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Commercial Court struck out councils' claims against Barclays for rescission of loans on the grounds of alleged LIBOR-related fraudulent misrepresentations

Posted on 12 April 2021

On 22 February 2021 Mrs Justice Cockerill gave judgment in favour of Barclays bank in its application to strike out the claims brought by multiple local authorities (Leeds City Council & Ors v Barclays Bank Plc [2021] EWHC 363 (Comm)). In doing so, the Court assessed the test for establishing reliance and inducement in a claim for misrepresentation. It was held that the claimant must prove an active understanding of the alleged misrepresentation.

Background

Throughout 2006 and 2008, the claimants obtained from Barclays various long-term Lender Option – Borrower Option loans for terms between 60 and 70 years. These loans were governed by different contracts and their specific terms varied. However, in all these loans, LIBOR was the reference rate for setting the relevant interest rate and/or as part of the methodology for calculating breakage costs.

In 2012, it was discovered that a number of banks on the LIBOR survey panel, including Barclays, were engaged in manipulating various LIBOR benchmarks for their own purposes.

The claimants contended that Barclays had made numerous representations about LIBOR in offering these LIBOR-referenced loans to the claimants.  These were to the effect that the rates had been set honestly and properly and that Barclays was not engaging in any form of improper conduct. For the purposes of Barclay's applications Mrs Justice Cockerill proceeded on the basis that each of the alleged representations was in fact made, it was false and Barclays made each of the alleged representations fraudulently.

Barclays applied for the claims to be struck out for the following reasons:

  1. the claimants cannot show that they relied on the representations which they allege were made (this argument would dispose of the claims absolutely); or
  2. if Barclays is wrong on the reliance issue, then, even if the claimants succeed in proving misrepresentation, the claimants affirmed the relevant contracts by continuing to pay interest.

The Test

Barclays relied on the decision in Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm), where the claim for rescission of loans was brought by a borrower against a bank on the basis of misrepresentations similar to the alleged representations. That claim had failed because no representations were proved but Mr Justice Picken considered (obiter) whether reliance would have been made out if he had found that misrepresentations had been made. In his judgment he said that the:

" authorities support the proposition that a claimant in the position of Marme in the present case should have given some contemporaneous conscious thought to the fact that some representations were being impliedly made …"

In the context of the interest rate rigging cases for a misrepresentation to be actionable, the representee must be aware of it, he must understand it, there must be "some contemporaneous conscious thought", it must be "actively present to his mind".

Accordingly, Barclays submitted that "awareness" was a necessary element of reliance (in addition to the causation requirement (inducement)), and that this required some "active" or "contemporaneous conscious thought" on behalf of the claimants in relation to the alleged misrepresentation.  The claimants argued that they were not required to demonstrate such a level of awareness. Instead, they argued that it was sufficient that the misrepresentee had assumed the matters represented by the misrepresentor as a result of the misrepretentor’s conduct.

Mrs Justice Cockerill revisited the question of what constitutes reliance in the context of misrepresentation claims and concluded that "the existence of the awareness requirement is of particular importance when considering implied representations". She went on to clarify the distinction between understanding and awareness. Mrs Justice Cockerill agreed with Barclays that active contemporaneous thought was a necessary element to prove the reliance in representation.

 She stressed that the claimants would not be able to satisfy the requirement of awareness, because the conduct they relied on "does not "speak for itself" in the same way so as to permit of the quasi-automatic understanding which may look like assumption" and in light of the recent case law.

Conclusion

This judgment has made it clear that in order to prove reliance on a misrepresentation, the claimant needs to prove more than just an assumption that certain matters were true but needs to show evidence of an active understanding of the representation.  This is important guidance for claims relating to the selling of bank loans and products, especially in the context of wider industry malpractice.

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