Fraudulent misrepresentation: High Court considers the requirement for claimants’ “awareness” of implied representations

In the context of an application to strike out or summarily dismiss a claim for fraudulent misrepresentation, the High Court has held that conscious awareness of the alleged implied representation 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).

This contrasts with recent authorities that 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 blog post here).

In the present case, which is the group litigation against Volkswagen (VW) arising from the “Dieselgate” emissions scandal, the judge considered those prior authorities and concluded that a single test for what amounts to the necessary awareness may not be possible.

In particular, he considered that VW’s conduct and the representations said to be implied from it (broadly to the effect that the vehicles complied with all relevant emissions regulations) were both relatively simple, whereas in the LIBOR cases the representations were found to be extremely complex and intricate and to have arisen “against the background of a web of prior communications.”  He concluded that there was a real prospect that the claimants in this case could succeed even if they were not consciously aware of the alleged misrepresentations but merely assumed the content of them from VW’s conduct, or would not have entered into the contracts had they known the truth.

An appeal against the Leeds judgment has very recently been heard by the Court of Appeal, meaning that further judicial guidance on the issue is expected shortly.

For more information see this post on our Banking Litigation Notes blog.

Claimants “substantially succeed” in the largest ever English civil fraud trial

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 (“Autonomy”) 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 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. However, the judge did indicate that he anticipated that “although substantial, it will be considerably less than claimed”.

The court observed that the litigation had been “an exceptionally onerous case” for everyone involved. The “unusually complex” trial lasted 93 days, including cross-examination of the first defendant, Dr Lynch, for 20 days (Mr Hussain did not attend as he is incarcerated in the US). There was a database of “many millions” of documents, reduced to a trial bundle of more than 28,000 documents. In addition, there were hundreds of pages of hearsay evidence, largely comprised of transcripts from previous civil and criminal proceedings in the US. The full judgment (on liability alone) is expected to run to at least 1500 pages.

The claims

The proceedings relate to the acquisition, for approximately USD$11.1 billion in cash, of the entire issued share capital of Autonomy by a special purpose vehicle (“Bidco”) established for that purpose by Hewlett-Packard Company (“HP”).

Dr Lynch was a former director of Autonomy and was throughout the relevant period “the driving force and leading figure within Autonomy”.  Mr Hussain was a former Chief Financial Officer and director of Autonomy.

The essential complaint in respect of the acquisition was that HP was induced into entering the transaction by dishonest statements and omissions in Autonomy’s published information, and other representations made personally by the two defendants. Specifically, those claims centred on:

(a)   the allegedly dishonest description of Autonomy as being a “pure software company” when in fact it undertook and had become accustomed to inflating what appeared to be the revenues of its software business by undertaking substantial hardware sales; and

(b)   the allegedly dishonest presentation of its financial performance, which disguised improper practices including artificially inflating and accelerating revenues; understating costs of goods sold by mischaracterising such costs so as to protect gross margins; misrepresenting the nature and quality of revenues; and overstating profits.

The claimants contended that this resulted in Autonomy being in fact a considerably less valuable enterprise than it appeared on the basis of its published information.

The fraud claims in respect of the acquisition were brought (by different entities within the HP group) under the following legal heads:

  • FSMA claim

By far the largest of the claims was a claim under Schedule 10A of FSMA  – in essence alleging liability on the part of the issuer (Autonomy) in respect of statements or omissions in its published information on which the investor relied in making an investment decision. The alleged basis for the issuer’s liability was that at least one of the defendants, as “persons discharging managerial responsibilities within the issuer” (“PDMRs”), knew those statements or omissions to be untrue or misleading, or to amount to the dishonest concealment of material facts. The defendants did not dispute that they were PDMRs for the purposes of Schedule 10A.

The FSMA claim was brought under what Hildyard J described as a “dog leg” structure. An action under Schedule 10A against the issuer (Autonomy) would not assist HP in this case given that it now owns Autonomy. Therefore:

    1. HP/Bidco notified its claim to Autonomy;
    2. Controlled by HP, Autonomy admitted liability to Bidco; and
    3. Autonomy (through its successor) then brought the present proceedings against the two defendants, as PDMRs, to meet that liability.

The amount of liability accepted by Autonomy to Bidco was USD $4.55 billion, which was therefore the principal sum claimed against the defendants under the FSMA claim.

No objection in principle was made by the defendants to the “dog-leg” nature of the claim, although every part of its substance was contested. The defendants’ case was that Autonomy had no liability to Bidco and should not have submitted to its claims.

The FSMA claim therefore required the claimant to satisfy two limbs in respect of each alleged wrongdoing:  first, that Autonomy was liable (as issuer) to Bidco, and second, that the defendants were liable to Autonomy as PDMRs.

  • Deceit / fraudulent misrepresentation / s2(1) Misrepresentation Act 1967

These claims were based on the personal liability of the defendants (rather than the issuer) for the portion of the loss attributable to the shares that the defendants themselves each held and sold in the transaction (pleaded at USD$420 million). The representations relied upon included reaffirmations of the relevant statements within the published information.  Any sum recovered under this head of claim will be in the alternative to the FSMA claim, to avoid double recovery.

In addition, the action included claims concerning the defendants’ management conduct. Approximately $76.1 million was claimed for direct losses suffered by HP entitles in loss-making transactions which they claim the defendants caused them to enter into, in breach of the defendants’ fiduciary duties or employment contracts (the “breach of duty claims“).

Findings

In the claims regarding the acquisition, the factual allegations related to six areas within Autonomy’s business and accounting.  On all but one of those six areas, Hildyard J concluded that the claimants had made out (to the extent that they were alleged in respect of that area) (i) both limbs of the FSMA claim and (ii) the common law / Misrepresentation Act claims.

On the breach of duty claims for transactional losses, the claimants were successful in respect of a portion of the impugned transactions.

Hildyard J noted, as a point of general interest, that no defence of contributory negligence is available as a defence to the FSMA or direct fraud claims. He confirmed that he had made no finding to the effect that HP’s due diligence was deficient but that, even if he had found that HP might have been expected to unearth and probe further into the relevant matters, that would not be a defence (unless he found that HP was in fact aware of the matters before the acquisition, which would defeat the necessary element of reliance, but that was not the case).

Quantum

The trial included full argument on quantum, including “dense and voluminous” evidence. However, Hildyard J considered it inappropriate to delay his judgment on liability while he proceeded to consider quantum, which he will now do.

He did however record in the Summary of Conclusions that he had provisionally determined that, even if adjusted to take account of the established fraud, HP would still have considered Autonomy a suitable acquisition.  He noted that “I would expect the quantum to be substantially less than is claimed”.

It therefore seems likely that quantum will be assessed by reference to what HP would have paid for the business if it had known the true position, rather than on a “failed transaction” basis (looking at what position it would be in if it had not proceeded). However, this will only be clear when the quantum judgment is delivered.

Mr Lynch’s representatives have reportedly said that he intends to seek permission to appeal.

Jan O'Neill
Jan O'Neill
Professional Support Lawyer, London
+44 20 7466 2202

High Court decision highlights the need to prove inducement in claims for fraudulent misrepresentation

In a recent decision, the High Court has rejected a claim for misrepresentation, finding that although a fraudulent misrepresentation had been made it had not induced the claimant to enter into the relevant transaction: Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch).

The decision highlights the dangers of failing to lead evidence of reliance in fraud cases.

The claimant alleged that it was induced to enter into the purchase of a shopping mall by the defendant’s fraudulent (alternatively negligent) misrepresentations about the leases and rental income from retail units in the centre.

The High Court found that the defendant did make the misrepresentations and had done so fraudulently. However, it held that the claimant had not relied upon the misrepresentation in deciding to enter into the contract.  That finding was based in large part on the claimant’s failure to call its former solicitor to give evidence, in circumstances where it had obtained information from the solicitor in the course of the proceedings, but had successfully claimed litigation privilege in respect of the relevant communication. As there was no explanation from the claimant for the failure to call the solicitor to give evidence, the judge inferred that his evidence would be unhelpful to the claimant’s case.

The decision demonstrates that, while the courts will not lightly draw adverse inferences from a failure to call a witness, it may do so in an appropriate case.

Read more on the decision here on our Litigation Notes blog.

 

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

In a recent decision, the High Court has struck out claims against a defendant bank alleging implied fraudulent misrepresentations in relation to LIBOR, on the basis that 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 significant in confirming that a claimant’s awareness of a representation is an essential prerequisite to a claim for misrepresentation, though what is required to satisfy the awareness requirement will depend upon the precise circumstances.

For more information see this post on the Banking Litigation Notes blog.

Court of Appeal confirms correct legal test for determining a principal’s liability for its agent’s fraudulent misrepresentation

The Court of Appeal has confirmed that, where a claimant has suffered loss in reliance on an agent’s fraud, the principal will be vicariously liable only if the fraudulent conduct was within the agent’s actual or ostensible authority: Winter v Hockley Mint Limited [2018] EWCA Civ 2480.

The court rejected the test applied by the High Court, which was whether it was just and fair for the principal to bear the loss and whether there was a sufficiently close connection between the agent’s wrongdoing and the class of acts he was employed to perform. The correct test is the objective one established by the House of Lords in Armagas Ltd v Mundogas SA [1986] AC 717, which requires a holding out or representation by the principal to the claimant that the agent had the necessary authority, including ostensible authority. This is likely to provide greater certainty as to when a principal will be liable for its agent’s fraud.

However, whilst the Court of Appeal’s decision states that there must be a holding out or representation by the principal, and not merely the agent, the facts which the court thought would (arguably) support a finding of ostensible authority in this case did not involve any direct statement from the principal to the claimant. Instead, they comprised acts such as the provision of an email address and notepaper which might lead the claimant to believe the agent had authority.

Although the Court of Appeal’s comments on the factual matters were obiter (as the case is to be remitted to the High Court for trial), they suggest principals or employers may have ostensible authority, and therefore vicarious liability for an agent’s fraud, even if they do not have direct contact with a potential claimant. To help reduce the risk of liability for a “rogue” agent’s fraudulent conduct, principals and employers should consider carefully what internal procedures may be required to ensure there is sufficient oversight or monitoring of communications or activities carried out by agents.

Jade Hu, an associate in our Dispute Resolution Division, considers the decision further below. Continue reading