Taberna Europe CDO II Plc v Selskabet AF1.September 2008 In Bankruptcy

For liability under section 2(1) of the Misrepresentation Act 1967, the representee must establish a contract, a representation made by the other contracting party, reliance, loss and the representor’s fraudulent-liability measure. The representation need not be the sole inducement, but it must have had a real and substantial causative effect.

In a secondary-market purchase, the statutory remedy may apply where the representation was made by the issuer and the purchase brought the investor into a contractual relationship with the issuer. A representation’s meaning is assessed as understood by a reasonable person in the representee’s position. Contributory negligence may in principle reduce damages, but reduction will ordinarily require a very special case where the representor intended reliance.

Taberna purchased subordinated notes originally issued by Roskilde from Deutsche Bank in the secondary market. It claimed damages under section 2(1) of the Misrepresentation Act 1967 for alleged representations concerning non-performing loans, credit policy, write-downs and project financing.

The principal issues were whether Roskilde had made actionable representations intended to be relied upon, whether Taberna relied on them, whether they were false and made without reasonable grounds, whether section 2(1) applied despite the purchase contract being with Deutsche Bank, and whether damages should be reduced for contributory negligence.

1. Liability under section 2(1). The claim was governed solely by section 2(1) of the Misrepresentation Act 1967. Taberna had to prove a contract, a representation made by another party to that contract, reliance, loss and circumstances which would have made Roskilde liable as for fraud. The representation need not be the sole inducement, but it had to be an effective cause and a real and substantial part of the decision to contract.
2. Secondary-market contract. The fact that Taberna bought the notes from Deutsche Bank did not take the claim outside section 2(1). The acquisition brought Taberna and Roskilde into a contractual relationship. The provision would not have assisted Taberna if the representations had been made only by Deutsche Bank.
3. NPL representations. The English references to “non-performing loans” were understood by a reasonable person in Taberna’s position as covering the totality of Roskilde’s non-performing loans, including loans in default for 90 days or more. Roskilde’s stated figure of DKK 57 million was false. Roskilde failed to prove reasonable grounds, or actual belief, that the representation was true. Taberna relied on it, and the representation was made with the requisite intention.
4. Other representations. The credit-policy statements were too vague to establish reliance and, in any event, were not shown to be materially false. The write-down figures were not shown to be false. The project-financing representation was not shown to have been relied upon or to be false.
5. Disclaimers and contributory negligence. The disclaimers did not prevent reliance on the representations or exclude section 2(1) liability. Roskilde was in principle entitled to plead contributory negligence under the Law Reform (Contributory Negligence) Act 1945, but Taberna’s failures did not break causation or constitute the very special case required for a reduction.
6. Order. Roskilde was liable for €26,421,585, with interest and costs to be agreed or determined by the court.