The High Court has dismissed claims against Credit Suisse relating to its sale of a collateralised debt obligation (“CDO”) “as clouds gathered in the sub-prime mortgage market” in the lead up to the 2007-2008 global financial crisis (“GFC”).

In a lengthy judgment, covering a number of issues, the claims were held to have failed in several respects, including because they were time-barred, and because the Judge found that key alleged misrepresentations – which were (perhaps revealingly) numerous, complex and involved, and which the Judge recorded had been recategorised and re-framed during the course of the trial – had not been made. As the Judge observed (at [328]), “an implied representation needs to be clear and capable of being spelled out from the surrounding circumstances”.

The main focus of this note is those parts of the judgment concerning the need for a claimant to prove it relied on the implied misrepresentations alleged.  In this regard – the point having been fully argued before her – Mrs Justice Cockerill reconsidered her own recent decision in Leeds County Council v Barclays Bank PLC (see [374]). Although strictly obiter, the Judge’s observations are of keen relevance and interest to practitioners.

Background

In 2007, a special purpose vehicle set up by IKB (a German bank) paid US$100m to Credit Suisse for a AAA-rated CDO (the “Notes”). The Notes were linked via credit default swaps to a portfolio which comprised 100 residential mortgage-backed securities (“RMBS”), each of which referenced pools of underlying mortgage loans. Of those 100 RMBS, 7 RMBS had been packaged, securitised or underwritten by Credit Suisse (or its affiliates) (the “CS RMBS”). In broad terms, the effect of the transaction was that IKB’s special purpose vehicle (“L30”) became exposed to the financial risk of the underlying mortgage loans. If those loans were repaid on time, L30 made money; if they were not, L30 lost money.

L30’s fraudulent misrepresentation claim was centred on the allegation that Credit Suisse knew but did not disclose that the CS RMBS were riskier than they were made out to be, including because Credit Suisse had misrepresented that it conducted its compliance and due diligence processes internally and rigorously.

Implied misrepresentations and reliance

Even if L30 had been able to make out the representations as alleged, Cockerill J held that L30 was unable to establish to the requisite standard that it had relied upon them. In coming to that conclusion, Cockerill J reconsidered but affirmed the conclusion reached in Leeds City Council v Barclays Bank PLC [2021] QB 1027, that a representee must be aware of the misrepresentation, or “have it actively present to their mindwhen they act on it” (at [421]). As the Judge put it (at [375]), “the core requirement is to establish that the claimant was materially influenced by the representation. The question of inducement is centrally concerned with establishing a causal link between the conduct of the defendant and the conduct of the claimant”. Any presumption of inducement arising from the facts that (i) a material misrepresentation was made and (ii) the claimant did enter the contract (which some authorities refer to), must, in the Judge’s view, logically be preceded by a finding that the claimant was actively aware of the (mis)representation in question (at [390]).

L30 “effectively conceded” that its case could not succeed if the test for awareness was “active presence” or “contemporaneous conscious thought”. Cockerill J remarked that that concession was “inevitable” in the absence of evidence from L30 that one of its employees had read and sufficiently understood the detailed term sheets so as to have had regard to the representations said to be implicit from them. One might go further and observe that it will be an unusual case where a witness for a claimant will be able to testify that they actively turned their mind to a (mis)representation that is said to have been implicit.

Conclusion

Cockerill J’s conclusion that in order to establish reliance, a successful claimant must be able to prove that it was aware of the implied (mis)representation, or that it was “actively present” to their mind, when acting on it, highlights – as the Judge herself observed – the difficulties claimants will face in cases involving sophisticated commercial transactions.

It is hard to disagree with the Court’s observation (at [424]) that in such cases “awareness is far from obvious; so much else is being said more explicitly that there are real questions as to whether a particular implicit message is received and understood”. However, it might be thought that that points to the question of whether the implied representation alleged can in fact be said to have been made at all as being another, arguably more appropriate “control mechanism” (see [375]). As Cockerill J herself observes, it is perhaps not insignificant that the authorities which focus on “awareness” – including this case itself – involved implied representations that were relatively abstract, convoluted or tenuous, while those which were prepared to presume inducement – or to accept that evidence that ‘had the representee known the truth’, they would have acted differently sufficed – involved implied representations that were relatively straightforward.

Given the significance of the issue to claimants in this jurisdiction, however, it would not be surprising – notwithstanding the judicial attention devoted to it recently – to find the point revisited soon.

A postscript: the implications of published statements agreed with regulators

One other interesting aspect of the decision, of potentially wider significance, was Cockerill J’s finding that a Statement of Facts published as part of a settlement with the US Department of Justice, which had been agreed by Credit Suisse, did not comprise representations made by Credit Suisse: “though interesting, [it] has no legal consequences”. The Judge held that Credit Suisse’s agreement was as to the facts set out in that document; it had not admitted, e.g., that the contents of an email quoted in the Statement were themselves true, or that the facts admitted had any consequences in English law. That was significant, Cockerill J observed, “because of course a word may mean one thing in a US context, but mean something entirely different in an English law context. So just because the [Statement of Facts] says that representations were made does not mean that as a matter of English law actionable representations were made”: at [107].