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Out-Law News 3 min. read

Test for fraudulent misrepresentation further clarified in LIBOR case

Businesses seeking to demonstrate that they relied on a misrepresentation made by others – a vital step in raising claims of fraudulent misrepresentation – generally have to be able to evidence their awareness of the representation made in the first place, the High Court in London has confirmed.

While it is possible for a business' reliance on a misrepresentation to be inferred, the court dismissed this notion in the case before it. The case concerned a dispute between a number of local authorities in England and a major bank.

Leeds City Council, among others, claimed that when Barclays sold it LIBOR-linked loans, the bank impliedly represented that LIBOR was a reliable benchmark, and that the representation was false in light of what the bank allegedly knew at the time about how LIBOR was being fixed.

The problem for the local authorities was that they could not prove that they had ever thought about LIBOR at all when entering into the loan contract. The bank said this meant that the authorities could not have relied on the representation even if it had been made – the bank disputed that the representation was made but agreed that the court could assume that it was for the purposes of proceeding with this stage of litigation.

The local authorities argued that the court should infer reliance from its conduct in entering into the contract, because, they said, it was obvious that they would not have entered into the contract if they had known the truth about LIBOR.

However, while the court said there might be some cases where you can infer reliance from conduct, the normal rule is that someone claiming to have relied on a misrepresentation has to show that he was aware of the representation being made and gave conscious thought to it. The case failed because the authorities could not show that they had thought about the representation or actually relied on it.

Litigation experts Mike Hawthorne and Michael Fenn of Pinsent Masons, the law firm behind Out-Law, said the ruling was important because it sets some limits on how far you can go with an implied misrepresentation claim. They said it would have been a step too far for the court to find fraudulent misrepresentation where the alleged representation in question was implied, not said or written, and the authorities could not show that it had engaged with the alleged representation at all at the time.

Hawthorne said: "The implied misrepresentation argument concerning LIBOR was approved in the sense of being a viable cause of action by the Court of Appeal in 2013. Since then there have been a number of first instance decisions where the claimants have failed to prove that in the actual circumstances of their case they either understood the alleged representation to have been made, or that they relied on it. The difficulty for claimants in these cases is that typically nothing was said to them by the banks about how LIBOR was set, and their reliance case was along the lines of 'I would have acted differently if I had known the truth' rather than 'I had the implied representation in mind when I decided to enter into the contract'."

"The cases to date, and most notably this case, show the courts grappling with the conceptual problem of how reliance can be proved in the absence of conscious thought by the person relying on the alleged representation. This judgment shows how the English courts will always start their analysis from the facts, and their reluctance to imply facts from theoretical propositions. After a long run through the courts it seems that we are now at the point where we can say that implied misrepresentation in LIBOR claims is a conceptually possible claim, but one that is extremely hard to prove when you get down to the facts of actual transactions," he said.

Fenn said: "On the question of reliance in misrepresentation cases more widely, the judgment provides useful guidance on whether the presence or absence of 'awareness' is to be regarded as a separate and necessary element of reliance or an element of inducement, an issue that the judge described as an area where there was a 'degree of unclarity'."

"The judge concluded that the authorities persuaded him 'that there is some requirement of awareness' of a representation in order to bring a misrepresentation claim, and proceeding on the basis of an assumption or any less stringent test of awareness would be wrong in law. In this case, the judge found that a bare assertion by the claimant that representations operated on their minds either consciously or subconsciously was not sufficient to show awareness. When looking to bring a misrepresentation claim it is important to ensure that the necessary element of awareness is present, properly pleaded and can be supported by evidence," he said.

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