LIBOR litigation: High Court confirms that a claimant must be “aware” of a representation when making a misrepresentation claim

In the latest case involving a claim for misrepresentation arising from the LIBOR scandal, the High Court has set a high bar for a successful misrepresentation claim, in what is a helpful decision for banks. The court held that the alleged representation must be actively present in the claimant’s mind when entering into the contract; that assumption is not enough to show awareness; and that in complex cases such as these, there is unlikely to be a representation implied by conduct, as the conduct does not “speak for itself”. Leeds City Council and others v Barclays Bank plc and another [2021] EWHC 363 (Comm).

Background

The claimant local authorities entered into a 60-70-year term LOBO (Lender Option – Borrower Option) loan with the defendant bank. The loans referenced LIBOR.

The claimants alleged that the bank made fraudulent implied representations that (i) LIBOR was set honestly and properly and (ii) the bank was not manipulating LIBOR, prior to their entry into the loans. They sought rescission of the loans, damages, interest and costs on that basis.

The decision in this case builds on two other misrepresentation cases involving interest reference rate manipulation; Property Alliance Group Ltd v The Royal Bank of Scotland Plc [2016] EWHC 3342 (Ch) (“PAG”) and Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm) (“Marme”) which concerned products referencing LIBOR and EURIBOR respectively.

Requirement for awareness

In this case, the High Court clarified the correct test for reliance in relation to a representation made impliedly or by conduct. The claimants argued that, to prove reliance, it would be sufficient to establish that the representations operated on their minds, whether consciously or subconsciously. The defendant bank argued that the claimant needed to have been aware of the representation at the time it entered into the contract.

The court rejected the claimants’ submissions and confirmed the awareness requirement. Significantly, the court confirmed that the awareness requirement is the same for both claims involving representations by conduct and those involving express words.

What constitutes awareness?

The court drew on PAG and Marme and noted that, in misrepresentation cases involving interest reference rate manipulation, there is a relatively stringent awareness requirement. Awareness of a representation in these cases requires the representation to be “actively present” in the representee’s mind, or for there to be “some contemporaneous conscious thought” given to the representations.

The claimants’ argument that it was sufficient for the represented state of affairs to be assumed by the claimants was dismissed. The claimants tried to argue that they assumed that the bank would not manipulate LIBOR submissions, and that this assumption amounted to awareness of a representation which the claimants relied on. However, the court confirmed that ‘awareness’ is the pre-requisite for reliance in a misrepresentation claim, and that an assumption does not amount to awareness, which requires more than subconscious thought or operation.

When can a representation be implied by conduct?

The judge confirmed that a representation can be implied by conduct when the action “speaks for itself”, in a way which permits quasi-automatic understanding. As an example, the judge referred to a bidder at an auction raising a paddle amounting to a representation that the bidder was willing and able to pay the amount of the bid.

The court decided that in this case, and in other cases concerning misrepresentation involving interest reference rate manipulation, the conduct in question did not “speak for itself”. In these cases, the representation arises from a web of dealings, where conduct is the immediate context, but that conduct arises against the background of a web of prior communications, written and oral. Therefore, the conduct is complicated and multi-faceted, and so does not have the requisite impact of quasi-automatic understanding, as a bidder raising his paddle at an auction would.

This sets a high bar in proving misrepresentation by conduct in these types of cases.

Comments

This case confirms that a claimant’s “awareness” of a representation is an essential prerequisite to a claim for misrepresentation.

This sets a high bar for misrepresentation claims involving interest rate manipulation where it will likely be difficult for claimants to say that they actively turned their minds to considering LIBOR at the time of entering the transaction in question. An assumption that the bank would not manipulate LIBOR is not enough to demonstrate that awareness. Additionally, representations can only be implied by conduct when that conduct effectively “speaks for itself”, which is likely to be hard to establish in complex transactions.

We continue to track developments related to LIBOR litigation and LIBOR transition. Please visit our LIBOR transition Insight page here for the latest analysis.