ESG for financial institutions – Top five trends in UK and EU regulation for 2023

October 12, 2022

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.

How to navigate the Autonomy judgment: guidance for corporate issuers defending Section 90A / Schedule 10A FSMA shareholder claims

June 9, 2022

The High Court has handed down its long-awaited judgment in the US$5 billion civil fraud action brought by the Hewlett Packard group in connection with its acquisition of the UK software company Autonomy Corporation Limited in 2012: ACL Netherlands BV & Ors v Lynch & Ors [2022] EWHC 1178 (Ch).

The judgment follows a previously published Summary of Conclusions, in which the High Court confirmed that the claimants “substantially succeeded” in their claims against two former Autonomy executives (see this post on our Civil Fraud and Asset Tracing Notes blog, which sets out the background facts to the dispute and summarises the outcome).

The successful claims were brought under s.90A of the Financial Services and Markets Act 2000 (FSMA), common law misrepresentation and deceit, and the Misrepresentation Act 1967, as well as claims for breach of the defendants’ management duties.

The 1657-page judgment is significant, not only because the case is one of the longest and most complex in English legal history, but also because it is the first s.90A FSMA case to come to trial in this jurisdiction.

As a reminder, s.90A (and its successor, Schedule 10A FSMA) is the statutory regime imposing civil liability for inaccurate statements in information disclosed by listed issuers to the market. It imposes liability on the issuers of securities for misleading statements or omissions in certain publications, but only in circumstances where a person discharging managerial responsibilities at the issuer (a PDMR) knew that, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact. The issuer is liable to pay compensation to anyone who has acquired securities in reliance on the information contained in the publication, for any losses suffered as a result of the untrue or misleading statement or omission, but only where the reliance was reasonable.

In recent years, there has been a noticeable uptick in securities litigation in the UK, in particular in claims brought under s.90A/Sch 10A FSMA. The purpose of this blog post is to distil the key legal takeaways on s.90A FSMA arising from the judgment, which may be relevant to such claims.

Scope of s.90A / Sch 10A FSMA

The court accepted the defendants’ “general admonition” that the court should not interpret and apply s.90A/Sch 10A FSMA in a way which exposes public companies and their shareholders to unreasonably wide liability.

It emphasised that, in considering the scope of these provisions (and in particular in considering the nature of reliance which must be shown and the measure of damages), the history of the s.90A regime is relevant. The court highlighted the following background to the provisions of FSMA, in particular:

Prior to s.90A, English law did not provide any remedy (statutory or under the common law) for investors acquiring shares on the basis of inaccuracies in a company’s financial statements (in contrast to the long-established statutory scheme of liability for misstatements contained in prospectuses). The rationale for the different treatment of liability for misstatements in prospectuses and those in other disclosures was because an untrue statement in a prospectus can lead to payments being made to the company on a false basis, but the same cannot be said of an untrue statement contained in an annual report, for example.
The ultimate catalyst for the introduction of a scheme of liability was the Transparency Directive (Council Directive 2004/1209/EC), which included enhanced disclosure obligations and the requirement for a disclosure statement. This gave rise to concerns that the English law’s restrictive approach to issuer liability would be disturbed and that issuers (and directors and auditors) might be made liable for merely negligent errors contained in narrative reports or financial statements.
The regime for issuer liability was introduced in this jurisdiction in a piecemeal fashion, recognising the historical tendency against liability. The government was aware that the scheme would involve a balance between: (a) the desire to encourage proper disclosure and affording recourse to a defrauded investor in its absence; and (b) the need to protect existing and longer-term investors who, subject to any claim against relevant directors (who may not be good for the money), may indirectly bear the brunt of any award against the issuer.
The original s.90A provisions introduced by the government were subsequently extended with effect from 1 October 2010 as follows: (a) to issuers with securities admitted to trading on a greater variety of trading facilities; (b) to relevant information disclosed by an issuer through a UK recognised information service; (c) to permit sellers, as well as buyers, of securities to recover losses incurred through reliance on fraudulent misstatements or omissions; and (d) to permit recovery for losses resulting from dishonest delay in disclosure. However, liability continued to be based on fraud and no change was suggested or made to the limitations that: (i) liability is restricted to issuers; and (ii) liability can only be established through imputation of knowledge or recklessness on the part of PDMRs of the issuer. Further, no specific provisions to determine the basis for the assessment of damages were introduced.

Two-stage test for liability under s.90A /Sch 10A FSMA

The court confirmed that the provisions of s.90A / Sch 10A FSMA make clear that there is an objective and a subjective test, both of which must be satisfied to establish liability:

Objective test: the relevant information must be demonstrated to be “untrue or misleading” or the omissions a matter “required to be included”.
Subjective test: a PDMR must know that the statement was untrue or misleading, or know such omission to be a “dishonest concealment of a material fact” (referred to in the judgment as “guilty knowledge”).

Each of these tests is considered separately below.

The objective test (untrue or misleading statement or omission)

The court said that the objective meaning of the impugned statement, is “the meaning which would be ascribed to it by the intended readership, having regard to the circumstances at that time”, endorsing the guidance provided in Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc [2010] EWHC 1392 (Comm).

The court gave some further guidance as to how to establish the objective meaning of a statement for the purpose of a s.90A/Sch 10A FSMA claim, including the following:

The content of the published information covered by s.90A/Sch 10A will often be governed by certain accounting standards, provisions and rules, which involve the exercise of accounting judgement where there may be a range of permissible views. The court confirmed that a statement is not to be regarded as false or misleading where it can be justified by reference to that range of views.
Where the meaning of a statement is open to two or more legitimate interpretations, it is not the function of the court to determine the more likely meaning. Unless it is shown that the ambiguity was artful or contrived by the defendant, the claim may not satisfy the objective test.
The claimant must prove that they understood the statement in the sense ascribed to it by the court.

The subjective test (guilty knowledge)

As in the common law of deceit, it must be proven that a PDMR “knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading”; or alternatively, that they knew that the omission of matters required to be included was the dishonest concealment of a material fact. The court noted that for both s.90A and Sch 10A, the language used shows that there is a requirement for actual knowledge.

The court clarified several key legal questions as to what will amount to “guilty knowledge” for the purpose of the subjective test, including the following:

Timing of knowledge. In the context of an allegedly untrue/misleading statement, a party will be liable only if the facts rendering the statement untrue were present in the mind of the PDMR at the moment the statement was made. In the case of an omission, the PDMR must have applied their mind to the omission at the time the information was published and appreciated that a material fact was being concealed (i.e. that it was required to be included, but was being deliberately left out).
Recklessness. In the context of s.90A/Sch 10A FSMA, recklessness bears the meaning laid down in Derry v Peek (1889) 14 App. Cas. 337, i.e. not caring about the truth of the statement, such as to lack an honest belief in its truth.
Dishonesty
- Even on the civil burden of proof, there is a general presumption of innocent incompetence over dishonest design and fraud, and the more serious the allegation, the more cogent the evidence required to prove dishonesty.
- For deliberate concealment by omission, dishonesty has a special definition under Sch 10A (although s.90A contained no such special definition), which represents a statutory codification of the common law test for dishonesty laid down in R v Ghosh [1982] 1 QB 1053 (although in a common law context, that test has been revised by Ivey v Genting Casinos (UK) Ltd [2018] AC 391). Under the Sch 10A definition, a person’s conduct is regarded as dishonest only if:

“(a) it is regarded as dishonest by persons who regularly trade on the securities market in question, and (b) the person was aware (or must be taken to have been aware) that it was so regarded.”

- Any advice given to the company and its directors from professionals will be relevant to the question of dishonesty (see below).

Impact of advice given by professionals on the subjective test
- The court emphasised that, where a PDMR receives guidance from the company’s auditors that a certain fact does not need to be included in the company’s published information, then the omission of that fact on the basis of the advice is unlikely to amount to a dishonest concealment of a material fact (even if the disclosure was in fact required).
- Similarly, where a PDMR has been advised by auditors that a particular statement included in the accounts was a fair description (as required by the relevant accountancy standards), it may be unlikely that the PDMR had knowledge that the statement was untrue/misleading or was reckless as to its truth (unless the auditor was misled).
- However, in the court’s view, directors are likely to be (and should be) in a better position than an auditor to assess the likely impact on their shareholders of what is reported, and (for example) to assess what shareholders will make of possibly ambiguous statements. Accordingly, the court said “on matters within the directors’ proper province, the view of the company’s auditors cannot be regarded as a litmus test nor a ‘safe harbour’: auditors may prompt but they cannot keep the directors’ conscience”.
- Accordingly, narrative “front-end” reports and presentations of business activities cannot be delegated by directors, as their purpose/objective is to reflect the directors’ (not the auditors’) view of the business and require directors to provide an accurate account according to their own conscience and understanding.
Subjective test to be applied in respect of each false statement. The court confirmed that liability is only engaged in respect of statements known to be untrue. If a company’s annual report contains ten misstatements, each of them relied on by a person acquiring the company, but it can only be shown that a PDMR knew about one of those misstatements, the company will only be liable in respect of that one, not the other nine.

Reliance

Reasonable reliance is another necessary precondition to liability under s.90A and Sch 10A, although the precise requirements of reliance are not defined in those provisions. In the Autonomy judgment, the court considered the question of reliance in further detail, providing the following guidance:

Reliance by whom? The court held that reliance must be by the person acquiring the securities, and not by some other person.
Individual statements vs published information. The court held that reliance must be upon a statement or omission, rather than, in some generalised sense, on a piece of published information (e.g. the annual report for a given year).
Express statements vs impression. The court suggested that statements and omissions may in combination create an impression which no single one imparts and, if that impression is false, that may found a claim (subject to the “awareness” requirement below).
Awareness requirement. The court held that, in order to demonstrate reliance upon a statement or omission, a claimant will have to demonstrate that they were consciously aware of the statement or omission in question, and that it induced them to enter into the transaction. The requirement for reliance upon a piece of information will not be satisfied if the claimant cannot demonstrate that they reviewed or considered the information: “it cannot have been intended to give an acquirer of shares a cause of action based on a misstatement that he never even looked at, merely because it is contained, for example, in an annual report, some other part of which he relied on”. Further, the relevant statement “must have been present to the claimant’s mind at the time he took the action on which he bases his claim”, i.e. made his investment decision.
Standard of reliance. The court held that a claimant must show that the fraudulent representation had an “impact on their mind” or an “influence on their judgement” in relation to the investment decision.
Presumption of inducement. The court held that the so-called “presumption of inducement” applies in the context of a FSMA claim to the same extent as it does in other cases of deceit. This is a presumption that the claimant was induced by a fraudulent misrepresentation to act in a certain way, which will assist the claimant when proving reliance. The presumption is an inference of fact which is rebuttable on the facts. In addition, for the purposes of s.90A and Sch 10A, any reliance must be “reasonable”, and that reasonableness requirement mitigates the effect of the presumption by introducing an additional test for the claimant to satisfy. The court also made clear that the presumption of inducement is subject to the “awareness” requirement above, i.e. the presumption of inducement will not arise if the claimant was not consciously aware of the representation.
When is reliance reasonable? The court held that “the test of reasonableness is not further defined, but is plainly to be applied by reference to the conditions at the time when the representee claimant relied on it. Circumstances, caveats or conditions which qualify the apparent reliability of the statement relied on by the claimant are all to be taken into account. The question of when reliance is reasonable is fact-sensitive.”

Loss in the context of FSMA claims

The court expressed its provisional view on some “novel and difficult issues” in the context of loss. In particular, it said that it is for the court to decide, and not for the defrauded party to make an election, as to whether “inflation” damages (i.e. if the truth had been known the claimant would have acquired the shares at a lower price) or “no transaction” damages (i.e. if the truth had been known, the claimant would not have purchased the shares in question) are available. The court will return to this question when addressing issues of quantum (the present judgment considered liability only).

Future use of s.90A / Sch 10A claims in M&A disputes

In the present case, the alleged liability of Autonomy under s.90A/Sch 10A was used as a stepping-stone to a claim against the defendants. This was described by the court as a “dog leg claim” because Autonomy (now under the control of HP) accepted full liability to its shareholder, and Autonomy sought to recover in turn from the defendants as PDMRs of Autonomy at the relevant time. The court said that there was no conceptual impediment to this, but that it was right to bear in mind that in interpreting the provisions and conditions of liability, the relevant question was whether the issuer itself should be liable.

This may open the door for future M&A disputes to be brought by way of a s.90A FSMA claim by disgruntled purchasers against the target company in order – ultimately – to pursue a claim against former directors of the target company (i.e. the vendors), based on breach of their duties owed to the target company.

Simon Clarke

Partner

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Ceri Morgan

Professional Support Consultant

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Rupert Lewis

Partner

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Chris Bushell

Partner

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High Court dismisses IRHP mis-selling and unlawful means conspiracy claims against bank

May 11, 2022

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 [2022] 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.

Background

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.

Decision

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.

Misrepresentation

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 [1963] 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 [1996] 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.

2007 swap

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.

2009 swap

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 [2020] 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 [2018] 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 [2021] 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.

Ceri Morgan

Professional Support Consultant

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Nihar Lovell

Professional Support Lawyer

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Katie-Scarlett Wetherall

Associate

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High Court considers the requirement for “awareness” in implied misrepresentation claims

February 25, 2022

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 [2021] 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 [2021] 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.

Background

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.

Decision

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 [2016] EWHC 3342 (see our blog post on the Court of Appeal decision) and Marme Inversiones v NatWest Markets plc [2019] 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.

Julian Copeman

Partner

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Ceri Morgan

Professional Support Consultant

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Daniel May

Senior Associate

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High Court decision in first s.90A FSMA claim to reach trial

February 22, 2022

The High Court has published a summary of its findings on liability in the long-running USD$5 billion civil fraud action brought by the Hewlett Packard group in connection with its acquisition of the UK software company Autonomy Corporation Limited in 2012. The claimants have “substantially succeeded” in their claims against two former Autonomy executives: ACL Netherlands BV, Hewlett Packard The Hague BV and others v Lynch and Shushovan [HC-2015-001324].

Mr Justice Hildyard in the Chancery Division outlined his findings in a detailed Summary of Conclusions, in advance of his full judgment which is currently embargoed. The successful claims were brought under s.90A of the Financial Services and Markets Act 2000 (FSMA), common law misrepresentation and deceit, and the Misrepresentation Act 1967, as well as claims for breach of the defendants’ management duties.

The findings are limited to the issue of liability, with a separate judgment on the quantum of damages to be delivered at a later date. The court indicated that although “substantial”, damages are anticipated to be “considerably less than claimed”.

This decision represents a significant development, as the first claim brought under s.90A FSMA to be considered at full trial. However, the s.90A FSMA claim was brought in the very different context of a post-closing M&A dispute, rather than the more classic securities class action brought on behalf of a large group of institutional investors. That said, there may be some helpful guidance on key elements of s.90A when the full decision becomes available, which we will consider in due course when it becomes public.

For more information see this post on our Civil Fraud and Asset Tracing Notes blog.

Know your limits: the increasingly high bar for claims to extend the limitation period

July 23, 2021

Herbert Smith Freehills LLP have published an article in the New Law Journal on recent authorities clarifying the application of the Limitation Act 1980 and the high threshold for claimants to postpone the limitation period under s.32 or s.14A of that Act.

The litigation market is well known to be counter-cyclical – an uptick in disputes usually follows market turmoil. The 2008 global financial crisis was no exception, and disputes with their factual roots in this period are still heard by the English courts today. As an inexorable consequence, the court must grapple with complicated limitation arguments, and recent decisions fleshing out the law demonstrate the judiciary’s willingness to consider time-barred claims on a summary basis, in circumstances where, traditionally, such cases have been less amenable to a strike out or summary determination.

In our article, we examine recent authorities focusing on the operation of the deliberate concealment extension under section 32(1)(b) of the Act and the alternative 3-year extension mechanism for negligence actions under section 14A(4)(b).

The article can be found here: Know your limits. This article first appeared in the 9 July 2021 edition of the New Law Journal.

Chris Bushell

Partner

+44 20 7466 2187

Ceri Morgan

Professional Support Consultant

+44 20 7466 2948

High Court finds that a claimant’s “awareness” of a representation is an essential prerequisite to a claim for misrepresentation

March 19, 2021

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) (see our blog post on the Court of Appeal decision) and Marme Inversiones 2007 v Natwest Markets [2019] EWHC 366 (Comm) (see our blog post 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

Partner

+61 3 9288 1821

Chris Bushell

Partner

+44 20 7466 2187

Ceri Morgan

Professional Support Consultant

+44 20 7466 2948

Nic Patmore

Senior Associate

+44 20 7466 2298

High Court considers First Tower judgment in the context of no-advice clauses and confirms UCTA does not apply

December 9, 2020

The High Court has dismissed the latest interest rate hedging product (IRHP) mis-selling claim to reach trial in Fine Care Homes Limited v National Westminster Bank plc & Anor [2020] EWHC 3233 (Ch).

The judgment will be welcomed by financial institutions for its general approach to claims alleging that a bank negligently advised its customer as to the suitability of a particular financial product (whether an IRHP or otherwise). While there are some aspects of the decision which hinge on the unsophisticated nature of this particular claimant, the touchstone of when it can be said that a bank owes a common law duty to advise, the content of that duty and what a claimant must prove to demonstrate that the advisory duty (if owed) has been breached, will be of relevance to similar claims faced by banks in relation to other products or services.

The aspect of the judgment likely to be of greatest and widest importance to the financial services sector, is the court’s analysis of how the doctrine of contractual estoppel should be applied in these types of mis-selling cases.

The question in this case was whether 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. In good news for banks, the court determined that clauses stating that the bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction (precisely the sort of clauses which are typically relied upon to trigger a contractual estoppel), were not subject to the requirement of reasonableness in the Unfair Contract Terms Act 1977 (UCTA) when relied upon in the context of a breach of advisory duty claim.

This may appear an unsurprising outcome, given the Court of Appeal’s decision Springwell Navigation Corpn v JP Morgan Chase Bank [2010] EWCA Civ 1221. However, certain obiter comments by Leggatt LJ in First Tower Trustees v CDS [2019] 1 WLR 637 could be read as conflicting with Springwell in relation to the effect of so-called no-advice clauses and the application of UCTA in relation to them.

In the present case, the court emphasised the clear distinction made in First Tower between, on the one hand, a clause that defines the party’s primary rights and obligations (such as a no-advice clause), and on the other, a clause stating that there has been no reliance on a representation (a “non-reliance” clause). It said that the Court of Appeal’s decision in First Tower was limited to the effect of non-reliance clauses given the nature of the clause at issue in that case. First Tower confirmed that where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act 1967 will be engaged and the clause will be subject to the UCTA reasonableness test. In contrast, the clauses at issue here were not non-reliance clauses, but rather clauses that set out the nature of the obligations of the bank, and therefore were not subject to section 2 of UCTA.

Contractual estoppel has regularly been relied upon by banks defending mis-selling claims to frame the obligations which they owe to customers, particularly in circumstances where claimants have sought to argue that, notwithstanding the clear terms of the contracts upon which the transactions were entered into, the banks took on advisory duties in the sale of financial products which turned out to perform poorly. The decision in Fine Care Homes will therefore be welcomed by financial institutions, particularly against the backdrop of the First Tower decision. While in many circumstances, no-advice clauses would be likely to meet the requirements of reasonableness under UCTA in any event (as was the outcome in the present case), removing a hurdle that must be cleared in order to rely on such clauses is clearly preferable from the bank’s perspective, adding certainty to the relationship.

Background

In 2006, the claimant (Fine Care Homes Limited) took out a loan with the Royal Bank of Scotland (the Bank) to finance the acquisition of a site in Harlow on which it intended to build a care home (the land loan). The claimant also intended to borrow further funds from the Bank to finance the development of the site (the development loan), although ultimately the parties were unable to reach agreement on the terms of the development loan.

In 2007, the claimant took out an IRHP with the Bank, as a condition of the anticipated development loan. The IRHP was a structured collar with a term of five years, extendable by two years at the option of the Bank (which was duly exercised).

In 2012, the IRHP was assessed by the Bank’s past business review (PBR) compensation scheme (which had been agreed with the then-Financial Services Authority (FSA)) to have been mis-sold. In 2014, the claimant was offered a redress payment by the Bank’s PBR.

The claimant did not to accept the offer under the PBR and pursued the following civil claims against the Bank at trial:

Negligent advice claim: A claim that the Bank negligently advised the claimant as to the suitability of the IRHP, in particular by failing to tell the claimant that the IRHP would impede its capacity to borrow, or that novation of the IRHP might not be straightforward / might require security.
Negligent mis-statement / misrepresentation claim: A claim that the information provided by the Bank regarding the IRHP contained negligent mis-statements or misrepresentations in the same two respects as the negligent advice claim.
Contractual duty claim: A claim that the Bank was subject to an implied contractual duty under section 13 of the Supply of Goods and Services Act 1982 to exercise reasonable skill and care when giving advice and making recommendations, which was breached in the same two respects as the negligent advice claim.

Decision

The court held that all of the claims against the Bank failed, each of which is considered further below.

1. Negligent advice claim

The court’s analysis of the negligent advice claim was divided into three broad questions: (i) did the Bank owe a duty of care to advise the claimant as to the suitability of the IRHP; (ii) could the Bank rely upon a contractual estoppel to the effect that the relationship did not give rise to an advisory duty; (iii) if there was an advisory duty in this case, was it breached by the Bank in the two specific respects alleged by the claimant?

(i) Did the Bank owe a duty of care?

It was common ground that the sale of the IRHP was ostensibly made on a non-advisory rather than advisory basis, but the claimant alleged that the facts nevertheless gave rise to an advisory relationship in which a personal recommendation was expressly or implicitly made. In this regard, the claimant relied on the salesperson at the Bank being held out as being an “expert” (as an approved person under FSMA); that he advised the claimant to buy the particular IRHP and that the Bank therefore assumed a duty of care which required it to ensure that the IRHP was indeed suitable.

As to whether the Bank owed an advisory duty on the facts of this particular case, the court referred in particular to two substantive trial decisions considering a claim for breach of an advisory duty in the context of selling an IRHP: Property Alliance Group v RBS [2018] 1 WLR 3529 and LEA v RBS [2018] EWHC 1387 (Ch). The court highlighted the following key points from these cases:

A bank negotiating and contracting with another party owes in the first instance no duty to explain the nature or effect of the proposed arrangement to the other party.
As a point of general principle, an assumption of responsibility by a defendant may give rise to duty of care, although this will depend on the particular facts (applying Hedley Byrne v Heller [1964] AC 465).
In the context of a bank selling financial products, in “some exceptional cases” the circumstances of the case might mean that the bank owed a duty to provide its customer with an explanation of the nature and effect of a particular transaction.
There are a number of principles emerging from the cases as to the way in which the court should approach this fact-sensitive question. In particular, the court must analyse the dealings between the bank and the customer in a “pragmatic and commercially sensible way” to determine whether the bank has crossed the line which separates the activity of giving information about and selling a product, and the activity of giving advice.
However, there is no “continuous spectrum of duty, stretching from not misleading, at one end, to full advice, at the other end”. Rather, the question should be the responsibility assumed in the particular factual context, as regards the particular transaction in dispute.
Assessing whether the facts give rise to a duty of care is an objective test.

On the facts, the court did not consider that this was to the sort of “exceptional case” where the bank assumed an advisory duty towards its customer. The court highlighted the following factual points in particular, which are likely to be of broader relevance to mis-selling disputes of this nature:

The court noted that it is quite obviously not the case that in every case in which an IRHP is sold by an approved person (as it will inevitably be) a duty of care arises to ensure the suitability of the product.
The claimant was unable to point to anything at all in the exchanges between the Bank and the claimant which contained advice to buy the IRHP. The court rejected the claimant’s argument that the Bank’s presentation of the benefits of IRHP products in general could amount to advice to buy any specific product. Referring to the decision in Parmar v Barclays Bank [2018] EWHC 1027 (Ch), the court confirmed that if a recommendation is to give rise to an advised sale, it must be made in respect of a particular product and not IRHPs in general. Although Parmar was decided in the context of a statutory claim under s.138D FSMA, the court found that the principle applied equally to a mis-selling claim of this type (see our blog post on the Parmar decision).

Accordingly, the court found that the Bank did not owe an advisory duty in relation to the sale of the IRHP.

In reaching this conclusion, the court rejected any suggestion that the rules and guidance set out in the FSA/FCA Handbook could create a tortious duty of care where one did not exist on the basis of the common law principles (applying Green & Rowley v RBS [2013] EWCA Civ 1197). The relevant context in Green & Rowley was whether the (then-applicable) Conduct of Business rules and guidance (COB) could create a concurrent tortious duty of care, but the court in this case extended the same reasoning to the Statements of Principle and Code of Practice for Approved Persons (APER). The court stated that APER code could not carry any greater weight in relation to the content of the common law duties of care than the COB rules.

(ii) Could the Bank rely upon a contractual estoppel?

The court found that the Bank was entitled to rely on its contractual terms as confirming that the relationship between the Bank and the claimant did not give rise to a duty of care to advise the claimant as to the suitability of the IRHP, and that the claimant was estopped from arguing to the contrary by those contractual terms.

The terms of business included the following material clauses:

“3.2 We will provide you with general dealing services on an execution-only basis in relation to…contracts for differences…

3.3 We will not provide you with advice on the merits of a particular transaction or the composition of any account…You should obtain your own independent financial, legal and tax advice. Opinions, research or analysis expressed or published by us or our affiliates are for your information only and do not amount to advice, an assurance or a guarantee. The content is based on information that we believe to be reliable but we do not represent that it is accurate or complete…”

The court rejected the claimant’s argument that these clauses were subject to the requirement of reasonableness under UCTA.

In reaching this conclusion, the court referred to the decision in First Tower Trustees v CDS [2019] 1 WLR 637, which considered the effect of a “non-reliance” clause (a clause providing that the parties did not enter into the agreement in reliance on a statement or representation made by the other contracting party). First Tower confirmed that, where the effect of a non-reliance clause is to exclude liability for misrepresentation which would otherwise exist in the absence of the clause, section 3 of the Misrepresentation Act will be engaged and the clause will be subject to the UCTA reasonableness test.

However, the court in Fine Care Homes found that clauses 3.2 and 3.3 in the present case were different from non-reliance clauses, being clauses that set out the nature of the obligations of the Bank. The court highlighted that the judgments of both Lewison LJ and Leggatt LJ in First Tower, clearly distinguished between a clause that defines the party’s primary rights and obligations, and a clause stating that there has been no reliance on a representation. In respect of the former, First Tower provided the following articulation of the position:

“Thus terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of [the 1977 Act]. Otherwise, every contract which contains contractual terms defining the extent of each party’s obligations would have to satisfy the requirement of reasonableness.”

In First Tower, Lewison LJ had gone on to refer to Thornbridge v Barclays Bank [2015] EWHC 3430 (a swaps case) which considered a clause stating that the buyer was not relying on any communication “as investment advice or as a recommendation to enter into” the transaction. In First Tower, Lewison LJ explained that this clause defined the party’s primary rights and obligations, and was not a clause stating that there had been no reliance on a representation.

Applying this reasoning to the present case, the court found that clauses 3.2 and 3.3 (stating that the Bank was providing general dealing services on an execution-only basis and was not providing advice on the merits of a particular transaction), were primary obligation clauses that were not subject to the requirement of reasonableness in UCTA (or, by parity of reasoning, COB 5.2.3 and 5.2.4).

Had UCTA applied, the court said that it would in any event have found the clauses reasonable, noting that some of the claimant’s objections effectively asserted that it could never be reasonable for a bank selling an IRHP to a private customer to specify that it was doing so on a non-advisory basis – which the court did not accept.

(iii) If an advisory duty was owed, was it breached by the Bank?

Although it was not necessary for the court to consider the specific breaches of duty alleged by the claimant (given its findings above), the court proceeded to do so for the sake of completeness.

The court applied Green & Rowley, confirming that the content of the advisory duty (if owed) “might” be informed by the COB that applied at the time of the sale (here COB 2.1.3R and COB 5.4.3R) and the APER code. However, the claimant did not in fact identify any specific respect in which the FCA framework had a material impact on the claimant’s case.

By the time of the trial, the claimant’s case was narrowed to two quite specific allegations concerning what it should have been told by the Bank in relation to two key issues: (1) that the Bank negligently failed to explain to the claimant that the Bank’s internal credit limit utilisation (CLU) figure for the IRHP, would affect the claimant’s ability to refinance existing borrowings / borrow further sums (from the Bank or another lender); and (2) that the Bank should have warned the claimant that novation of the IRHP might require external security to be provided.

The arguments on these allegations were fact-specific, and ultimately the court found that there was no evidence to support them.

2. Negligent mis-statement / misrepresentation claim and contractual claim

The claims on these alternative grounds also failed, given the court’s finding that what the Bank told the claimants was correct, in respect of the two complaints identified.

Consistent with the position found in Green & Rowley, the court noted that the content of the Bank’s common law duty in relation to the accuracy of its statements was not informed by the content of the COB rules or APER code (in contrast with the advisory duty, where the content of the duty might be informed by the FCA framework).

Accordingly, the claim was dismissed.

John Corrie

Partner

+44 20 7466 2763

Harry Edwards

Partner

+61 3 9288 1821

Ceri Morgan

Professional Support Consultant

+44 20 7466 2948

Nic Patmore

Senior Associate

+44 20 7466 2298

Shareholder class actions – new webinar and “handy client guide”

March 18, 2019

Herbert Smith Freehills has today released the third in our series of webinars on class actions in England and Wales, looking at shareholder class actions. In the presentation Simon Clarke, Harry Edwards and Kirsten Massey discuss the outlook for shareholder group actions in England and Wales, the types of claims (eg under sections 90 and 90A FSMA) and remedies likely to be pursued by shareholder group claimants, and some challenges in bringing and defending these actions. Clients and contacts of the firm can register to access the archived version by contacting Prudence Heidemans.

The webinar is accompanied by the fourth in our series of short guides to class actions in England and Wales, Shareholder class actions, which has been published here (together with our first three editions: (i) Overview of class actions in the English courts; (ii) Group Litigation Orders; and (iii) Data breach class actions).

Simon Clarke

Partner

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Harry Edwards

Partner

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Kirsten Massey

Partner

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Commercial Court rejects EURIBOR implied representations

March 7, 2019

The Commercial Court has dismissed claims that a bank made implied representations as to EURIBOR rate-setting in the context of selling an interest rate swap: Marme Inversiones 2007 SL v NatWest Markets plc & Ors [2019] EWHC 366 (Comm).

This is the second civil court trial judgment considering IBOR manipulation, the first being Property Alliance Group Ltd v Royal Bank of Scotland [2018] 1 WLR 3529 in which the claim relating to LIBOR manipulation was also dismissed (see our banking litigation e-bulletin). Together, these decisions are a reminder of the difficulties of proving allegations that IBOR-setting banks made implied representations when selling IBOR-linked products. The combined effect of these judgments suggests:

The requirement to identify specific conduct which led to the implied representation being made is important (and should not be underestimated). In the context of these transactions, a bank simply entering into an IBOR-linked swap is unlikely to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal in PAG (see below).
Implied representations must be certain and obvious: if there is “elasticity of possible meaning“, this will indicate the absence of an implication.
The broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.
Proving reliance on any representations which are implied will be fact-specific and onerous.
Falsity must be specifically proven: it is not sufficient to draw inferences on the basis of conduct relating to other benchmarks (such as an IBOR in a different currency) or indeed findings of the regulator.

In PAG, the Court of Appeal held that the bank made the narrow implied representation (at the time of entering into the swaps) that it was not itself seeking to manipulate GBP LIBOR and did not intend to do so in the future (however the claimants could not prove that the representation was false). In this case, the court’s view was that a similar narrow representation in relation to EURIBOR could theoretically have been implied, but this implied representation was not alleged, and was not shown to be false in any event.

Background

The proceedings arose out of interest rate swaps set by reference to EURIBOR, entered into between Marme Inversiones 2007 SL (“Marme“) and the defendant banks (the “Banks“). The Banks sought various declarations that they had lawfully terminated the swaps and that Marme owed them €710 million plus interest.

Marme sought rescission of the swaps ab initio and/or damages of up to €996 million on the basis that one of the Banks (RBS plc, “RBS“) negligently/fraudulently made representations regarding the integrity of the process of setting EURIBOR (on its own account and as agent for the other Banks) and that Marme relied upon those representations when entering into the swaps. Marme did not contend that the representations were made expressly, but that they should be implied from the circumstances and RBS’s conduct.

Decisions

The court found in favour of the Banks. It granted the declarations sought and held that the alleged representations did not fall to be implied.

The court distilled the following principles from existing authorities considering implied representations:

It is possible for a representation to be made expressly or impliedly through words or conduct. For a representation to be implied, silence or mere assumption is not usually enough as there is no general duty of disclosure. It is necessary to view the words or conduct objectively to determine whether an implied representation has been made. The natural assumptions of the reasonable representee will be helpful in assessing whether an implied representation has been made through the conduct of the representor.
Whether or not a representation is implied is ultimately a question of fact to be determined in the circumstances of the particular case: see also Deutsche Bank AG v Unitech Global Ltd [2013] EWCA Civ 1372.
More may be required, in terms of words or conduct, to prove an implied representation which is wide in meaning or complex.
It is less likely that a representation that is vague, uncertain or ambiguous would be objectively understood to have been made from words or conduct.

With these principles in mind, the court considered the representations alleged in the instant proceedings, identifying a number of (legal and factual) difficulties with the case alleged by Marme. The key points which are likely to be of broader interest are summarised below.

Marme alleged that in the light of PAG, at least some of the alleged representations in this case should be treated as having been “plainly” made by RBS. The court found that in truth PAG provided no support at all for Marme’s case. In PAG, the claimants similarly sought rescission of swap agreements and/or damages on the basis of (among other things) alleged implied fraudulent representations. The Court of Appeal in PAG found that the representations as pleaded could not be implied, but decided that a different implied representation would be justified:

“In the present case there were lengthy discussions between PAG and RBS before the swaps were concluded as set out by the judge in the earlier part of her judgment. … RBS was undoubtedly proposing the swap transactions with their reference to LIBOR as transactions which PAG could and should consider as fulfilment of the obligations contained in the loan contracts. In these circumstances we are satisfied that RBS did make some representations to the effect that RBS itself was not manipulating and did not intend to manipulate LIBOR. Such a comparatively elementary representation would probably be inferred from a mere proposal of the swap transaction but we need not go as far as that on the facts of this case in the light of the lengthy previous discussions.”

Marme submitted that, in the same way as PAG, the representations in this case should be inferred from a mere proposal of the swaps. However, the court observed that the representations in this case were not the same as the (narrow) implied representations reformulated by the Court of Appeal in PAG.

The court held that the implied representations were not supported by any other authority, in particular Deutsche Bank v Unitech offered no support. The court emphasised that although the Court of Appeal in Deutsche Bank v Unitech granted permission to amend to include pleas of implied representations about LIBOR, it would be wrong to regard what was decided as having too great a significance (given the appeal related to an interlocutory application to amend statements of claim and merely found that the points advanced were arguable).

Importantly, the court was concerned that if Marme’s case on implication was to succeed, it would inevitably involve a ‘watering down’ of the requirement that specific conduct be identified from which any alleged representation is said to arise. It said Marme could identify no conduct other than RBS entering into (and allegedly proposing) the swaps to justify the implication of any representation wider than the limited representation formulated by the Court of Appeal PAG. In the court’s view, this was an “intractable difficulty” for Marme.

The court also considered the decision in Geest v Fyffes [1991] 1 All ER (Comm) 672. The court in that case had set out a “helpful test” for evaluating the representor’s conduct in cases of implied representations, which is: to consider whether a reasonable representee would naturally assume that the true state of facts did not exist and that, if it did, he would necessarily have been informed of it. The Court of Appeal in PAG agreed this test was helpful, but it warned that this should not water down the requirement that there must be clear words or clear conduct of the representor from which the relevant representation can be implied. Here, the court said that invocation of the “helpful test” in Geest was not enough by itself – Marme could not merely rely on an internal assumption on its part that RBS failed to correct.

The court was concerned about the distinct lack of certainty (and associated lack of obviousness) as to what was entailed in the alleged representations. It said there was the same “elasticity of possible meaning” which had operated against the implication in Raiffeisen Zentralbank Osterreich AG v RBS [2010] EWHC 1392 (Comm).

The court accepted that passive conduct may sometimes be sufficient for the implication of a representation. However, it said the broader and more complex the alleged representations, the more active and specific the conduct must be to give rise to the implication.

In the court’s view, RBS’s conduct in going along with the swaps was sufficient for the implication of a much narrower representation: namely that RBS was not itself manipulating, and did not intend to manipulate or attempt to manipulate, EURIBOR. However, that implied representation was not put forward by Marme in the action. The court said that this was probably because Marme recognised that it would be “in no position to establish falsity“.

The court therefore rejected the implication of the representations alleged by Marme, the action failed and the court held that the banks were entitled to the declaratory relief sought. In case it was wrong in these conclusions, the court went on to consider questions of falsity and reliance, but this was on an obiter basis given its primary conclusions.

Donny Surtani

Partner

+44 20 7466 2216

John Corrie

Partner

+44 20 7466 2763

Ceri Morgan

Professional Support Lawyer

+44 20 7466 2948

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Tag: Misrepresentation Act 1967

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Tag: Misrepresentation Act 1967

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