The Court of Appeal clarifies the position on liability to secondary market participants under the Misrepresentation Act 1967.
- Where a financial document is published in circumstances which actively invite investors to make use of it, those investors may be entitled to rely on its contents. Particular care should be taken when placing presentation materials on the internet.
- However, an appropriately worded disclaimer contained within the document (even if it is within a non-contractual notice) may prevent liability for a misrepresentation.
- Liability under section 2(1) of the Misrepresentation Act 1967 (the ‘Act’) is limited to circumstances where there is a direct contract between the representor and representee.
Roskilde Bank A/S (Roskilde), a Danish regional bank, issued subordinated loan notes (the ‘Notes’) in 2006, some of which were acquired by Deutsche Bank. In 2008, Deutsche Bank sold these to Taberna Europe CDO II Plc (Taberna), an Irish investment vehicle, on the secondary market. The following year, Roskilde was declared insolvent. Prior to this, however, the majority of its assets and liabilities (with the exception of the Notes) had been transferred to a new bank.
Taberna considered that its best option for recovery was to argue that liability for misrepresentation had passed to the new, solvent bank. Accordingly, rather than prove for the Notes in Roskilde’s bankruptcy, it claimed damages for misrepresentation under s2(1) of the Act against the new bank.
Taberna asserted that it had been induced to buy the Notes by an "Investor Presentation" published by Roskilde on its website which significantly misstated the amount of its non-performing loans (NPLs). The Presentation was widely available and was accessible to potential purchasers of the Notes on the secondary market. However, the Investor Presentation contained a series of disclaimers as to the accuracy of the information contained therein. The loss claimed was the purchase price paid to Deutsche Bank to buy the Notes. No allegation of misrepresentation was made against Deutsche Bank.
At first instance, Eder J found in favour of Taberna. He held that: (1) the Investor Presentation had misrepresented Roskilde’s NPLs and that Taberna had been entitled to rely on this; (2) the disclaimer language did not have contractual effect and was therefore invalid (although, if valid, it would have passed the reasonableness test required by the Unfair Contract Terms Act 1977); and (3) s2(1) of the Act applied despite the misrepresentation having been made by a third party (Roskilde) to the contract (between Deutsche Bank and Taberna) it induced.
The Court of Appeal reversed the decision, holding that Taberna was not entitled to damages under the Act. It considered three key questions.
Was there a misrepresentation to Taberna?
The Investor Presentation was originally directed to those who attended various investor roadshows – as the disclaimer made clear. However, not only had the Investor Presentation been put on Roskilde’s website, but Roskilde had actively encouraged potential investors to view it there. The Court of Appeal found that where a company actively invites potential investors to make use of information, it can hardly complain if the investor does then use that information. Roskilde intended Taberna to rely on the Investor Presentation and the representations in it were made by Roskilde to Taberna.
Was the disclaimer valid?
The Investor Presentation contained disclaimers relating to its content and use. These included disclaimers restricting liability for errors (liability disclaimers) and disclaimers stating that no representations were made (duty disclaimers). As there was no direct contract between Roskilde and Taberna, the disclaimers did not have contractual effect.
The Court of Appeal held that the disclaimer could take effect as a non-contractual notice that limited the scope of the duty. Where a prior representation induces a contract, only a contractual estoppel arising from an agreement in the contract could negate liability. Here, although there was no contract, the limitation was contained in the same document as the misrepresentation and it could affect the scope of the representations. Generally, parties to commercial contracts are entitled to determine for themselves the terms on which they will do business. Taberna was an experienced investor and can be expected to have read and taken account of all the disclaimers. So long as the position is made clear, there is no reason in principle why a party cannot publish material on the basis that it does not take responsibility for its content.
Did section 2(1) of the Act apply where the representor was not a party to the contract?
The Court of Appeal held that s2(1) only permitted a claim for damages when the misrepresentation that induced the contract was made by the other party to the contract. This reversal of the first instance decision has significant wider implications for the secondary markets.
A complicating factor was that, as a result of purchasing the Notes, Taberna and Roskilde were brought into contractual relations, so Taberna could argue that it had entered into a contract within the meaning of s2(1) in reliance on the misrepresentation. This argument would have been unavailable had Taberna acquired from Deutsche Bank property other than an obligation of a contractual nature.
Moore-Bick LJ, in delivering the main judgment, stated that: "section 2(1) is concerned only with the contract which the representee has been induced to enter into directly with the representor (and in respect of which a right of rescission would arise)… although the notes in the present case represented obligations of a contractual nature they are better regarded for these purposes as a species of property, which Taberna acquired pursuant to a contract with Deutsche Bank... The contract that came into being between Taberna and Roskilde as a result of the purchase of the notes was a consequence of the contract with Deutsche Bank, not the cause of it".
In short, it was the loss under the contract between Taberna and Deutsche Bank which Taberna was looking to claim against – not the loss arising from any contract between Taberna and Roskilde. As such, Taberna could only have recovered its loss (being the price it paid for the notes) under s2(1) of the Act had it been a misrepresentation by Deutsche Bank which had induced them to buy the notes.
Securities issuers will take comfort from the fact that the application of s2(1) of the Act to secondary market purchases of notes has now been clarified. The first instance decision exposed issuers of tradeable securities to liability to a potentially wide class of investors and the Court of Appeal’s decision closes those floodgates.
This case highlights the risks associated with making investor materials publicly available. Issuers should recognise that these materials may be relied on by investors. While disclaimers may be effective, they do not fall within the wide doctrine of contractual estoppel and are subject to a reasonableness test.