively present to his mind” (BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596BV). In other words, the representation had to have some impact on the representee’s thinking and decision making process when entering into the contract although it did not need to be the major reason.
  • The Local Authorities had attempted to rely on the criminal case of DPP v Ray [1974] AC 370, which concerned the impact of deception on a waiter who takes orders on trust that the customer will pay. They claimed that there was no suggestion that the waiter needed to consciously ask himself whether the customer would pay when taking the order. This is similar to the LIBOR situation, for the Local Authorities did not need to consciously ask themselves whether the LIBOR rate was being honestly set.

However, the judge pointed out that in deciding whether to convey the order to the kitchen, the waiter will have done so for it is not unheard of for a waiter to refuse to serve a customer if they think they are not good for the money. By means of a footnote to the judgment and in further support, the judge referred to the scene in “Pretty Women” when the sales-women in Rodeo Drive refused to serve Julia Roberts thinking she could not afford to pay for the dresses.

  • Often, whether something is actively present to the mind  (that is whether it had an impact on the representee’s thinking) will not be in issue, but that does not mean it is not a requirement; it is just that it is so obvious that the parties do not need to argue about it.

When it is in issue, in some cases, the question will be what the claimant consciously thought and in other cases, it may be better expressed by a focus on active presence to mind.

This may mean that the element of awareness of the representation will come close to something which might loosely be characterised as an assumption most obviously derived from conduct. The judge gave the example of the conduct of a bidder at an auction raising a paddle. That conduct would amount to a representation of a willingness and ability to pay a certain sum. However, in other situations, the dividing line between giving contemporaneous conscious thought to the conduct and contemporaneous conscious thought to the representation may be thin to non-existent.

  • Merely, however, assuming that LIBOR would be set in a straightforward and proper manner would not be enough. Case law indicates that there is no scope for reliance on an assumption where there is an issue as to whether the representation was ever actively present to the representee’s mind.
  • As the judge acknowledged, she did not operate in a vacuum, and there had been two relevant previous cases on LIBOR. In Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2016] EWHC 3342 (Ch) (PAG), the high point of evidence was an assumption by the bank of honest/straightforward rate setting. The Court of Appeal held that the absence of any thought being given to the representations was fatal to the claim. Again, in Marme, reliance would have required some contemporaneous conscious thought being given to the representations, and the evidence that at best the relevant person had assumed the rate was honest and did not understand the representations to have been made was not enough.

The judge concluded that in respect of the claims made by Leeds City Council there had been an acceptance that the contemporaneous conscious thought test could not be met and, for the London Borough of Newham claims where it had not been expressly accepted, it had been implicitly accepted that this could not be established such that the claims had no real prospect of success.

Comment

To succeed in a claim for misrepresentation, a party will need to show an awareness of the representation. The focus may be that they had given a conscious thought to the representation, or it may be better to focus on active presence to mind as to the representation being made. In any event, the representation must have had some impact on the representor’s thinking when deciding to enter into the contract and  merely relying on an assumption as to the representation having been made will be insufficient.

Given the previous judgments of PAG and Marme, which decided that the absence of thought as to the representation being made about LIBOR was fatal to the claim, this latest judgment which deals with similar circumstances is perhaps unsurprising.

Reliance is also relevant to securities claims under section 90A of the Financial Services and Markets Act 2000 (FSMA)   where an issuer of securities is liable to pay compensation to a person who has acquired, held or disposed of securities in reliance on certain publications to the market and suffered loss as a result of any untrue or misleading statement in – or omission from – such publications. Please see here.

The claimant must establish reliance on the relevant published information. While there is no case law on what constitutes reliance in s90A FSMA claims, that section is based on the tort of deceit and case law in relation to deceit and fraudulent misrepresentation is likely to guide the courts on this issue.  In misrepresentation claims, given the requirement to establish an awareness of the representation and some influence on the representee’s thinking, s90A claims are likely to require that the relevant published statement was actively present in the mind to some degree when investment decisions were being made. In the LIBOR context, the representations being asserted were implied.

In s90A claims, misleading statements could be express (e.g. a profit statement that is known to be untrue) or implied (e.g. that the profit figures were not being dishonestly manipulated).  In either case it will be necessary to show the relevant statement was actively present in the mind when investment decisions were made.  This may be obvious for financial figures incorporated in investment models whereas for implied representations as to the honesty and accuracy of financial information published by listed companies this is likely to require a witness statement from the fund manager. However, that should be a low bar as the honesty and accuracy of financial information published is likely to be at the forefront of any fund manager’s mind when making investment decisions.

Furthermore, as the LIBOR cases demonstrate, asserting an implied representation may by its very nature not be straightforward. Assuming that the other party is making honest representations when the claimant did not, in reality, think about that representation will not suffice. Where a claimant has not given any thought to the representation and it did not play any part in their decision making process even if the representation was fraudulent, the claim is unlikely to succeed.

Note: We understand the Mrs Justice Cockerill gave permission to appeal. The Leeds City Council have settled their claim, but the London Borough of Newham is pursing their appeal at this time.