Reliance/inducement and misrepresentation by conduct

The Commercial Court has reviewed the test for reliance/inducement for misrepresentation by conduct in a case brought by local authorities against a major bank. Tim Lord QC and Kyle Lawson analyse the judgment.

In Leeds City Council & Ors v Barclays Bank Plc & Anor [2021] EWHC 363 (Comm) Cockerill J. has reviewed the test for reliance/inducement in the context of claims for fraudulent misrepresentation brought by a number of local authorities (the “Councils”) against Barclays Bank Plc (“Barclays”) in relation to the sale of so-called ‘LOBO loans’.

Between 2006 and 2008, each of the Councils entered into a series of ‘LOBO’ (or ‘Lender-Option, Borrower-Option’) loans with Barclays pursuant to which they borrowed large sums of between £3 million and £30 million for long terms of between 60 and 70 years (the “LOBO Loans”). The LOBO Loans had ‘teaser’ interest rates which were initially fixed at low levels. However, thereafter, Barclays had the option to increase the interest rates on fixed dates. If Barclays elected to do so, then the Councils had the option to break the loans, but, in that event, they would have been required to pay very significant breakage costs to Barclays. Each of the LOBO Loans employed LIBOR as a reference rate, either for the purposes of setting the interest rate or as part of the methodology for calculating the breakage costs.

The Councils brought claims against Barclays for rescission of each of the LOBO Loans on account of alleged fraudulent implied misrepresentations made by Barclays in relation to the setting of LIBOR, following Barclays’ well-publicised participation in the “LIBOR rigging affair”.

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Barclays applied to strike out the claims on two grounds: first, that the Councils could not satisfy the applicable legal test for reliance on any implied misrepresentations about LIBOR (the “Reliance Issue”); and second, that the councils had affirmed the LOBO Loans by continuing to make interest payments and were thereby barred for claiming rescission (the “Affirmation Issue”).

The application failed in relation to the Affirmation Issue, but succeeded in relation to the Reliance Issue.

In relation to the Reliance Issue, Cockerill J. accepted (at [102]) that, in order for a misrepresentation to be actionable, the misrepresentee must be able to establish that it was “aware” of the misrepresentation at the relevant time. However, there was a debate between the parties about what this meant and whether, particularly in cases of implied misrepresentation or misrepresentation by conduct, it was necessary for the misrepresentee to establish that it had given some “active” or “contemporaneous conscious thought” to the misrepresentation that had been made to it by the misrepresentor (as Picken J. had held in Marme Inversiones 2007 SL v Natwest Markets Plc [2019] EWHC 366 (Comm) at [286]). The Councils argued that this was unnecessary and that, in such cases, it was sufficient that the misrepresentee had assumed the matters represented by the misrepresentor as a result of the misrepretentor’s conduct (e.g. putting forward a transaction that would be set to LIBOR).

Cockerill J. addressed this issue at [144]-[163] and at [146]-[147] she held that:

[146] That there is some requirement of awareness I am, as I have indicated, persuaded is established by the authorities. Often that requirement will not be in issue; but that does not mean that it is not a requirement; just that in some cases that it is so obvious that the parties do not bother to argue about it. And when that requirement is in issue, in some cases the question will be what the claimant consciously thought, but in other cases it may be better expressed by a focus on active presence.

[147] I am of the opinion that there will however be cases where the element of awareness will come very close to something which might loosely (and without careful analysis) be characterised as assumption and which is most obviously derived from conduct. As I remarked to Mr Beltrami in closing, the dividing line between giving contemporaneous conscious thought to the conduct and contemporaneous conscious thought to the representation may – in some cases – be thin to non-existent. In some cases what Mr Cox referred to as specific conduct may precisely and inevitably equate to a representation, without any room for ambiguity. That may be the case, for example, in the simplest of representation by conduct cases. Thus, for example, in the case of a bidder at an auction raising a paddle, representing a willingness and ability to pay a certain sum. In such a case a requirement for separate or distinct understanding or thought to the representations would be artificial.

At [148] Cockerill J. acknowledged that the approach that she had outlined at [147] “does come close the formulation of both assumption and subconsciousness which were advanced for the Claimants”. However, she ultimately concluded that, on the facts, the Councils would be unable to satisfy the requirement of “awareness” (1) because the conduct on which they relied did not “speak for itself” so as to permit of a “quasi-automatic understanding which may look like an assumption”; and (2) in light of previous first instance decisions in relation to implied misrepresentations relating to LIBOR in PAG v RBS and Marme Inversiones

At [149], Cockerill J went on to say that, were it not for the two factors that she had identified, “I would certainly be tempted to say that the question of what feeds into the equation on understanding depends on the precise facts as to the representation, and the answer may be one which requires conscious thought or some less stringent element of awareness. From there it would be but a short step to acceding to the submissions made as to the unsuitability of determining these issues at the strike out/summary judgment stage”

In light of Cockerill J’s findings in relation to the Reliance Issue, the Affirmation Issue did not arise.  However, Cockerill J. nevertheless addressed this issue in detail at [164]-[212] and, at [194], explained that she had formed the “firm view” that, had this issue arisen, she would not have granted Barclays’ application on this ground, and that the Affirmation Issue was unsuitable for summary judgment, essentially for the same reasons as those given by the Court of Appeal in The Law Debenture Trust Corporation Plc v Ukraine [2018] EWCA Civ 2026.

The Affirmation Issue raised factual issues as to the knowledge of each of the Councils and, in particular, as to the extent of their knowledge of the relevant facts and of their legal rights to rescind.  At [207], Cockerill J. expressly rejected Barclays’ submission (based on a line of authority following the decision of Coleman J. in Moore Large & Co Ltd v Hermes Credit & Guarantee plc [2003] EWHC 26 (Comm)) that, where a party had employed lawyers or had had access to in-house legal advice, then, unless that party waived privilege and disclosed the contents of its legal advice, the Court should infer that it had been advised as to its legal rights.

Tim Lord QC and Kyle Lawson are barristers at Brick Court Chambers. They acted for the seven Councils in Claim No. FL-2018-000009, instructed by Hausfeld & Co LLP.

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