Misrepresentation requires ‘active appreciation’—assumption is not enough (Leeds City Council and others v Barclays)

This article was first published by LexisNexis.

The court has struck out fraudulent misrepresentation claims brought by Leeds City Council and others against Barclays in connection with the ‘LIBOR rigging affair of 2012’.

In Leeds City Council and others v Barclays Bank plc and another [2021] EWHC 363 (Comm), the court held that the lack of awareness (in the sense of ‘active appreciation’) of any representation regarding LIBOR was fatal to the claim. In a decision likely to be of significant comfort to banks, the court concluded that ‘to say that the key people assumed that LIBOR would be set in a straightforward and proper manner’ is simply not enough. The court also briefly considered (although the claims had already been found to have no prospect of success) Barclays’ alternative ground for strike out on affirmation. It held that the disputed questions of fact regarding the councils’ knowledge of their rights would have had to be resolved at trial. The case on affirmation would not have been suitable for summary determination.

What are the practical implications of this case?

This decision makes it clear that in order to prove reliance on a representation, you need to prove awareness of that representation. In the context of LIBOR rigging misrepresentation claims, this means that evidence of an active understanding of the representation is required.

In Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm), Mr Justice Picken held that claimants needed to prove that they had given ‘contemporaneous conscious thought’ to LIBOR representations for a LIBOR misrepresentation claim to succeed. In this case, the councils argued that either:

• the phrase ‘contemporaneous conscious thought’ means no more than that the misrepesentation ‘operates on the representee’s mind, knowingly or not’, or
• that Marme is contrary to previous authority and wrong

The court rejected this argument. It held that the two lines of authority presented by the parties on misrepresentation, while not quite ‘apples and oranges’, arose in different contexts. Analysing the authorities (without concluding any of them were irrelevant or wrongly decided), the court distilled the following key principles of relevance both to misrepresentation claims in general and specifically to LIBOR misrepresentation claims:

• representations by conduct and representations by express words are subject to the same rules
• proof of understanding of a representation is a constituent part of a case in misrepresentation
• it is not sufficient to rely on assumption (combined with what the claimant would have done if told the truth), if the representation was never actively present in the representee’s mind
• what the claimant would have done if told the truth may sometimes—but not always be powerful evidence. Where the representee is unaware of the representation, it is irrelevant
• for a misrepresentation to be actionable, the representee must be aware of it and must understand it—it must be ‘actively present to his mind’
• the degree of awareness required may vary depending on the circumstances of the case
• following Property Alliance Group Ltd v The Royal Bank of Scotland plc [2016] EWHC 3342 (Ch) (PAG) and Marme, in LIBOR rigging cases (or similar) an assertion of subconscious operation is insufficient to establish awareness

What was the background?

The councils entered into a series of Lender-Option, Borrower-Option (LOBO) loans with Barclays between 2006–2008. Interest rates were initially low but with an option for Barclays to increase the rates on certain fixed dates. If the rates were increased, the councils had the option to break the loans (with breakage costs). The loans referenced LIBOR either for setting interest rates or as part of the breakage cost calculations. Following the LIBOR rigging affair in 2012, the councils brought claims against Barclays for misrepresentation.

The councils alleged that Barclays represented that:

• LIBOR rates were being set honestly and properly, and
• Barclays was not (and had no intention of) engaging in any improper conduct in connection with its participation in the LIBOR panel

Barclays applied to strike out the claims on two grounds:

• that the councils could not meet the test for reliance in relation to misrepresentation, and
• that the councils had affirmed the loans by continuing to make interest payments

For the purposes of the strike out application, it was agreed that the court should assume that the alleged representations had been made, that they were false, and that they had been made fraudulently.

In relation to the affirmation application, Barclays contended that the councils had sufficient knowledge of the right to rescind the loans from mid-2012, when the LIBOR rigging affair become public knowledge. It argued that despite in-house lawyers and ready access to legal advice, the councils had not only not rescinded the loans, but without reservation of rights—continued to make regular payments under them.

What did the court decide on reliance?

The court decided that it is necessary to establish awareness of a representation in order to bring a misrepresentation claim. It held that the degree of awareness required may vary depending on the case.

However, given the previous authority on ‘effectively identical’ representations in Marme and PAG, the court held that proceeding on the basis of an assumption or any less stringent test of awareness would, in this case, be wrong in law. The court also held that in this case, it would make no difference whether the test of awareness was ‘contemporaneous conscious thought’ or ‘active appreciation’. The highest at which the councils put their claim was a bare assertion that the representations operated on their minds either consciously or subconsciously. This was insufficient in a ‘case of this sort’.

What did the court decide on affirmation?

The court decided that had the issue of affirmation arisen, the strike out application would not have been granted on that ground. It was not sufficiently clear for the purposes of summary determination that the councils had the requisite knowledge of the facts giving rise to the right to make the claim and/or the right to rescind. In particular, Cockerill J held that the claims were novel and not straightforward and that although the councils had in-house legal advisors they were not likely to be specialist litigators. She held that she would be: ‘unwilling to make the inference on a summary basis that the existence of such in-house legal advisers means that the claimants were or should have been advised as to their rights’.

Case details

• Court: The High Court
• Judge: Cockerill J
• Date of judgment: 22 February 2021