In an important decision for financial institutions, the High Court has confirmed that a claimant’s awareness of a representation is an essential prerequisite to a claim for misrepresentation, by striking out implied fraudulent misrepresentation claims in relation to LIBOR against a defendant bank. The claimants had failed to plead that the alleged representations were actively present in their mind when entering into the products in question and therefore the claim stood no realistic prospect of success: Leeds City Council and others v Barclays Bank plc and another [2021] EWHC 363 (Comm).

The decision is particularly helpful in several respects:

  • Requirement for awareness. The court’s detailed consideration of the “awareness” requirement in the context of misrepresentation claims provides important, binding clarity on the topic. This prerequisite means that a representee must have had some appreciation that a representation in the sense alleged was being made, and is a necessary part of the reliance or inducement analysis in misrepresentation claims. Without it, a claim must fail.
  • Satisfying the awareness requirement. What is required to satisfy the awareness requirement will depend upon the precise circumstances. The answer may be one which requires conscious thought, or for the representation to have be “actively present” in the representee’s mind, or some less stringent element of awareness (depending on the facts).
  • Assumptions based on conduct. The court rejected the notion that mere assumption based on the representor’s conduct is sufficient. In the simplest representation by conduct cases, the element of awareness may be very similar to an assumption (e.g. where a bidder at auction represents their willingness and ability to pay a certain sum by raising a paddle). However, this principle should not be inferred in more complex cases where the conduct does not “speak for itself” in the same way so as to permit the quasi-automatic understanding which may look like assumption.

Considering the awareness requirement in the context of the present case, the court commented that the present claim was not being considered in a vacuum and referred to two previous cases based on similar LIBOR-related representations: Property Alliance Group Ltd v The Royal Bank of Scotland plc [2016] EWHC 3342 (Ch) and Marme Inversiones 2007 v Natwest Markets [2019] EWHC 366 (Comm) (see our blog posts here and here). These decisions pointed towards an established position that, in misrepresentation cases of this type, there is a relatively stringent awareness requirement. In the present case, this required each claimant to prove that the alleged representations were “actively present” in their mind. As the claimants failed to plead awareness in the sense required, the claims were struck out.

At first blush, it may appear obvious that a party saying that it has relied upon a representation must also be able to say that it was aware of the representation being made. However, the healthy debate in this case and others demonstrates that the requirement for awareness has caused controversy. Leeds v Barclays provides welcome clarity and certainty on the issue. The approach taken by the court in finding that the alleged representations were not understood in the sense alleged and therefore not relied upon demonstrates a welcome degree of scepticism, particularly given how intricate and complex the alleged representations at issue in the claims have been. It is also noteworthy that to date, no claim relating to LIBOR representations has been successful at full trial.

Background

The claimant local authorities entered into 60 to 70 year term Lender Option – Borrower Option loans (or LOBO loans) with Barclays (the Bank) between 2006 and 2008. The interest rate payable under the loans referenced LIBOR. As is well known, in 2012, it was discovered that several banks on the LIBOR survey panel were engaged in LIBOR manipulation (including the Bank).

The claimants brought an action alleging that fraudulent implied representations in relation to LIBOR were made by the Bank prior to their entry into the loans. In particular, the claimants alleged that the Bank had made implied fraudulent representations to the effect that LIBOR was set honestly and properly and the Bank was not (and had no intention of) engaging in any improper conduct in connection with its participation in the LIBOR panel. The alleged representations were similar in nature to those which have been considered and rejected by the court in the cases of PAG and Marme. The claimants sought rescission of the loans, damages, interest and costs on that basis.

The Bank sought to strike out the claims on the basis that: (1) the claimants could not show that they relied on the representations alleged; and (2) even if the claimants were successful in proving misrepresentation, they had affirmed the relevant contracts. For the purpose of the Bank’s application, the court assumed that the LIBOR representations had been made, were false and had been made by the Bank fraudulently.

Decision

On the question of reliance, the court found in favour of the Bank and struck out all of the claims. Given this outcome, it was not necessary for the court to determine the question of affirmation, but the court considered the alternative application briefly and found that the case on affirmation would not have been suitable for summary determination (and this aspect of the application is not considered further in this blog post).

In relation to the reliance requirement which forms part of misrepresentation claims, the Bank asserted that a necessary building block of reliance in a misrepresentation claim is awareness by the claimant of the representation being made. As none of the claimants had pleaded awareness of the alleged representation, the Bank argued that their claim should be struck out.

The claimants focused only on inducement, pointing to their pleading that, had they known the truth, they would not have entered into the contracts. They argued that awareness cannot be separated from inducement and is not an independent precondition that must be satisfied in its own right before the court can move on to the analysis of inducement.

The court conducted a useful and detailed analysis of the authorities in which the question of reliance has been considered, in particular, the extent to which the relevant representation must operate on a claimant’s mind. The key points of general application are considered below.

Is there an awareness requirement for misrepresentation claims?

The court confirmed that misrepresentation involves some requirement of awareness. In reaching this conclusion, the court considered a number of authorities generally and those specifically in the context of LIBOR manipulation, which indicated that for a misrepresentation to be actionable, the representee must be aware of it. In particular, so far as relevant in a financial services context, the court cited: Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc [2010] EWHC 1392, Cassa Di Risparmio Della Republica Di San Marino SpA v Barclays Bank Plc [2011] EWHC 484 (Comm), Property Alliance Group Ltd v The Royal Bank of Scotland plc [2016] EWHC 3342 (Ch), Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm).

Importantly, the court rejected the claimants’ submission that in the case of a representation by conduct, there is no requirement of awareness. The court confirmed that the existence of the awareness requirement is the same in cases involving representations by conduct and those involving representations by express words (rejecting the argument that the authorities could be divided into separate categories based on cases about representations by conduct vs express words, because most of them concerned representations compounded out of words and conduct). Representation by conduct is discussed in more detail in the next section.

The court also noted that often the requirement for awareness will not be in issue; but that does not mean it is not a requirement. It is just that in some cases, the fact that the claimant was aware of the representation is so obvious that the parties do not bother to argue about it. In contrast, the court said that the existence of the awareness requirement is of particular importance when considering implied representations.

What is required to satisfy the awareness element?

Where awareness is in issue, the court noted that in some cases the question will be what the claimant consciously thought, while in others it may be better expressed by a focus on whether the representation is “actively present” in the representee’s mind (see Marme and PAG).

The court considered expressly the question of assumption, and whether or not an assumption by a claimant (in combination with proof of what the claimant would have done if told the truth) could ever be sufficient. It said that where there is an issue as to whether the representation was ever actively present in the representee’s mind, the authorities indicate there is no scope for reliance on an assumption.

In particular, the court rejected the claimants’ argument that assumption suffices in the case of representations by conduct, so that there is no requirement for awareness in such cases. The claimants’ arguments here were based on the criminal appeal in DPP v Ray [1974] AC 370. In this case, the House of Lords held that by entering the Wing Wah restaurant and placing an order for prawn chop suey and rice, Mr Ray represented that he intended to pay the 47 pence that the meal cost. The court in the present case said that comparisons with DPP v Ray were “overstretched”. Such comparison ignored a number of “not unimportant” facts, including that it was a criminal case; that it focused on the fact that the representation was true when it was made but became untrue (when Mr Ray changed his mind about paying for the meal and absconded after eating); and that it did not deal with the question of an awareness requirement.

In the court’s opinion, there may be cases “where the element of awareness will come close to something which might loosely (and without careful analysis) be characterised as assumption and which is most obviously derived from conduct”. This may be the position for the simplest of representation by conduct cases, where specific conduct may precisely and inevitably equate to a representation, without any room for ambiguity (for example, in the case of a bidder at an auction raising a paddle, implicitly representing by that conduct a willingness and ability to pay the relevant bid amount). In such a case a requirement for separate or distinct understanding or thought to the representations would be artificial.

However, the court recognised that this principle should not be inferred in more complex cases where the conduct does not “speak for itself” in the same way so as to permit the quasi-automatic understanding which may look like assumption.

Accordingly, what is required to satisfy the awareness requirement will depend upon the precise circumstances, and the answer may be one which requires conscious thought or some less stringent element of awareness (depending on the facts). In this context, the court emphasised throughout the judgment that misrepresentation is capable of occurring in a huge range of factual circumstances of varying complexity; and the difference in complexity of different representations may have an impact both on how the representation is spelled out and how it is received (and understood).

The court recognised that the above analysis could lead the issues in the present application to be unsuitable for determination at the strike out/summary judgment stage. However, the court was conscious of previous case law which had considered the issue on essentially the same facts (see the section on reliance in the context of interest reference rate manipulation cases below).

Awareness in the context of interest reference rate manipulation cases

As mentioned when discussing the test for awareness, the court found that what is required to satisfy the awareness requirement will depend upon the precise facts as to the representation.

Looking at the facts of the present case, the court commented that it did not operate in a vacuum and referred to two previous cases based on similar LIBOR-related representations as this one, where the court found that awareness was required:

  • PAG: this case concerned LIBOR representations and, at first instance, the court considered the question obiter. It found that the claimants had no understanding of what were extremely complex and intricate representations, and concluded that they did not cross the relevant principals’ minds. As a result, they could not have understood the representations to have been made and therefore did not rely on them.
  • Marme: this case concerned EURIBOR representations and, although also obiter, the court commented that there would need to be “some contemporaneous conscious thought” given to the fact that some representations were being impliedly made.

The court was clear that PAG and Marme pointed towards an established position that, in misrepresentation cases involving interest reference rate manipulation, there is a relatively stringent awareness requirement. In the present case, this required each claimant to prove that the alleged representations were “actively present” in their mind.

In contrast, the claimants failed to plead that the representations were “actively present” in their mind. Their pleaded cases relied on their assumption that LIBOR was honest and not being manipulated rather than anything more, which was not sufficient. As a result, the LIBOR misrepresentation claims were struck out.

Harry Edwards
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