In a judgment handed down on 8 December 2016, the Court of Appeal overturned the judgment of Mr Justice Eder at first instance awarding damages of over €26 million to the Claimant investment company (“Taberna”) for misrepresentation by the defendant, a now bankrupt Danish bank (“Roskilde”) and dismissed the claim. In doing so, the Court of Appeal ruled for the first time on whether a claim under the Misrepresentation Act 1967 is available to secondary market purchasers. While the case related to a purchase of subordinated notes on the secondary market, the Court of Appeal’s reasoning is potentially applicable to any secondary market purchase, including any purchase of shares (other than as part of a new issue). The Court of Appeal also considered the effectiveness of non-contractual disclaimers.
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 amount 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. Mr Justice Eder concluded that there had been one misrepresentation by Roskilde arising from the use of the term “non-performing loans” (NPLs) in an Investor Presentation published on Roskilde’s website and awarded Taberna damages of over €26 million pursuant to section 2(1) of the Misrepresentation Act 1967 (“the Act”).
Roskilde appealed against the Judgment arguing that:
i) Taberna could not bring a claim for loss suffered under its contract with Deutsche Bank (i.e. the price paid) under section 2(1) of the Act, since a claim under the Act was limited to claims for losses arising from a contract with the representor;
ii) No actionable representation was made to Taberna by publishing the Investor Presentation on Roskilde’s website
iii) The disclaimers in the Investor Presentation meant no representations were being made by Roskilde and/or that Roskilde had excluded liability for misrepresentation.
iv) The term “non-performing loan” did not have the specific meaning given to it by Mr Justice Eder.
The Court of Appeal agreed with Mr Justice Eder that:
Where financial documentation is published on a company’s website so that potential investors can have access to it, the documents are capable of amounting to representations to those potential investors.
Although there was no generally accepted definition of the term “non-performing loans”, in the absence of a definition, a reasonable reader was entitled to assume that the term represented the whole range of loans which were significantly in default, without having to extend his researches to the Danish version of the company’s accounts in order to determine whether Roskilde meant the term in some other sense.
However, the Court of Appeal overturned Mr Justice Eder’s judgment on two grounds holding that:
The scope of the Act: The Act deals only with the relationship between the two contracting parties arising out of or in relation to a contract which has been induced by misrepresentation on the part of one of them. Therefore, a claim for damages under section 2(1) of the Act is limited to loss arising as a result of entry into the contract with the representor. While, as a result of purchasing the notes from Deutsche Bank, Taberna was brought into contractual relations with Roskilde, the notes were better regarded as a species of property which the representee acquired from the third party (Deutsche Bank) and the loss which Taberna incurred under that contract with Deutsche Bank could not be the subject of a section 2(1) claim against Roskilde.
The effect of non-contractual disclaimers: While the disclaimers in the Investor Presentation were non-contractual in nature, since they were included in the very document which was said to contain the representation on which Taberna relied, the disclaimers were in principle capable of both limiting the scope of the representation and/or excluding liability. Applying the modern approach to construing exclusion clauses from HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6 which had superseded the principles enunciated in Canada Steamship Lines Ltd v The King [1952] A.C. 192, Roskilde was entitled to include a disclaimer of liability for the statements in the Investor Presentation and it was clear that Roskilde had intended to do so. There was, therefore, no representation on which Taberna could rely and Roskilde had excluded any liability for representation (other than for fraud).
Although the judgment limits claims under the Act for secondary market purchases, the case shows the potential risks arising from companies publishing financial information effectively to the world by putting it online and the importance of ensuring that proper disclaimers are included.
Matthew Cook (led by Charles Béar QC and instructed by Macfarlanes) acted for Roskilde.
The Judgment can be found here.