Fraudulent misrepresentation and the awareness condition: will the Court of Appeal bring certainty?

One of the key ingredients for a successful claim in fraudulent misrepresentation is the claimant proving that they relied on false representations in entering into a contract.  In a recent interlocutory decision in the “NOx” litigation arising from the Volkswagen emissions scandal (Anthony Crossley and others v Volkswagen Aktiengesellschaft and others) the High Court grappled with the following question in this regard: whether the claimant must plead and prove that they were “actively and consciously aware” of the representation in question, or as the court described it, the “awareness condition”.

Whilst the court did not have to make any binding determination on the applicability of the awareness condition, the judgment highlights the complexity of the law in this area and a need for clarity from the courts, which it is hoped will be provided by the Court of Appeal in a hearing scheduled to take place in a separate case (Leeds City Council and others v Barclays Bank plc and another (Leeds)), but dealing with broadly the same point, on 22 February 2022.

Background

The “NOx” litigation concerns various claims brought by 86,000 owners of VW, Audi, Skoda and SEAT diesel cars.  20 lead claimants have been selected by the parties with the trial due to start on 24 January 2023.

The case concerns a “defeat device”.  This device was installed in vehicles manufactured by four of the defendants. It enabled various limits set in EU Regulations concerning nitrogen dioxide and oxide emissions to be met when activated in a particular mode during testing.

Two interim applications were brought by the parties and heard in December 2021.  This blog post deals solely with the application brought by four of the defendants, the “VW Manufacturers”, for the strike out or summary dismissal of the claimants’ fraudulent misrepresentation claim.  The representations relied on included representations implied by conduct (in the form of offering up the vehicles for sale in the UK), that the vehicles complied with all relevant EU and UK statutory and regulatory requirements and that the vehicles did not include any devices preventing the proper and accurate testing and recording of their emissions.

The VW Manufacturers argued that it was clear that “conscious awareness” has, for many years, been an essential element of any claim in deceit and that, even if there had been any doubt, Cockerill J’s findings in Leeds, resolved the position. In that case, which concerned LIBOR rigging, the court held that some form of active awareness of the representation having been made was required, and that there was no scope, when looking at whether a representation was actively present in the claimant’s mind, for reliance on an assumption. The VW Manufacturers’ argument was that Leeds meant that the claimants must have actively considered and been aware of the representations on purchasing or leasing the vehicles to have any shot at succeeding on a deceit claim.

The claimants, on the other hand, argued that the law in this respect is far from clear and that Leeds has both come in for some criticism and is distinguishable.

Decision

The court dismissed the part of the strike out application concerning the awareness condition.  Waksman J considered that there was a real prospect of success for the fraudulent misrepresentation claim and so this particular claim now proceeds to trial in 2023.

In reaching its decision, the court reviewed voluminous case law and, in particular, Cockerill J’s findings in Leeds that the claims in that case had no real prospect of success because:

“reliance would have required some contemporaneous conscious thought being given to [the representations] and the evidence that at best the relevant person had assumed that the [LIBOR] rate was honest, and did not understand the representations to have been made as not enough”.

In its analysis, the court noted that a number of cases considered “awareness” as a live issue but did not in fact require the active and conscious awareness of the representee to the specific representations pleaded in order to found a deceit claim.  Instead, the Court distilled from DPP v Ray and Spice Girls Ltd v Aprilia, that there have been instances where:

“at least sometimes, an implied representation, intended by the representor to be relied upon by the representee, which is accompanied at least by CFOT [or assumptions], can be sufficient”.

“CFOT” is the “counterfactual of truth”.  In this case, that amounted to a statement that none of the claimants would have purchased an affected vehicle if they had known that the regulatory approval for it had been obtained through fraudulent means and that it contained a defeat device.

Although Waksman J held that it was overwhelmingly likely that the claimants could not prove that there was conscious awareness (as distinct from an assumption or CFOT), the court decided that that was not sufficient to warrant the summary disposition of the fraudulent misrepresentation claim.  In other words, it held that the awareness condition was not so settled so as to justify the early dismissal of the deceit claim in this case.

In making this finding the court referred to a concept of “quasi-automatic awareness” – where a representee might not have been consciously aware of the representation but had assumed a particular state of affairs to be the case based on the conduct of the representor.  The key point is that the court held that there was a real prospect of success for the fraudulent misrepresentation claim given the:

“… circumstances where a relevant assumption of CFOT must be taken to exist or at any rate is likely to be established or at least there is a real prospect of it being established.”

Comment

Given the terms of the judgment and the extensive review of relevant case law, the claimants were right to say that “the law in this respect is far from clear”.  Indeed, the court ruled as follows:

“Further, I do not consider that the whole issue of the Awareness Condition could seriously be described as a “short point of law” which I should grapple with now.”

The scene is now fairly and squarely set for the Court of Appeal to grapple with the awareness condition in the Leeds appeal which is coming up in February 2022.  Given that both Leeds and Crossley were concerned with summary disposal applications and, in effect, were decided at different ends of the spectrum, the Court of Appeal seems about to be afforded a wide remit to tackle this issue afresh.  Of course, the factual differences between Leeds and Crossley, with Leeds concerning LIBOR rigging (a complicated factual matrix) and Crossley the selling of motor vehicles (which is immeasurably simpler to comprehend), may mean that the Court of Appeal is careful to craft a decision which does not extend beyond the specific facts in Leeds.

All that said, it would be particularly helpful if the appeal court could confirm whether the awareness condition applies in all instances or whether there are particular examples or circumstances where an assumption or CFOT will suffice.  It may be one step too far to hope that the court will seek to define Waksman J’s “quasi-automatic awareness”, but time will tell if the resulting decision will resolve the uncertainty in this area.

An original version of this article was published on 20 January 2022 by Thomson Reuters Practical Law.