The Court of Appeal has handed down judgment in David McClean & Ors v Andrew Thornhill KC  EWCA Civ 466, unanimously dismissing the appeal. Herbert Smith Freehills Partner Will Glassey and Associate Henry Saunders acted for the successful Defendant Andrew Thornhill KC.
In October 2022, the Advertising Standards Authority (the ASA) ruled for the first time that a bank had misrepresented its green credentials and engaged in so-called “greenwashing“. In this blog post, we consider how banks and financial services institutions can fall within the remit of the ASA’s advertising codes and the potential risks associated with making “environmental” claims.
The ASA’s role
In the UK, the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (the CAP Code) is the rule book for non-broadcast marketing adverts (i.e. marketing communications other than TV or radio adverts). The CAP Code applies to all adverts aimed at “consumers“, anyone who is likely to see a given marketing communication (whether in the course of business or not). The central principle for all marketing communications under the CAP Code “is that they should be legal, decent, honest and truthful” (Rule 1.1).
While banks and financial services institutions may not see themselves as “marketers“, to the extent that they produce any marketing communications, including adverts in newspapers and marketing on their websites, they fall within the scope of the CAP Code. One notable exception is that the CAP Code does not apply to “investor relations” material, information addressed to members of the financial community who might be interested in the company’s stock or financial stability.
The CAP Code is designed to be self-regulatory, but the ASA is the independent body that endorses and administers it to ensure that the self-regulatory system works in the public interest. The ASA, therefore, investigates and rules on complaints from consumers or businesses under the CAP Code.
Environmental claims are a particular focus area for the ASA currently, particularly since the development of its Environment and Climate Change Project. The ASA notes that the project “sends a clear signal that the ASA will be shining a brighter regulatory spotlight on advertising issues that relate to climate change and the environment in the coming months and years“.
Specific requirements for environmental claims are set out at Rule 11 of the CAP Code. In particular:
- The basis of environmental claims must be clear. Unqualified claims could mislead if they omit significant information (Rule 11.1).
- The meaning of all terms used in marketing communications must be clear to consumers (Rule 11.2).
- Absolute claims must be supported by a high level of substantiation. Comparative claims such as “greener” or “friendlier” can be justified, for example, if the advertised product provides a total environmental benefit over that of the marketer’s previous product or competitor products and the basis of the comparison is clear (Rule 11.3).
However, marketers should also be aware of the general prohibitions on misleading advertising, which are equally applicable to environmental claims.
Similar provisions are also contained in the UK Code of Broadcast Advertising, which applies to adverts on radio and television series, but environmental claims have so far most commonly been brought under the CAP Code.
Rule 3 of the CAP Code generally considers the potential for marketing communications to mislead consumers. Importantly, the ASA takes into account the impression created by marketing communications, as well as specific claims and rules on the basis of the likely effect on consumers, as opposed to the marketer’s intentions. Particular rules that may be relevant to environmental claims include:
- Marketing communications must not materially mislead or be likely to do so (Rule 3.1).
- Marketing communications must not mislead the consumer by omitting material information. They must not mislead by hiding material information or presenting it in an unclear, unintelligible, ambiguous or untimely manner (Rule 3.3).
- Marketing communications must state significant limitations and qualifications. Qualifications may clarify but must not contradict the claims that they qualify (Rule 3.9).
Implications of non-compliance
If the ASA considers there may be a breach of the CAP Code, it gives the marketer an opportunity to respond (usually in writing). The burden of proof is on the marketer to show that its claims comply with the CAP Code.
The ASA cannot impose legally binding penalties, but its findings are published on its website and often attract a lot of press attention. A negative finding can therefore be a strong deterrent to marketers, particularly in the field of environmental claims as banks face increased public pressure to reduce or halt their financing of oil and gas production.
ASA’s ruling against a bank
The ASA’s recent ruling centred on two adverts which ran on high streets in October 2021, in the run‑up to COP26. The adverts highlighted how the bank in question had invested $1 trillion in financing and investment globally to help its clients hit climate targets and how the bank was helping to plant two million trees. Complainants argued that the adverts omitted significant information about the bank’s contribution to carbon dioxide and greenhouse gas emissions through its other financing commitments.
The ASA upheld the complaint on the basis of CAP Code Rules 3.1 and 3.3 (misleading advertising) and Rule 11.1 (the basis of environmental claims must be clear). The ASA considered that consumers would understand the claims to mean that the bank was making a positive overall environmental contribution as a company and was committed to ensuring its business and lending model would help support businesses’ transition to models which supported net zero targets. Notably, the ASA found that the use of imagery from the natural world, including the image of waves crashing on a beach, contributed to that impression. However, the ASA referred to the bank’s annual reports to demonstrate the bank’s current financed emissions and continuing commitment to financing thermal coal mining, which it did not consider consumers would know. This was found to be “material information that was likely to affect consumers’ understanding of the ads’ overall message“.
Banks have faced increasing scrutiny over the last year in relation to their climate commitments. Earlier this year, ShareAction accused 24 banks in the Net Zero Banking Alliance of pumping billions of dollars into new oil and gas production despite being part of a green banking group and Adfree Cities (one of the complainants in the ASA case) said it has made similar greenwashing-by-omission complaints against two further banks’ social media adverts.
While banks and financial service institutions will be keen to advertise their long-term commitments to net zero and their financing of projects assisting in the transition to a lower-carbon economy, there is a difficult balance to be struck in respect of their marketing communications to avoid complaints that they are misleading consumers. In particular, thought needs to be given to any necessary qualifications or disclosures (admittedly not what the ad man or woman wants to be concentrating on when devising their advertising concept), and clearly it is dangerous to seek to impute any general knowledge to consumers as to what existing customers or positions banks may have on their books. In this case, the ASA ruled that any future adverts featuring environmental claims must be adequately qualified and must not omit material information about the bank’s contribution to carbon dioxide and greenhouse gas emissions. This ruling is likely to have read-across implications for other banks which are contemplating advertising their green credentials.
So far, the adverts in question are consumer issues, but any negative press around a company’s climate impact will likely concern shareholders particularly as many banks have now passed climate change resolutions. Negative press may therefore lead to an increased risk of activist claims or shareholder reaction.
As financial institutions get to grips with the opportunities and challenges presented by the constantly evolving ESG landscape, our FSR colleagues have outlined the top five trends that they are seeing in this space. From a disputes perspective, particularly for mis-selling and securities class action claims, it is important that firms take note of these trends as they are likely to influence the ESG agenda into 2023 and beyond.
The top 5 trends are as follows:
- Impact of the energy crisis on the ESG agenda
- Increasing focus on the ‘S’ and ‘G’ in ESG
- Divergence and convergence in international approaches
- The ESG data challenge
- Greenwashing and ESG enforcement
For more information on each of the trends, please see our FSR Notes blog post.
Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law (JIBFL) on Russia’s default on its foreign currency sovereign debts from the perspective of potential disputes and litigation.
Russia’s default on its foreign currency sovereign bonds is unprecedented and likely to lead to bondholder litigation as well as derivatives disputes. The article highlights the reasons for Russia’s default and explores the scope of potential bondholder litigation, together with some of the obstacles which bondholders may face in bringing claims against Russia. The article then considers the ripple effect on the derivatives market, where it is possible that investors in products linked to Russian debt may seek to recover losses by bringing mis-selling claims.
The article can be found here: Russian sovereign debt defaults: a disputes perspective and first appeared in the September 2022 edition of JIBFL.
The Court of Appeal has given some helpful guidance on the approach to assessing damages for deceit: MDW Holdings Limited v James Robert Norvill (& Ors)  EWCA Civ 883.
While the decision arose in respect of the acquisition of a private company and focused on the timing of when damages should be assessed in a breach of warranty claim, it will be of interest to financial institutions as a reminder of the court’s approach to assessing damages for deceit, which is often relevant in the context of mis-selling disputes and shareholder claims.
The Court of Appeal recognised that a claimant who would not have made a purchase but for the deceit will be entitled to (at least) the difference between the price paid for the property and its actual value (if the claimant has suffered consequential losses, a higher figure may be payable). However, the court found that the same cannot be said for a claimant who would have proceeded with the purchase (albeit at a lower price) despite knowing the truth. In the latter scenario, the orthodox principle requires damages to be measured by reference to the difference between the price paid and the price which the purchaser would have paid had it known the truth.
For a more detailed analysis of this decision, please see our Litigation Notes blog post.
The Bank of England (BoE) has published the results of the Climate Biennial Exploratory Scenario (CBES), which explores the financial risks posed by climate change for the largest banks and insurers operating in the UK. In line with the findings of other central bank stress tests across the globe, the CBES found that while the financial system might be adequately capitalised to absorb the shocks of climate change scenarios, the sector would suffer losses across each scenario, with the greatest quantifiable losses suffered in a No Action and Late Action scenario. This reaffirms the BoE’s drive to an early and orderly transition to a net-zero economy.
- In June 2021 the BoE launched the CBES, seeking to explore and better understand the financial risks posed by climate change to the UK financial system, and to ensure that real change is effected to help with systemic resilience.
- Following the submission of participants’ initial responses in October 2021, we looked at the CBES in the context of other central bank initiatives and stress tests across the globe, to understand the scope of the CBES as part of our November 2021 Global Banking Review, which focussed heavily on the issues facing financial institutions in connection with Climate Change.
- Just over six months later the BoE has published the results of the CBES, and we consider here what it has learnt, where will the focus fall, and what will come next?
Summary of key findings – Banks
The climate risks captured in the CBES scenarios are likely to create a drag on the profitability of both UK banks and insurers. Loss projections varied across participating firms and the three different climate scenarios but equated to an annual drag on profits of around 10-15% on average. Projections suggested (unsurprisingly) that the overall costs will be lowest in scenarios with early, well-managed actions to transition to a net-zero economy.
However, the CBES found that there was substantial uncertainty as to the magnitude of climate risks. The figures identified in the BoE report were heavily caveated to allow for various acknowledged limitations, with this, its first CBES, including:
- The banks’ projections were focused on credit risk, and did not yet fully take into account possible impacts resulting from market risk;
- The data used to populate responses from firms was incomplete and inconsistent in its approach – for example, loss estimates on the same corporate customers differed substantially in participating firms’ responses;
- The ‘No Action’ scenario would likely incur losses past the time horizon selected for the CBES projections, and as such projections for this scenario were likely partial; and
- The BoE acknowledged the limitations of the fixed balance sheet approach adopted for the CBES.
Despite these, and other limitations, the CBES included a number of interesting observations for market participants:
Quantitative findings – calculating the risk
- Projected climate risk impacts were highest for banks’ wholesale and mortgage exposures, and projected climate-related consumer credit losses were relatively low.
- Institutions which relied upon third-party modelling and data without sufficient internal capability to challenge and scrutinise often gave rise to materially lower loss projections than those institutions which had invested in and developed their own internal models. The development of internal models was more established in the insurance than the banking sector.
- Limitations caused by data gaps and inconsistent data provision from third parties such as clients and counterparties were again noted. In particular, the lack of available data regarding corporates’ current value chain emissions and future transition plans was a common issue affecting firms. The BoE also recommends that banks act to encourage remediation of data limitations and gaps to help firms meet the PRA’s supervisory expectations, as set out in SS3/19. Firms’ efforts in this area will be supported by initiatives currently in train to resolve some of these data gaps.
Qualitative findings – planning ahead
- Responses to the qualitative secondary part of the CBES, which focused on transition planning, suggested that some banks, in particular, were not considering their transition plans holistically: they were failing to take into account the likelihood of similar management actions from competitors or adjusting for different macro scenarios.
- Transition plans suggest that banks intend to divest from energy-intensive sectors. The BoE sounded a note of caution in relation to these suggestions and to the idea that capital requirements could be used to target investment towards “green” sectors and away from energy-intensive sectors. The BoE noted the systemic risk inherent in depriving energy-intensive sectors from the funding they would need to transition towards net-zero, and also the economic repercussions of mass divestment from providing finance to carbon-intensive sectors ahead of the expansion of renewable energy supply.
- Capital adequacy remains at the forefront of the BoE’s mind, but in the context of developing (along with other central banks) Solvency II to better accommodate the nuances of climate change risk, rather than using the BoE’s prudential regulation as a pseudo-governmental arm seeking to drive policy change.
- While participating firms were making good progress in some aspects of climate risk management, they all had more work to do to improve their climate risk management capabilities.
Climate Litigation Risk
As part of the CBES, the BoE engaged with members of the London Insurance Market to understand the extent to which existing policies would cover climate-related litigation. Following the trend of increasing climate-related litigation (particularly in the United States, which is ahead of many European jurisdictions in this regard), the BoE wanted to look at the impact of this development in the contentious landscape. The BoE identified seven ‘types’ of climate-related litigation, these are set out in full below:
- Direct causal contribution: a corporate is found liable for its representative contribution to manmade climate change.
- Violation of fundamental rights resulting in cessation or reduction of operations: a corporate is prevented from practising carbon-intensive activities that violate fundamental human and dignity rights, this has a significant impact on financial revenues.
- Greenwashing: a corporate is found to be misleading customers (e.g. false advertising, mislabelling as ‘environmentally friendly’, underreporting disclosures) and must pay out compensation to customers/investors.
- Misreading the transition: a corporate is sued on the basis that it continued to sell a carbon-intensive product while in knowledge it would become redundant due to government net-zero policy, they must refund and compensate customers.
- Indirect casual contribution (related to exposure to Utilities sector only): utilities are sued for their indirect contribution to climate change which amplifies physical risks due to inadequate or negligent preparation.
- Directors’ breach of fiduciary duties (related to cover against asset managers only): investors of an asset manager allege that the entity’s directors have understated the physical and/or transition risk to their assets in their disclosures. Investors seek payment for damages from the directors’ breach of fiduciary duty.
- Indirect causal contribution (financing): a case is brought against financiers of carbon-intensive activities, as they have contributed indirectly to manmade climate change through financing activities of carbon majors.
Taken from Table 1 of Box C of the CBES Results
Following engagement with members of the insurance market, the BoE identified that (in aggregate) just under half of the D&O insurance policies currently in place would cover these types of litigation risk; while approximately a quarter of the professional indemnity policies would cover climate related litigation. The respondents noted that this figure may not reflect coverage of the defendant’s own legal costs, which could often be high, particularly where the claims were investor-led.
While the focus of these questions was on the impact to the insurance industry of the developing trend, the analysis should focus the minds of banks and asset managers: have they sufficiently considered their litigation risk? Have they considered whether their policy coverage is adequate? As we move forward, have they budgeted for the increasing cost of Profin and D&O insurance which may arise from developing trends in this area?
- The BoE’s work on climate scenario analysis, including that done as part of the CBES, provides a key tool supporting firms and policymakers as they navigate uncertainty over future climate policy and climate change, enabling assessment against a range of possible outcomes.
- As set out in the PRA’s October 2021 Climate Change Adaptation Report, the PRA and the BoE are undertaking further analysis to determine whether changes need to be made to the design, use, or calibration of the regulatory capital frameworks.
- To support this work on the capital framework, the BoE will host a research conference on the interaction between climate change and capital in Q4 2022, and has already put out a ‘Call for Papers’. The BoE will publish follow-up material on the use of capital, including on the role of any future scenario exercises, informed by the conference and the findings of the CBES.
- While no future CBES has been announced, it is clear that more work is needed before the BoE and market participants understand the stress that they may soon be under as a result of climate risks.
The High Court has dismissed claims brought by a business against a bank alleging the mis-selling of interest rate hedging products (IRHPs) and an unlawful means conspiracy regarding the transfer of the business to the bank’s internal restructuring unit: CJ And LK Perks Partnership & Ors v Natwest Markets plc  EWHC 726 (Comm).
This decision continues the trend of past IRHP mis-selling decisions, in which the court has refused to impose additional obligations on banks that were providing general dealing services on an execution-only basis (see blog posts here). It highlights the difficulty for customers in bringing mis-selling claims in circumstances where the bank has provided accurate information and stated clearly that it is not providing advice on a transaction.
In the present case, the court was satisfied that the bank had not breached its duties towards the customer. The bank had provided full explanations of the costs and risks involved with each of the IRHPs. The bank had underlined in the contractual and non-contractual documentation that it was not assuming a duty to provide advice to the customer in relation to the IRHPs. The court also found that the defaults on loan repayments and the likelihood of the customer’s insolvency were genuine and compelling reasons for the bank’s decision for the transfer of the customer’s business to its restructuring group.
We consider the decision in more detail below.
In 1999, the defendant bank (the Bank) provided finance to a Scottish legal partnership (the Partnership) and two companies (together, the Claimants) for (i) the expansion of a chain of chiropractic clinics across Scotland and North-East England, and (ii) the acquisition of commercial property. In 2007, the facilities were consolidated into a £2m variable interest rate loan. One of the conditions of the loan required that the Partnership enter into an IRHP (the 2007 swap). This would provide the Partnership with protection from any increase in interest rates. However, the Partnership would not be able to benefit from any decrease in interest rates, as there would be a corresponding increase in the payments due to the Bank under the swap.
Between 2008 and 2009 interest rates fell rapidly to reach a low of 0.5% in March 2009, placing the Partnership in a less advantageous position than it would have been if its only commitment had been to pay a floating rate under the loan. Following a cashflow crisis, in 2009 the existing loan was restructured into a new package, under which the Partnership entered into a new IRHP with costs for breaking the 2007 swap “blended in” (the 2009 swap). Following a default on loan repayments, in November 2009 the Bank transferred the management of the Claimants to its Global Restructuring Group (GRG). At the Bank’ request, the Claimants engaged the services of an independent business consultant who assisted with the negotiation of further restructuring, which concluded in mid-2011. The Claimants continued to suffer from financial difficulties and went into administration in 2013.
In due course, the Claimants commenced legal proceedings against the Bank regarding: (i) the alleged mis-selling of the 2007 and 2009 swaps (the Mis-selling Claim); and (ii) an alleged conspiracy concerning the conduct of GRG following the transfer of the management of the Claimants to GRG in 2009 (the Conspiracy Claim).
The Bank denied each of the claims and brought a counterclaim for the sums outstanding under the loan.
The court found in favour of the Bank and dismissed each of the claims. The court said that the Claimants had failed to establish liability in relation to their various causes of action. Since the claims failed, the Claimants were liable in principle for the sums owed to Bank.
The key issues which will be of broader interest to financial institutions are summarised below.
1) Mis-selling Claims
The Claimants argued that the Bank: (i) failed to explain the risks involved and advise properly in respect of both the 2007 and 2009 swaps; and (ii) in relation to the 2007 swap only, made a negligent misrepresentation at a meeting in October 2007 that interest rates were going to rise, when the Bank was in fact aware that a fall in base rate was imminent.
The court found that there had been no misrepresentation by the Bank.
The court said that, on the balance of probabilities and in light of the documentary evidence: (i) it could not make a finding that the representation relied upon (i.e. the direction of interest rates) was made in 2007 or at any time; and (ii) the claim would have also failed on causation as the Claimants would have entered into the swap if the relevant misrepresentation had not been made.
Failure to explain
The court found that there had been no breach of duty by the Bank.
Duty not to misstate and to give advice fully, properly, and accurately
The court noted that, as per Hedley Bryne v Heller  UKHL 4, there may be factual circumstances arising out of the position of the defendant in relation to the claimant, combined with the defendant’s conduct or omissions that give rise to an assumption of responsibility and the imposition of a tortious duty. This is a duty not to carelessly make a misstatement. What amounts to a misstatement will depend on the factual circumstances of the relationship and identification of the matter for which the defendant has assumed responsibility.
The court also highlighted that, as per Bankers Trust International plc v PT Dhamala Sakti Sejahtera  CLC 518, that if a bank does give an explanation or tender advice then it owes a duty to give that explanation or tender that advice fully, accurately and properly. However, how far that duty goes will depend on the precise nature of the circumstances and of the explanation or advice which is tendered.
The court rejected the Claimants’ arguments that the Bank failed to explain the risks of the applicable break costs, the impact of a “Contingent Obligation” on future lending decisions, restrictions on property sales and fees charged by the Bank.
The court noted that the documentation provided to the Claimants clearly highlighted the risks of the 2007 swap. There had been a meeting in October 2007 to discuss the advantages and disadvantages of the different types of IRHPs, the potential for breakage costs, the mechanics of how a breakage cost would be calculated, and a recommendation that the Partnership seek independent advice before proceeding.
On the basis of the above, the court said it did not consider that there had been any misstatement in the information provided by the Bank in relation to break costs, nor any tortious duty which required more detail as to the size of possible break costs to be provided. Also, the key person acting on the Claimants’ behalf was capable of understanding financial matters including the consequences of the swap as explained to him.
The court said that, on the evidence, the Bank had sufficiently explained the substantial break costs for breaking the 2007 swap and the lengthening of the swap period. The court also highlighted that it did not consider that the Claimants would not have acted any differently if given any further details on the risks.
Failure to advise
The court found that there had been no breach of duty by the Bank.
Duty to provide advice
The court noted that, as per Fine Care Homes Ltd v National Westminster Bank PLC  EWHC 3233 (Ch), the ultimate question was “whether the particular facts of the transactions, taken as a whole and viewed objectively, show that the bank assumed a responsibility to advise the customer as to the suitability of the transaction“.
The court also pointed out that, as per London Executive Aviation Ltd v RBS  EWHC 74 (Ch), even if advice was given by the bank, whether such advice was of a kind to attract a duty of care on the bank would depend on a number of factors including: (i) the sophistication or otherwise of the claimant; (ii) the presence or absence of a written advisory agreement; (iii) the availability of advice from other sources; (iv) the indicia of an advisory relationship; and (v) the contractual documentation and agreed basis of dealing.
2007 and 2009 swaps
The court said that any single instance of advice given by the Bank in respect of swaps was not sufficient to attract a duty of care. The court highlighted: (i) the general absence of any advisory language in the Bank’s communications with the Claimants; (ii) the Bank’s recommendation to the Claimants that they seek independent advice prior to proceeding; (iii) both the contractual and non-contractual documentation made it clear that the Bank was providing an execution-only service and was not acting as an advisor to the Partnership; and (iv) the contractual documents contained the Partnership’s agreement that it had made its own decision to enter into the swaps and had not relied on any advice from the Bank when doing so.
The court said that, since the claim failed irrespective of the effect of the contractual documents, it was not necessary to consider in detail the parties’ arguments in relation to the validity of the terms relied upon. In any event, the court would have reached the same conclusion as Fine Care Homes, which confirmed that the bank was entitled to rely on its contractual terms as giving rise to a contractual estoppel (so that no duty of care to advise the customer as to the suitability of the IRHP arose) and that this clause was not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 when relied upon in the context of a breach of advisory duty claim.
2) Conspiracy Claim
The court found that the Bank had not engaged in an unlawful means conspiracy. In the court’s view, there were genuine and indeed compelling business reasons for the Claimants’ transfer to GRG.
Test for unlawful means conspiracy
The court recalled that the test for conspiracy, as per Lakatamia Shipping Co Ltd v Nobu Su and others  EWHC 1907 (Comm), requires (i) a combination or understanding between two or more people; (ii) an intention to injure the claimant, for which intention to advance economic interests at the expense of the claimant is sufficient; (iii) unlawful acts carried out pursuant to the combination or understanding; and (iv) loss to the claimant suffered as a consequence of those unlawful acts.
Transfer to GRG
The court said that the Conspiracy Claim failed on the grounds that: (i) there was no relevant combination; (ii) individuals at the Bank including the consultant did not act unlawfully; and (iii) there was no intention on the part of the Bank to cause loss.
The court noted that the two core reasons for the transfer to the GRG were: (i) the inability of the Claimants to generate sufficient turnover and profit to repay its debt over an acceptable time frame; and (ii) a concern that the Bank had a security shortfall in respect of its lending to the Claimants.
The court said there was no evidence whatsoever that the transfer to GRG, and the 2011 restructuring, was driven by an ulterior motive on the part of the Bank, or was part of an internal conspiracy within the Bank, to profit from and at the expense of the Claimants. On the contrary, the court concluded that given the actual default on loan repayments and the likely insolvency of the Claimants, the Bank had a “commercially reasonable and rational basis” for the transfer to GRG and what became the 2011 restructure.
Moreover, the court found no evidence that the consultant furthered the Bank’ interests to the detriment of the business. The court pointed out that the consultant had worked positively in favour of the Claimants a number of times.
Accordingly, for all the reasons above, the court found in favour of the Bank and dismissed the Mis-selling and Conspiracy Claims.
The High Court has found in favour of a global financial brokerage business in its claim for unlawful means conspiracy against several businesses and individuals in the context of a repo fraud: ED & F Man Capital Markets Limited v Come Harvest Holdings Limited & ors  EWHC 229 (Comm).
The decision will be of broader interest to financial institutions who may have been victims of a fraud perpetrated by a counterparty, or when defending mis-selling litigation, where allegations of unlawful means conspiracy are commonly included as part of a suite of claims.
While the decision did not involve new law, it serves as a reminder of the principles underpinning the tort of unlawful means conspiracy, and provides a useful application of the test set out in Kuwait Oil Tanker v Al Bader & ors  EWCA Civ 160. Of note is the court’s view is that in pursuing a claim for unlawful means conspiracy: (a) there can be different levels of intentionality involved when assessing whether there has been an intention by the fraudster(s) to cause harm; (b) it is not necessary that a party prove that the perpetrator(s) must have directed their actions towards a specific claimant, as opposed to a third party or class of persons more generally; and (c) blind-eye or Nelsonian knowledge (i.e. where a party abstains from inquiry because they do not wish to confirm a particular state of affairs which they believe likely to exist) may be sufficient to establish intention to cause harm.
In the present case, the court was satisfied that the defendants knew that the global financial brokerage was an intended victim of the unlawful means conspiracy, and if this had not been the case, the court noted that it would have found that the defendants had blind-eye knowledge. They also knew it was the global financial brokerage who would suffer loss.
We consider the decision in more detail below.
Between May and October 2016, the claimant global financial brokerage business (MCM) entered into 28 sale and repurchase transactions. The counterparties to the transactions were 2 Hong Kong companies (together, the HK Companies). As part of the transactions, MCM received 92 purportedly genuine original warehouse receipts (Purported Receipts) purporting to give a right to title to parcels of nickel issued by the warehouse storing such metals. MCM consequentially provided finance to the HK Companies via its own sub-sale of 83 of the Purported Receipts to an Australian financial services company (ANZ).
When it later transpired that the Purported Receipts were forgeries which did not confer title to any nickel, MCM brought an unlawful means conspiracy claim against the HK Companies on the basis that it had been left seriously out of pocket for the monies it had advanced. MCM also added the following parties as defendants to the claim: (a) the sole director and shareholder of the HK Companies (Mr Wong); (b) the agent and adviser of the HK Companies (Genesis); (c) the sole director and shareholder of Genesis (Mr Kao); and (d) a Singaporean brokerage (Straits).
MCM’s case was that Straits either knew or consciously decided not to enquire as to how the HK Companies, Mr Kao and Genesis were obtaining finance from MCM, ANZ and other financiers using the Purported Receipts. If they chose not to enquire, MCM submitted that this was a situation where the test for “blind-eye” or Nelsonian knowledge (i.e. refraining from making enquiries when suspicious) was satisfied.
However, Straits contended that there was no (documentary or otherwise) evidence that it had any knowledge of the fraud perpetrated on MCM; nor did it have blind-eye knowledge. Rather, it claimed that it was itself misled by Mr Kao and at most “with the benefit of hindsight as perfect vision“, it could be said that Straits missed a number of “red flags” in regard to Mr Kao and his associated companies.
The court found in favour of MCM, holding that the defendants had conspired to injure MCM by unlawful means.
The key issues which may be of broader interest to financial institutions are set out below.
Test for unlawful means conspiracy
In reaching its conclusion, the court noted that the tort of conspiracy to injure by unlawful means is actionable where the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so (as per Kuwait Oil Tanker).
A combination or understanding between two or more people
The court found that there was a combination, understanding or agreement between the CEO and Vice President of Straits, Mr Wong and Mr Kao that Straits should carry out certain steps as part of the wider fraud. The basis upon which this conclusion was reached was fact specific and related to the state of certain defendants’ knowledge. However, it is notable that the court found that the “overt acts” of Straits were themselves strongly suggestive of a conspiracy, and what is more, the implausible explanation offered by Straits’ witnesses and “untruthful attempts” in evidence to explain away the part Straits played only provided further “compelling evidence” in support of Straits’ involvement.
Intention to injure
In regard to this element of the tort, Straits sought to contend that the defendant must have directed their actions towards a specific claimant, as opposed to a third party or class of persons more generally, and mere recklessness as to injury to the claimant was not sufficient. However, MCM maintained that this was not supported, and in fact contradicted, by the authorities cited.
The court referred in its analysis on this point to OBG v Allan  UKHL 21, where the House of Lords considered the level of intentionality required to establish liability, and highlighted the distinction between ends, means, and consequences. In summary: (i) ends, where harm to the claimant is the end sought by the defendant, then the requisite intention is made out; (ii) means, where the harm to the claimant is the means by which the defendant seeks to secure his/her end, then the requisite intention is made out; and (iii) consequences, where the harm is neither the end nor the means but merely a foreseeable consequence, the requisite intention is not made out. The court then went on to note that there was another category, known as “the other side of the coin”, to consider if harm to the claimant was the necessary consequence of the defendant’s actions. This was differentiated from category (iii) on the basis that the defendant’s gain and the claimant’s loss are inseparably linked and the defendant cannot obtain the one without bringing about the other, and the defendant knew this to be the case. In such circumstances, then although the purpose of the defendant’s action was not to harm the claimant, they will be considered as having intended to harm the claimant. The court also noted that there was no additional requirement that the precise identity of the victim be required at law to establish the requisite intention.
The court acknowledged the overlap between intention and knowledge and in particular, the fact that blind-eye or Nelsonian knowledge may be sufficient, which strengthened the view that there can be no requirement to intend to harm a specific claimant (because, in a case of blind-eye knowledge, no inquiry would have been undertaken to confirm the state of affairs, such as the identity of the claimant).
In any event, the court found on the facts that Straits knew that MCM was an intended victim of the unlawful means conspiracy at least from or shortly prior to April 2016, and if this had not been the case, the court noted that it would have found that the CEO and Vice President of Straits had blind-eye knowledge.
Similarly, the court found that the HK Companies, Mr Kao, and Genesis entered into a combination with intent to injure MCM by deceit. In the court’s view, they knew it was MCM who would suffer loss.
The court agreed with the parties that there were two constituent parts to this element of the tort, namely (i) the unlawfulness of the act; and (ii) whether the unlawful act is in fact the “means” by which injury is inflicted. Straits contended that the “indeed the means” component of the tort was made up of two aspects, causation and intention, and that this requirement of “intention” was in addition to the separate requirement that the defendant had intent to injure the claimant (considered above). By contrast, MCM maintained that in fact the “indeed the means” concept went to the unlawful means and causation elements of the tort, but not intention.
The court held that MCM’s analysis was correct and confirmed that there was no intention requirement to this component of the tort. It found that MCM had sufficiently met the required threshold, given that Straits knew about the forgeries (although it was noted that the defendant is not required to know the specifics of the “unlawful means” deployed).
On the question of loss, the court considered there to be no doubt that MCM had suffered loss as a result of the unlawful means.
Accordingly, for all the reasons above, the court found in favour of MCM in relation to its claim for unlawful means conspiracy.
The High Court has refused an application to strike out or summarily dismiss a claim for fraudulent misrepresentation, finding that conscious awareness of the alleged implied misrepresentation was not necessary for the claim to have a real prospect of success at trial: Crossley & Ors v Volkswagen Aktiengesellschaft & Ors  EWHC 3444 (QB).
The decision will be of interest to financial institutions in light of the recent line of authorities which have held that conscious awareness is a necessary part of a claimant’s case, in the context of claims brought against banks for alleged implied misrepresentations in respect of LIBOR setting, most recently Leeds City Council and others v Barclays Bank plc and another  EWHC 363 (Comm) (see our blog post here).
In Crossley, which is the group litigation against Volkswagen (VW) arising from the well-known “Dieselgate” emissions scandal, the judge found that there was a real prospect that the claimants could succeed even if they were not consciously aware of the alleged misrepresentation but merely assumed the content of the representation from VW’s conduct, or would not have entered into the relevant contracts had they known the truth (referred to as the Counterfactual of Truth or “CFOT“).
While this suggests a potentially less restrictive approach to that taken in Leeds and earlier authorities on LIBOR setting, the judge made clear that this was a very different case, and in particular that the implied representations alleged in Crossley were significantly more straightforward than those in Leeds. In light of that, it may be that there is limited crossover from the judgment in Crossley to claims relating to LIBOR setting.
The claims arise against from the “defeat device” which it fitted to the engines of approximately 1.2 million cars in the UK. The defeat device enabled the engine to emit Nitrogen Oxide and Dioxide at levels which complied with emissions regulations during emissions testing, although exceeded those limits when run normally.
Approximately 86,000 owners of VW cars (and other brands which are part of the VW group) have brought proceedings under a Group Litigation Order, which include a claim in fraudulent misrepresentation. The claimants allege that in selling vehicles fitted with a defeat device, VW impliedly represented that the vehicles complied with all statutory and regulatory requirements and met the relevant emissions limits.
VW sought to strike out the fraudulent misrepresentation claim on the basis that the claimants needed to demonstrate conscious awareness of the relevant representation in order to prove reliance on it, which is an element of the cause of action. VW said that conscious awareness had either not been properly pleaded or alternatively had no real prospect of success, as it was inherently unlikely and implausible that the claimants would have actually turned their mind to the alleged representation at the time of purchase.
In the course of the hearing, the claimants’ solicitors obtained witness evidence from a number of the claimants which made clear that at least some of them at the time had formed a mere assumption as to the relevant representation (that their car was lawful to drive and complied with emissions regulations) rather than being consciously aware of it. The question for the judge to decide was therefore whether, as VW contended, conscious awareness was required to sustain a claim in fraudulent misrepresentation as a matter of law.
The judge reviewed the authorities on implied representations, in particular the decision in Leeds. In Leeds, the judge had put significant weight on Property Alliance Group (PAG) v RBS  EWHC 3342 (see our blog post on the Court of Appeal decision) and Marme Inversiones v NatWest Markets plc  EWHC 366 (Comm) (see our blog post here), two earlier cases which had considered very similar alleged implied representations to the effect that LIBOR was set honestly and properly. In both those cases, the court considered (albeit obiter) that in order to prove reliance the claimant was required to show they had given contemporaneous conscious thought to the implied representation.
The judge in Crossley found that the case before him was very different from Leeds, PAG and Marme. In Leeds, the judge had commented that she should be “cautious about expressing a principle which works well in the complex cases but which is unrealistic in more pedestrian situations” which led the judge in Crossley to conclude that a single test for what amounts to the necessary awareness may not be possible, and that he considered that VW’s conduct and the representations to be implied from it were both relatively simple, whereas in the LIBOR cases the representations were found to be extremely complex and intricate, and to have arisen from what was described in Leeds as, “a web of dealings…against the background of a web of prior communications written and oral” between the claimants and the bank. The judge also considered earlier authorities, in a non-banking context, which gave some support for the proposition that a relevant assumption or CFOT could be sufficient for a claimant to establish that they relied on an implied representation, in particular Gordon v Selico (1986) 18 HLR 219 in which the Court of Appeal had upheld a case in which there had been reliance on a CFOT (in relation to the non-existence of dry rot), which was hard to reconcile with Leeds.
The judge also found that there were other compelling reasons why the fraudulent misrepresentation claim should be determined at trial rather than on a summary basis. First, summary judgment on the fraudulent misrepresentation claim would not have disposed of the whole case; there would still need to be a substantial trial to resolve the other claims. Second, VW’s conduct in relation to the defeat device and its alleged dishonesty would still be relevant at trial (even absent the fraudulent misrepresentation claim), meaning that there was likely to be evidence at trial concerning the same or similar factual matters as those traversed in the application. Finally, the law in this area could not (in the judge’s view) be said to be complete or fully developed, so that it was desirable to avoid determining the point of law in issue ahead of trial and in the absence of all relevant findings of fact.
In the context of a claim brought by the victim of a fraud against the perpetrator, seeking damages for consequential loss of investment opportunity in relation to certain fraudulent transactions, the Court of Appeal has dismissed an appeal by the fraudster on the basis that the victim was obliged to give credit not only for the cash they received as part of the fraudulent transactions, but also for the “time value” of that money in the period between the transaction and the trial: Tuke v Hood  EWCA Civ 23.
This decision will be noteworthy for financial institutions for the Court of Appeal’s analysis as to the correct calculation of damages in deceit claims, particularly in the context of mis-selling disputes, shareholder claims and the increasing number of fraud claims emerging from the Covid-19 pandemic. The Court of Appeal found that where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, the innocent party must simply give credit for the money (or money’s worth) they received under the transaction itself, in order to reflect the position as it would have been if the deceit had not occurred.
The Court of Appeal referred to the classic modern statement of the applicable principles when assessing damages for deceit in Smith New Court Ltd v Scrimgeour Vickers  AC 254. Smith New Court confirmed that the time at which credit is to be given for the benefits received by the innocent party is normally the date of the fraudulently induced transaction (although this is not an inflexible rule and a different date may be adopted if taking the date of the transaction would under-compensate the victim). The Court of Appeal noted that Smith New Court did not say anything about the innocent party having to give credit for benefits received against claims for consequential losses.
The suggestion in the present case that, unless the victim gave credit for the time value of the money received, they would be overcompensated, was a novel one. The Court of Appeal found it to be fundamentally misconceived and contrary to principle. In the court’s view, a claimant would not be fully compensated if they were required to give any credit for the time value of the money received.
We consider the decision in more detail below.
Between 2009 and 2012, the claimant, Mr Tuke purchased a number of classic cars as investments either from or through a specialist classic car dealership, JD Classics Ltd (JDC), which was founded and run by the defendant, Mr Hood.
In 2011, on Mr Hood’s suggestion, Mr Tuke entered into a transaction which involved him borrowing £8 million from a finance company to purchase 5 Jaguar racing cars for £10 million. It later transpired that Mr Hood had deceived Mr Tuke into buying the cars for far more than they were worth, having provided Mr Tuke with bogus valuations. In order to repay the loan from the finance company, Mr Tuke was obliged to sell a number of his classic cars and was induced to sell all but one to JDC at an undervalue.
Mr Tuke subsequently brought a claim against Mr Hood for deceit, dishonest assistance in breach of fiduciary duty, knowing receipt and conversion. Mr Tuke sought damages including for loss of investment opportunity. Mr Tuke’s case was that if he had not been defrauded, he would have sought to retain particular cars which would have substantially increased in value.
High Court decision
The High Court found that Mr Hood had deceived Mr Tuke on many occasions over many years in flagrant breach of the trust that had been placed in him. The High Court said that Mr Hood was liable in both deceit and dishonest assistance in JDC’s breaches of trust in relation to a number of transactions. The High Court also said that, but for the fraud, Mr Tuke would have been able to keep many of the cars until 2020 or at least until 2015/2016 by which time the market had risen significantly.
The High Court quantified the “base claims” in respect of the loss made on the sales at an undervalue in the normal way, by comparing the market value of the cars at the date of sale to the true value of the consideration received for them.
In relation to the claim for consequential loss of investment opportunity, the High Court compared the market value of each car with its 2020 value, which reflected the subsequent enhancement in value of the investment, before applying a 25% discount for uncertainties.
Mr Hood appealed against the High Court’s decision. Mr Hood contended that the High Court, when assessing loss of investment opportunity, should have taken into account the notional benefit that Mr Tuke received over time from the cash element of the consideration he received for the investment cars and that this resulted in Mr Tuke being overcompensated.
Court of Appeal decision
The Court of Appeal found in favour of Mr Tuke and dismissed the appeal by Mr Hood.
The key issues which will be of interest to financial institutions are set out below.
Legal principles on the calculation of damages for deceit
The Court of Appeal noted that the aim of an award of damages for deceit is to put the claimant in the position in which he would have been if no dishonest representations had been made to him.
The Court of Appeal then went on to highlight the following key legal principles relating to the assessment of damages for deceit:
- In assessing damages, the claimant must give credit for any benefits which he has received as a result of the transaction. The time at which credit is to be given for the benefits is normally the date of the fraudulently induced transaction, but this is not an inflexible rule (as per Smith New Court).
- A defendant who wishes to assert that post-breach events have reduced a recoverable loss must plead as well as prove it (as per OMV Petrom SA v Glencore International AG (Rev 1)  EWCA Civ 778).
Application of legal principles on the calculation of damages for deceit to the present case
The Court of Appeal held that all that the innocent party is required to do, in order to reflect the position as it would have been if the deceit had not occurred, in a case where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, is to give credit for the money (or money’s worth) he received under the transaction itself.
The Court of Appeal felt that Mr Hood should not be rewarded for his dishonest behaviour by the reduction of his liability, especially if to do so would result in Mr Tuke not receiving the full value of loss. Requiring Mr Tuke to give credit for the hypothetical “time value” of the cash he received from JDC under the relevant transactions would result in his not receiving full credit for the loss of investment opportunity. That would be directly contrary to the policy of seeking to award the innocent party full compensation for the wrong suffered in cases of dishonesty.
The Court of Appeal observed that in this case, but for Mr Hood’s fraudulent misrepresentations, Mr Tuke would not have taken out the loan and he would not have had to sell all but one of his investment cars to repay the loan. Also, Mr Hood had not pleaded or proved that post-breach events had reduced a recoverable loss.
The Court of Appeal noted that Smith New Court did not say anything about the innocent party having to give credit for benefits received against claims for consequential losses. Once the value of the cash benefit received by Mr Tuke when he sold the cars was taken into account in the basic computation of loss, there was no justification for taking into account its value over time. There was also no reason to give credit for the “time value” of the cash benefit when assessing the further loss of the chance of making a capital gain from keeping the cars rather than selling them.
Further, the Court of Appeal said that as a matter of principle a claimant is only required to give credit for a benefit that results from and is intrinsic to a transaction. What Mr Tuke did, or may have done, with the cash he received for the cars was irrelevant. Any gains or losses would be as a result of Mr Tuke’s own independent acts and decisions. The time value of the cash received had insufficient nexus with the fraudulent transactions and was not a benefit received under those transactions. In any event, the loss of investment opportunity was not an award calculated by reference to the passage of time as such, but was a claim for the loss of the cars’ appreciation in capital.
The Court of Appeal also commented that the analogy made by Mr Hood with awards of interest was deeply flawed. Mr Hood had contended that the “time value” should be calculated either in the same way as Mr Tuke was awarded compound interest on the equitable compensation for Mr Hood’s dishonest assistance in breaches of fiduciary duty of JDC, or in the same manner as discretionary interest under statute. Firstly, the loss of investment opportunity claim was an alternative to a claim for interest on the base damages awarded. Secondly, the discretionary award of interest on a debt or damages under s.35A of the Senior Courts Act 1981 is purely the creature of statute. There is no discretion at common law to make such an award to a claimant for the loss of use of money over time, if the claim is not a claim for “debt or damages” within the meaning of s.35A (as per Odyssey Aviation Ltd v GFG 373 Ltd  EWHC 1980). Thirdly, if interest is claimed at common law as damages for later payment of a debt, the actual losses must be pleaded and proven (as per Sempra Metals Ltd v Inland Revenue Commissioners and another  UKHL 34). The Court of Appeal found it difficult to see how there could be any power to compute the supposed “time value” of a cash receipt by the innocent party and credit it to the dishonest defendant, especially in an evidential vacuum. The analogy with compound interest was even more difficult to maintain, given that compound interest is an award in equity designed as a means of discouraging dishonest behaviour. There was no reason for the innocent victim of the fraud to be put on the same footing as the fraudster and treated as if he had received compound interest on any cash he had received as part of the fraudulent transaction.
Finally, the Court of Appeal said that policy considerations strongly militated against requiring credit to be given by the injured party for the notional time value of the money. That would incentivise the fraudster to lengthen the time between the fraudulent transaction and the award of damages, because the longer that period, the higher the credit. A fraudster should not be encouraged to prevaricate or to conceal his wrongdoing.
Accordingly, for the reasons above, the Court of Appeal found in favour of Mr Tuke and dismissed the appeal by Mr Hood.