Bank not liable in misrepresentation
14 July 2010
Case summary: Raiffeisen Zentralbank Osterreich AG (RZB) v The Royal Bank of Scotland PLC (RBS)  EWHC 1392, 11 June 2010
In this case, the latest in a series of recent judgments dealing with what can broadly be described as "mis-selling" claims, RZB alleged that RBS had made certain implied misrepresentations which had induced RZB to participate in the syndication of a loan to an Enron entity.
Christopher Clarke J held that RBS was not liable because the alleged implied representations had not in fact been made. He further held that even if the alleged representations had been made, they were not false and they had not induced RZB to contract. Of perhaps widest interest to clients is the finding by Clarke J that RZB was, in any event, contractually estopped from advancing its claim by statements in the syndication documentation to the effect that RBS was not making any representation as to the accuracy or completeness of the information provided.
The transaction out of which these proceedings arose was complex. By way of broad summary, it was aimed at "monetising" Enron Corp's investment in one of its subsidiaries. In order to do this, RBS set up a special purpose entity known as RBSFT, which was capitalised with around £4.9 million (or 3.5%) equity and a loan from RBS of £138.5 million (the Loan). It was syndicated to banks including RZB and was used by RBSFT to purchase shares in the Enron subsidiary. It was effectively guaranteed by Enron Corp under the terms of a Total Return Swap and Enron Corp also gave a series of oral assurances to RBS to the effect that, when the transaction was unwound, it would ensure that RBS would recover its equity and a 13.5% return.
The transaction was set up in this way to allow Enron Corp to account for the transaction by showing a profit in relation to the sale of the shares but not any liability to RBSFT under the Total Return Swap, an accounting treatment which was apparently permitted under the applicable US accounting principles, provided that at least 3% of the substantive equity in RBSFT was "at risk". It was for this reason that Enron Corp only gave oral assurances to RBS about its equity investment; it took the view that if it made promises in writing they would be contractually binding and RBS's equity would not be at risk, whereas they would not be contractually binding if given orally. The relevant transaction documents were governed by English law.
The Information Memorandum (IM) and the related documents on the basis of which RZB decided to participate in the Loan included detailed information about the Loan, its intended purpose (i.e. the monetisation of Enron's investment in its subsidiary) and Enron Corp's guarantee of the Loan under the Total Return Swap. The documents also made it clear that RBSFT was capitalised with 3.5% equity. However, no mention was made of the oral assurances.
RZB alleged that four representations were implicit from the information contained in the IM and the related documents: (1) that RBS's equity in RBSFT was "at risk"; (2) that the unwinding of the transaction would be as stated in the IM; (3) that the transaction would monetise Enron Corp's future dividend stream and so satisfied the relevant accounting principles; and (4) that there was nothing improper about the transaction or its proposed US accounting treatment. RZB said that those representations were false, that they had induced it to participate in the Loan, and that as a result RZB had suffered loss.
Issues considered by the judge
(1) Were the alleged implied representations made and were they false?
Clarke J first considered whether the alleged implied representations had been made at all. He reviewed the case law and concluded that the representations alleged by RZB were not implicit in the IM or the related documents and so had not in fact been made. In summary, he took the view that: (1) the references to RBS's equity investment did not imply that the equity was entirely unsupported;(2) the reference to "monetisation" of Enron's investment did not imply that accounting principles had been satisfied because "monetisation" is not a technical term and, in any event, assurances as to legality and the satisfaction of accounting principles are for lawyers or accountants to give; and (3) it was not implicit from the documentation that the transaction was legal and that the accounting for it was not improper or unlawful, again on the basis that these kinds of assurances should come from lawyers or accountants. He also concluded on the facts that, even if the alleged representations had been made, they were not in fact false.
Clarke J then went on to consider whether, if RZB was correct in arguing that false representations had been made, those representations could be said to have induced RZB into participating in the loan. He said that in order to establish that it had been induced, it was necessary for RZB to show that the alleged representations played a real and substantial part in inducing it to contract, although not necessarily that the representations were the sole inducement. It would not be sufficient, however, if RZB could only show that the representations supported or encouraged RZB in deciding whether to enter into the transaction.
The judge found that the test involves "but for" causation. In this case he asked himself three questions: (1) absent the representation, would RZB have participated in the Loan?; (2) what would RZB have done had there been no indication as to whether the equity was supported or not?; and (3) what would RZB have done had it known that non-binding assurances had been given? He concluded on the facts that if the alleged representations had indeed been made, they were not a real and substantial inducement to RZB to enter into the transaction.
(3) Effect of contractual terms: contractual estoppel
In perhaps the most interesting part of his judgment, Clarke J then considered whether, if false representations had been made and had induced RZB to participate in the Loan, RZB was nevertheless precluded from advancing its claim by provisions contained in the IM, the related Confidentiality Agreement and other connected documents.
The Confidentiality Agreement (which defined confidential information very widely, so as to encompass the IM itself) included an acknowledgement by RZB that RBS did not make "any representation or warranty…or assume any responsibility for the accuracy, adequacy, reliability or completeness of any of the Confidential Information". The IM contained an "Important Notice" which included a statement to the effect that no representation, warranty or undertaking was made or responsibility accepted by RBS as to the adequacy, accuracy, completeness or reasonableness of the IM. The Facility Agreement pursuant to which RZB participated in the Loan contained similar provisions to those in the IM.
The authorities at the heart of the judge's consideration of the effect of these provisions (the Relevant Provisions) were a series of cases on estoppel, going back to Burroughs Adding Machine Ltd v Aspinall  41 TLR 276. Clarke J said that in that case a provision that statements of account given to a salesman were deemed to be correct was accepted as effective, even though the statements in question were in fact incomplete.
He then considered Lowe v Lombank  1 WLR 196 and said that in that case the court appeared to have found that an agreement as to past facts could create an estoppel by representation but not a positive contractual obligation. He also referred to the subsequent decision in Colchester Borough Council v Smith  Ch 448 in which, he said, an estoppel by contract and convention was found to exist.
Clarke J said that in Peekay Intermark v Australia and New Zealand Banking Group  EWCA Civ 386, the Court of Appeal had held that where parties agree that a particular state of affairs will form the basis of their transactions, they are estopped by contract from asserting that the true facts are different. He found that in JP Morgan Chase Bank v Springwell Navigation Corp  EWHC 1186, Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd  EWHC 1686 and Titan Steel Wheels Ltd v RBS  EWHC 211, the principle of contractual estoppel as set out in Peekay had been applied.
Clarke J noted that it is not easy to reconcile Peekay and the other subsequent cases with the statements in Lowe v Lombank to the effect that statements as to past facts known to be untrue cannot be converted into contractual obligations. He said that there were good reasons for allowing businessmen to agree as to the basis of fact (including past fact) on which they are transacting, even if the true facts were different and, on the basis that in Lowe v Lombank the defendant did not rely on an estoppel argument (in fact he expressly disclaimed reliance on such an argument), Clarke J concluded that he would not take Lowe v Lombank as a decision that a contractual estoppel as to past facts can never arise. He went on to say that if he was wrong on that point, then in his view Lowe v Lombank was both wrong and per incuriam in the light of Colchester Borough Council v Smith, following Burroughs.
He also took the view on the facts of this particular case that while some of the relevant provisions related to past facts, the Confidentiality Agreement itself was forward looking, providing that RBS would make no representations, so the question of an agreement as to past fact did not in fact arise.
(4) Effect of contractual terms: Section 3 Misrepresentation Act 1967
The final important question that Clarke J considered was the extent to which the Relevant Provisions were exclusion clauses under s3 Misrepresentation Act 1967 (the Act). Section 3 essentially provides that a term which would exclude or restrict liability or remedy for misrepresentation is of no effect unless it satisfies the requirement of reasonableness under s11(1) Unfair Contract Terms Act 1977.
The judge took the view that "…the essential question is whether the clause…goes to whether the alleged representation was made (or, I would add, was intended to be understood and acted on as a representation) or whether it excludes or restricts liability in respect of representations made, intended to be acted on and in fact acted on; and that question is one of substance not form". He added that everything must depend on the facts and that the key question is "whether the clause attempts to rewrite history or parts company with reality".
Clarke J went on to say that if sophisticated commercial parties agree to regulate their future relationship, a suitably drafted clause may properly be regarded as establishing that no representations are being made (he contrasted this with the position where a purchaser of a used car is told by the vendor that it is perfect and then they agree that no representations have been made; the judge thought that may in substance be an attempt to exclude/restrict liability).
On the facts Clarke J found that the Relevant Provisions were not attempts to exclude or restrict liability; they were simply an agreement as to the basis on which information was being provided. The promises made were at the start of, and defined, the relationship between the parties. Interestingly, however, he went on to say that if there had been no IM or Confidentiality Agreement then it may be that Relevant Provisions in the Facility Agreement should be regarded as exclusion clauses (although it was, of course, not necessary to consider this on the facts of this case). Clarke J went on to say that even if the Relevant Provisions did fall within the scope of s3 of the Act, they were reasonable in any event.
The judge also considered and rejected arguments by RZB that the construction of the Relevant Provisions should be narrowed so as not to apply to the statements allegedly made.
(5) Was RBS liable in deceit?
RZB also alleged that RBS was liable in deceit, for knowingly making false representations. Again, this was an argument that the judge rejected; there was no evidence that any false representations had been made with the requisite degree of knowledge.
Comment: Clarke J considered the issues before him in some detail and as a result his judgment is a very useful starting point for parties considering misrepresentation, estoppel and the extent to which parties can rely on their documentation to define the limits of their relationship with a counterparty in the future. His conclusions on contractual estoppel provide more clarity on this area of law and further comfort for contracting parties that, at least where sophisticated counterparties are concerned, terms such as those considered in this case will generally be upheld.
It is unclear whether a different decision might have been reached had the claimant been an unsophisticated or private investor and had it been established that misrepresentation had been made and, with the knowledge of the defendant, relied upon. What is clear from the judgment is that the context of the transaction was an important factor which the judge took into account; it is a point which he picked up on at the start of his analysis and throughout his judgment. RZB was found to be a sophisticated counterparty, with experience in the syndication market, and the documentation was in a form that is standard in that market. If the facts were weighted more strongly in the claimant's favour, it is not clear whether terms such as those relied upon by RBS in this case would necessarily be sufficient to protect a party from any claims.
Another practical point arising from the judgment is the fact that it is important for parties to agree on the basis of their relationship at the very outset of that relationship (and to keep records of that agreement). Both in relation to the question of whether RZB was estopped from pursuing its claim and on whether the Relevant Provisions were exclusion clauses, the judge placed reliance on the fact that the Relevant Provisions were agreed at the start of the relationship between the parties and formed the basis on which they did business.