In his judgment handed down on 30 March 2015, Mr Justice Eder awarded damages of over €26 million to the claimant investment company (“Taberna”) for misrepresentation by the defendant, a now bankrupt Danish bank (“Roskilde”) whose liabilities have since been taken over by a new Danish state-backed bank. It appears to be the first time that an English court has given judgment for misrepresentation by a note issuer in respect of a purchase of notes in the secondary market.
The claim arose from Taberna’s purchase in February 2008 of subordinated notes originally issued by Roskilde; the notes were purchased by Taberna on the secondary market from Deutsche Bank AG who had bought them from Merrill Lynch. During the second half of 2008 severe financial difficulties were experienced by Roskilde and in early 2009 it went into bankruptcy as a result of which it was unable to make any principal or interest payments to Taberna on the subordinated notes.
Taberna claimed damages from Roskilde, in the sum of the purchase price paid to Deutsche Bank, under section 2(1) of the Misrepresentation Act 1967 on the grounds that it had been induced to purchase the notes (thereby entering into a contractual relationship with Roskilde) by various misrepresentations by Roskilde relating to (a) so-called “non-performing loans” (NPLs); (b) Roskilde’s credit policy; (c) Roskilde’s write-downs for 2007-2008; and (d) Roskilde’s practices in relation to project financing. Roskilde denied every element of the claim.
The issues before the court were, in summary:
i) Did Roskilde make the representations alleged by Taberna?
ii) If so, did Roskilde make them in order to induce Taberna to invest in or to become a holder of the subordinated notes?
iii) Did Taberna rely on the representations and was it entitled to rely on them?
iv) What was the effect of the disclaimers relied upon by Roskilde?
v) Were the representations false?
vi) If the representations were false, did Roskilde's then management make them without reasonable grounds for believing them to be true?
vii) Was Taberna entitled to rely on s.2(1) of the Misrepresentation Act in circumstances where it purchased the subordinated notes from Deutsche Bank on the secondary market rather than from Roskilde itself?
viii) What damages are recoverable by Taberna if Roskilde was found liable as alleged by Taberna and were such damages to be reduced on account of contributory negligence?
ix) Was Taberna's decision to purchase the subordinated notes caused by or contributed to by its own misunderstandings, errors and/or failures to follow reasonable procedures for an investment of this scale?
Mr Justice Eder held that Taberna succeeded in its misrepresentation case in relation to the NPLs and therefore it was entitled to the damages claimed, without any reduction on account of contributory negligence. In doing so, he held that, inter alia:
- Taberna was induced by false representations in relation to the amount of Roskilde’s NPLs, upon which it was entitled to rely and which Roskilde had made in order to induce Taberna to become a holder of the notes. Roskilde’s management made those representations without reasonable grounds for believing them to be true. The representations were contained in public documents which, so the Judge held, were clearly intended by Roskilde generally to be available for use by potential investors of the subordinated notes in the secondary market, including Taberna.
- A representee need not show that he relied solely and exclusively on the representation; it is sufficient that the representation plays a real and substantial part in inducing the representee to act and is an effective cause of the transaction.
- The unusual mechanism by which Taberna became party to a contract with Roskilde (as a result of its purchase of the notes from Deutsche Bank) did not prevent s.2(1) of the Misrepresentation Act 1967 from applying.
- Taberna’s loss was the amount which it had paid Deutsche Bank for the notes, and this was the amount recoverable by way of damages. It was common ground that there was no realistic prospect of Roskilde having the funds to redeem, purchase or repay the subordinated notes.
- To the extent that Roskilde was guilty of any misrepresentation giving rise to a liability under s.2(1) of the 1967 Act, it was, in principle, entitled to rely on a defence of contributory negligence under the Law Reform (Contributory Negligence) Act 1945 because the question as to whether a defendant can rely upon the 1945 Act should not depend on the happenstance as to whether the claimant advances a claim based on a breach of a concurrent duty of care; the question should depend on whether or not there is or would be concurrent liability (see Sir Donald Nicholls V-C in Gran Gelato Ltd. v. Richcliff (Group) Ltd. [1992] Ch 560 and Lord Hoffmann in Standard Chartered Bank v Pakistan Shipping Corporation [2003] 1 AC 959).
- However, on the facts, Roskilde could not avail of the defence of contributory negligence because (a) Taberna’s actions or omissions, said to constitute contributory negligence, did not meet the high test as to what constitutes an intervening act sufficient to break the chain of causation (see e.g. Gross LJ in Borealis v. Geogas Trading [2010] EWHC 2789 (Comm) at [44]), which is to the effect that in order to break the chain of causation, there must be an event of such impact that it “obliterates” the wrongdoing of the defendant; and (b) the matters relied upon did not constitute a “very special case” which would make it just and equitable to reduce the damages otherwise payable (see the rule in Redgrave v. Hurd (1881) 20 ChD 1 and Sir Donald Nicholls V-C in Gran Gelato Ltd. v. Richcliff (Group) Ltd. [1992] Ch 560 at 574).
Alain Choo-Choy QC and Michael d'Arcy (instructed by Duane Morris) acted for Taberna; Matthew Cook (led by Charles Béar QC and instructed by Macfarlanes) acted for Roskilde.
The Judgment can be found here.