What level of awareness is required to be in a person’s mind when being induced by another to rely on an implied fraudulent representation? According to the English High Court, which recently had to answer this question in the context of a (successful) application brought by Barclays Bank plc (“Barclays”) to strike out a LIBOR manipulation claim commenced against it by a group of UK local authorities (Leeds City Council v Barclays Bank plc  EWHC 363 (Comm) (Cockerill J) (“Leeds”)), an assumption in a person’s mind that a representation is true is not sufficient to prove reliance on it. Instead, and by contrast, the misrepresentation has to be “actively present” in that person’s mind for the reliance element of the tort to be made out (at ). That is notwithstanding that, on recent authority, a sub-conscious assumption by a representee can be sufficient for the representation to be implied in the first place.
The case raises two important issues. The first is the fundamental question of whether it is correct as a matter of legal principle to find that an actionable implied misrepresentation requires the claimant to have a level of awareness of the representation akin to actual knowledge. This is particularly so in light of the English Court of Appeal’s relatively recent decision in another leading LIBOR manipulation case, Property Alliance Group Ltd v The Royal Bank of Scotland Plc  EWCA Civ 355 (“PAG”), where it was found (in summary) that implied representations by a bank as to the honesty and integrity of a financial benchmark which it participates in setting can be implied from the mere incorporation by the bank of the benchmark in a loan or swap product. The reason for this is that the counterparty to the loan or swap is entitled to assume that the benchmark is honest and reliable and that the bank has not been involved in manipulating it. Second, and no less importantly for those involved in litigation before the English Courts, which have traditionally been reluctant (especially in novel or developing areas of the law) to grant strike out applications in cases where additional facts and evidence relevant to the determination may be expected to emerge by the time of any trial, there is the procedural question of whether it was appropriate for the Court to determine the awareness issue on a strike out application ahead of the main trial. It may be for these (as well as for other) reasons that we understand the English Court of Appeal may have recently granted permission to appeal from the High Court’s decision.
Context – LOBOs and the LIBOR Scandal
Leeds is the latest in what is now a long line of cases which have come before the English courts as a result of the LIBOR scandal, which first broke into public consciousness as long ago as 2012.
As is well known, LIBOR is an acronym for the London Interbank Offered Rate, a set of benchmark rates whose purpose is to reflect the cost of inter-bank borrowing on the London financial market. While, as a result of the scandal, extensive efforts are now being undertaken by regulators and market participants to transition financial contracts away from LIBOR, LIBOR remains the most widely used interest rate benchmark in the world, referenced in some USD 373 trillion notional value of financial transactions of all types. In simple terms, it is supposed to reflect the rate at which a prime bank could obtain an unsecured loan from another bank in a particular currency for a particular period in the London market.
In the period from 2006 to 2008, when the loans at issue in Leeds were entered into, LIBOR was calculated by surveying a panel of major banks every day for their assessment of the rates at which they considered they would be offered funds for specific currencies and maturities. In 2012, the LIBOR scandal erupted. It was discovered that a number of panel banks were manipulating LIBOR for various currencies. This manipulation took a number of different forms, but for example, rather than submit their genuine assessment of the rate at which they thought they would be offered funds, it was often the case that panel banks would submit rates that assisted their trading divisions to profit from LIBOR-linked derivatives trades, or which were lower than they should have been, with a view to projecting creditworthiness. The scandal led to fines, prosecutions and extensive reforms on both sides of the Atlantic and beyond.
The LIBOR-based financial instruments at issue in Leeds were so-called Lender-Option Borrower-Option loans (“LOBO loans”). In essence, these are long-term loans that enabled the lending bank (here, Barclays) to change the interest rate in line with fluctuations in market rates. However, if the lender did so, the borrower had the option to pay out the outstanding amount in full, thereby avoiding the need to pay any higher interest rate. These loans have proved to be unsuitable for local authorities, and have given rise to very high (and above market) debt servicing costs. All of the LOBO loans had the common feature that LIBOR was used to set either the interest rate or certain breakage costs.
The Alleged Representations
In essence, the claimants argued that by offering the LOBO loans to the councils, Barclays had impliedly represented that the LIBOR rates were being set honestly and reliably, and that Barclays was not (and had no intention of) engaging in any improper conduct in connection with its role in setting LIBOR rates. The alleged implied representations (on the claimants’ case) were that, as at the date of the loans, Barclays had not itself previously attempted to manipulate the LIBOR rate; was not currently doing so; and had no intention to do so in the future. Further, Barclays (on the claimants’ case) also impliedly represented that it had no reason to believe LIBOR had been, was being or would be manipulated by other banks.
The claimant councils argued that Barclays had made fraudulent misrepresentations in connection with its participation in setting the LIBOR rates during the 2006 to 2008 period. Accordingly, their claim was for rescission of the LOBO loans, in an attempt to claim restitution of the sums paid thereunder and, commercially, to refinance their borrowing at lower and more affordable market rates. There was an alternative claim for damages on the grounds of negligent (i.e. non-fraudulent) misrepresentation. Given it was a strike out application, the Court was required to take the claimants’ case at its highest, and assume the relevant pleaded facts were true. As such, the Court proceeded on the basis that the alleged representations were made, that each was false and Barclays made those false representations fraudulently.
We note that there was a further alternative issue about whether the claimants had sufficient knowledge such that it could be said that, in any event, they had affirmed the LOBO loans. A finding to that effect would have led the claimants to fail in their fraudulent misrepresentation claims. We do not consider this aspect of the decision in detail, save to note that, as a matter which was inherently factual in nature, the Court found against Barclays on this point – on the basis that the point could not fairly be resolved on a strike out application.
The Court’s Decision
The Court found that the pleaded facts did not satisfy the test in law for reliance in an action for misrepresentation. As noted above, the conclusion was that, for the reliance element of the tort to be proved, a representee must be aware of a representation in the sense of it being “actively present to his mind” (at ). He or she must have turned his mind to the representation, and an assumption – here, that LIBOR was being set honestly and reliably by Barclays – was not enough. This decision was said to be justified by reference to the misrepresentation authorities generally, and also specifically by reference to the rate-manipulation implied misrepresentation cases (chiefly PAG and Marme Inversiones 2007 v Natwest Markets plc  EWHC 366 (Comm) (“Marme”)). The Court went on to find that, because the claimants had not pleaded that any of the alleged misrepresentations consciously operated on anyone’s mind, the claims were bound to fail (at ). Accordingly, the claims were struck out before reaching the main trial.
First Issue – Whether Knowledge Requirement Is Correct
The primary issue raised by the decision is whether it is correct as a matter of legal principle. To reiterate, the Court found that an active awareness or “active presence” of the representation in the mind of the claimant is an essential element in a misrepresentation claim (see  and ). In short, the person must have turned his or her mind to what was being represented. A mere assumption of the relevant state of affairs is not enough.
This point was characterized by Barclays as an issue going to the reliance element of the tort of fraudulent misrepresentation. Barclays’ defense (and the Court’s decision) was that the councils had not relied on any representations made by Barclays because the relevant employees of the councils did not, at the time they were made, actively or consciously appreciate that the representations were being made to them. In accepting this submission, which had also previously been accepted (albeit obiter) by Mr Justice Picken in Marme, the Court placed weight on the distinction between a claim for misrepresentation (which is actionable in the general sense), and a claim for non-disclosure (which is only actionable if there exists a duty of utmost good faith, or where it is specifically contracted for) (at ). The Court also explicitly sanctioned an approach of breaking down the ‘inducement’ element of misrepresentation into its “building blocks” – essentially, in appropriate cases, looking at the individual smaller parts of that element (at ).
As a matter of principle – and in the event that it were to stand – the Court’s decision has cut down the scope of implied misrepresentation under English law significantly. This is because, according to the Court, implied misrepresentation claims in effect require a level of awareness akin to actual knowledge. Mrs Justice Cockerill emphasized that the precise level of knowledge may be formulated in different ways: “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” (at ). Nonetheless, this case sets the bar higher for claimants when faced with an otherwise actionable implied fraudulent misrepresentation.
This finding does not sit well with the reasoning of the Court of Appeal in PAG. While in that case the Court of Appeal ultimately found in relation to the LIBOR claims at issue that it could not interfere with the trial judge’s findings of fact that the Royal Bank of Scotland (“RBS”) had not in fact manipulated the relevant GBP rates to which the claimant’s swaps were tied (the only regulatory findings of manipulation as against RBS related to the setting of rates in Japanese Yen), it nonetheless made the following finding: “[a] party to a contract containing a swap needs to be certain of the counterparty’s honesty at the beginning of the deal not just in the future but throughout its course” (at ). Indeed, it went on to find that, on the facts, the RBS had impliedly represented it was not manipulating LIBOR (and did not intend to do so). Moreover, the Court of Appeal found that this “comparatively elementary representation would probably be inferred from a mere proposal of the swap transaction…” (at , emphasis added).
That representation about honesty may operate consciously or sub-consciously on a person’s mind. Indeed, as argued by the claimants in Leeds, Barclays’ position (and the Court’s decision) effectively invites a “rogue’s charter” (at ). This is because, in order to prove reliance on such a representation, the representee would need to ask themselves ‘is the representor making an implied representation to me, and if so, what are its terms?’. However, as recognized by the Court of Appeal in PAG, some representations are so intrinsic to a proposed transaction that they do ‘go without saying’ (see, contra, Mrs Justice Cockerill at ). Representations as to the honesty of the counterparty and the integrity of an interest rate benchmark plainly fall into such a category. Accordingly, it is not obvious why a claimant’s assumption that the counterparty has made the representation should not also be sufficient to prove reliance upon it, especially in circumstances where the claimant would not otherwise have entered into the relevant transaction had he or she known the truth. By holding to the contrary, Leeds significantly restricts the extent to which implied representations may practically operate in a commercial context, as a claimant would always need to actively turn his or her mind to all of the possible representations that may be made in a given scenario.
This leads to a linked criticism of the Court’s reasoning. The Court did not give sufficient weight to the presumption of inducement – namely, that in cases of fraud, there is a presumption that the fraudster induced the claimant to rely on the representation. This is due to the very fact a fraud is being perpetrated. In this regard, both Leeds and Marme have led to the ‘parsing’ of the constituent elements of fraudulent misrepresentation to an unacceptable degree. This is a result of the Commercial Court’s recent approach in this line of cases, in which it unpicks the “building blocks” of the elements of the tort (see Leeds at ), thereby losing sight of the broader point at stake in these rate-manipulation cases – namely, that “fraud unravels everything”. That famous dictum of Lord Denning in Lazarus Estates Ltd v Beasley  1 QB 702 has recently been re-emphasized by the Supreme Court in Takhar v Gracefield  UKSC 13 (see Lord Kerr’s speech at –).
Second Issue – Determination of the Point on a Strike Out
Given it was a strike out application, it was, as the Court acknowledged, for Barclays to persuade it that the case should not proceed to trial. Nonetheless, the Court found that because the claimants’ pleadings could not in law satisfy the test for implied misrepresentation, the case should be struck out. Two key points may be made.
First, while the Court had the benefit of argument on the awareness issue, more weight should have been given to the point that here the Court was required to take the claimants’ case at its highest, and assume the fraudulent misrepresentations had been falsely made (due to the fact it was a strike out application). The Court itself recognized that, were it not for the PAG and Marme decisions, it would be a “short step” towards finding that the issues on awareness were not suitable for summary determination (). However, as the Court of Appeal recognized in PAG, its decision on the law of implied fraudulent misrepresentation was not the last word. The law in this area is still developing. Therefore, in accordance with well-established practice before the English Courts, it was not appropriate for the issue raised by Barclays to have been determined summarily.
Second, and more importantly, the Court found that there are some cases of misrepresentation where the element of awareness may come “very close” to an assumption, and careful analysis is required to make the relevant distinction (). This is the crux of the issue, but the Court’s reasoning on it was thin. For this reason, as well as in light of the significant impact that the decision will have on the tort of misrepresentation in England if the decision is allowed to stand, the outcome of any appeal will be eagerly awaited.