A welcome end to the "fraudsters charter": Privy Council brings the law of deceit back in line with commercial reality

In the landmark decision of Credit Suisse Life (Bermuda) LTD v Bidzina Ivanishvili, the Privy Council (in a unanimous judgment delivered by Lord Justice Leggat) has confirmed that it is not necessary for claimants to prove that they were consciously "aware" of a misrepresentation to successfully bring a claim for deceit or fraudulent misrepresentation – emphatically closing off an errant line of first instance decisions which had introduced this requirement.

The decision is a vitally important correction in the path of the law for those misled into entering into transactions.  It removes a significant legal and evidential hurdle which was wrongly erected by a succession of controversial judgments on claims arising from implied misrepresentations.  Many but not all of those were concerned with alleged financial misselling and securities fraud, where strong financial incentives coupled with English law's strong respect for the caveat emptor principle in commercial matters do on occasion lead to distorted economic behaviour. 

The judgment brings English law back in line with the realities of commercial and human comprehension and behaviour.  This is reflected in the remarkable clarity of the Privy Council's judgment. 

Background

The Privy Council's decision determined claims commenced in 2017 by Georgian businessman and former prime minister, Bidzina Ivanishvili, against Credit Suisse Life (Bermuda) Ltd (CSLB) in relation to certain life investment policies that were essentially investment funds managed by Credit Suisse AG (Credit Suisse).

Mr Ivanishvili invested over US$750 million in these policies on the recommendation of his relationship manager at Credit Suisse, Patrice Lescaudron.  However, Mr Lescaudron misappropriated the policy assets as part of a wide-ranging fraud.  Upon its discovery, Mr Ivanishvili brought claims for breach of contract and fraudulent misrepresentation against CSLB.

Mr Ivanishvili's claims were upheld at first instance by the Bermudan Court. In doing so, the Court found that, by recommending the policies, CSLB impliedly represented that Credit Suisse (including Mr Lescaudron) was not managing Mr Ivanishvili's accounts fraudulently and did not intend to manage the policy assets fraudulently.

The Bermudan Court of Appeal dismissed CSLB's subsequent appeal in relation to the breach of contract claim, but allowed its appeal in relation to the misrepresentation claim. CSLB appealed the Court of Appeal's decision in relation to the former and Mr Ivanishvili cross-appealed in relation to the latter.

The "awareness" requirement

One of the key issues for the Privy Council in determining Mr Ivanishvili's cross-appeal was whether the Bermudan Court of Appeal was correct in holding that the misrepresentation claim failed because Mr Ivanishvili had not pleaded or proved that he had any conscious awareness or understanding of the representations at the time they were made.

The Court of Appeal's decision was based on a relatively recent string of first instance decisions in the English Courts in relation to financial misselling claims: Raiffeisen Zentralbank Osterreich AV v Royal Bank of Scotland plc^[1], Marme Inversiones 2007 SL v Natwest Markets plc^[2], Leeds City Council v Barclays Bank plc^[3] and Loreley Financing (Jersey) No 30 Ltd v Credit Suisse Securities (Europe) Ltd^[4].

The crux of these first instance decisions was that, in order to establish the necessary element of reliance in a misrepresentation claim, a claimant must prove that they had given "contemporaneous conscious thought" to the representation or that the representation was "actively present" in their mind, when they decided to enter into the contract. Critically, this awareness had to be more than an assumption.

The emergence of this requirement has been highly controversial and subject to widespread criticism and doubt (including in the notable judgment in Crossley v Volkswagen^[5]). In reality, in the absence of any specific cause for concern, the starting point for parties is quite reasonably that their counterparties are self-interested, but honest. That is perhaps all the more so when dealing with ostensibly reputable financial institutions or commercial organisations.  Parties will rarely have consciously considered whether their counterparty's conduct amounts to a specific representation of an absence of fraud, which essentially requires consciously thinking your counterparty might be acting fraudulently and then dismissing it because they have done something to contradict the possibility of fraud.  Consequently, the requirement to plead and prove specific, conscious awareness of such a representation has often since this line of authority began to solidify presented an insurmountable barrier for victims of deceit – particularly in cases involving an actively concealed fraud.

The requirement has also proved difficult to reconcile with other English Court judgments where claims for fraudulent misrepresentation or deceit have been upheld in circumstances where the claimant did not have any such conscious awareness or understanding that a specific representation was being made. Attempts to do so have generally resulted only in further confusion, with expressions such as "quasi-automatic" or "quasi-reflexive" understanding doing little to clarify the point at which this requirement would be satisfied.

This developing requirement for conscious awareness of an implied representation of honesty which was subsequently falsified was also at odds with the position in English criminal law where there is no such requirement.  The famous example being restaurant 'dine-and-dash' criminals who by sitting down to dine at a restaurant, ordering, and generally behaving like good paying customers impliedly represent to the waiter and restaurant that they will pay for the meal without saying so expressly (after all, who would ever say that, and why would the law require that?), which the waiter then relies on in serving them.  In criminal law, defendants would not get off by arguing that the waiter was unable to evidence that he or she had consciously thought that the way they were acting like good paying customers meant a representation had been made that they would pay for the meal. That goes without saying, or consciously deliberating about, and is implicit in the actions.   

The Privy Council's decision

The Privy Council categorically rejected the existence of a freestanding requirement for civil law claimants to prove contemporaneous awareness or understanding of a representation in order to establish reliance in claims for deceit/fraudulent misrepresentation.

In doing so, the Privy Council recognised that it is an "everyday feature of human experience that people form and act on beliefs without any conscious awareness or thought", often through established social norms and expectations. A defendant that acts in such a way as to cause and exploit such a belief is just as much liable for deceit as one who deceives the claimant by influencing their conscious mind.

The Privy Council illustrated the point by comparing two taxi drivers each hailed by a passenger who never intended to pay. The first driver naturally assumed, without any conscious thought, that the passenger intended to pay. The latter (unusually) consciously had the thought that the passenger was impliedly representing that they would pay by flagging down the cab. The Privy Council recognised that both drivers are victims of the same deceit, and it would be "unreasonable and unworldly – and a charter for fraudsters – if the law were to distinguish between the two cases".  Unfortunately, that was exactly the position that had begun to develop in the first instance decisions referenced above.

The Privy Council also addressed the two principal justifications often cited for the awareness requirement:

• First, that a claimant supposedly cannot have relied on a representation when acting on an assumption.  The Privy Council noted that this was a false dichotomy, with the two not being mutually exclusive. The correct question is whether the assumption is one the claimant would naturally be expected to make in response to the defendant's actions, or one that the claimant formed independently of the defendant's conduct.  The first could be actionable, the second could not because the defendant's conduct did not change the claimant's position.

• Secondly, that the absence of the awareness requirement would supposedly collapse the distinction between misrepresentation and non-disclosure.  Again, the Privy Council held that the question comes down to whether the defendant's conduct caused the claimant to form a false belief, or whether the defendant simply did not correct a false belief that the claimant had in any case formed independently of anything done by the defendant.

The Privy Council reiterated that the question of whether a claimant relied on a misrepresentation by a defendant is one of fact to be determined in each particular case. In some instances, that may require the claimant to prove their contemporaneous understanding of the representation being made (for example, where a representation is capable of one or more interpretations). However, it does follow that it is necessary to do so in every case.

The Privy Council therefore upheld the first instance Court's finding that, in proposing the policies, Mr Lescaudron induced Mr Ivanishvili to believe that Credit Suisse did not intend to manage the policy assets fraudulently and enter into the policies. Unfortunately for Mr Ivanishvili, the Privy Council upheld findings that his misrepresentation claim was time-barred under Georgian law (although the Privy Council did substantially uphold his claim for breach of contract so all was not lost).

The determination of this long-running claim has undoubtedly served the wider interests of justice by providing the Privy Council with the opportunity to quash the errant requirement for conscious awareness of an implied representation which had, unfortunately, temporarily developed in English civil law.  Fraudsters may well regret the Privy Council's crisp despatch of a "fraudsters charter", but good actors should have no reason to mourn its passing.  It is certainly good news for those who have fallen foul of sophisticated fraudsters who are careful with their words but no less persuasive for it.

[1] [2010] EWHC 1392 (Comm).

[2] [2019] EWHC 366 (Comm).

[3] [2021] EWHC 363 (Comm).

[4] [2023] EWHC 2759 (Comm).

[5] [2021] EWHC 3444 (QB)