Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland Plc

An implied representation is assessed objectively in its commercial context, including qualifications and the recipient’s sophistication. An assumption drawn from omitted information does not itself establish a representation of completeness. The claimant must also have understood and relied on the alleged representation. For non-fraudulent misrepresentation, inducement requires an effective cause: without the representation, the claimant would not have contracted on the same terms.

Sophisticated parties may agree the factual basis of their dealings through contractual estoppel. Whether a clause falls within section 3 of the Misrepresentation Act 1967 depends on substance. A clause genuinely defining future dealings may prevent a representation arising. A clause retrospectively negating an actionable representation may exclude liability and require justification as reasonable.

Royal Bank of Scotland, the defendant arranging bank, established RBS Financial Trading Company Ltd as a special-purpose entity for a transaction with Enron Corp. The entity purchased preference shares representing an interest in an Enron subsidiary. Royal Bank of Scotland supplied £4.9 million equity and a £138.5 million senior credit facility. A total return swap with Enron effectively guaranteed the senior debt. Enron also gave strong oral assurances that the bank would recover its equity and an agreed return.

Raiffeisen Zentralbank Osterreich, the claimant bank, acquired a £10 million participation in the senior facility. The oral assurances were absent from the syndication materials. Following Enron’s collapse, the claimant sought its unrecovered lending loss through statutory misrepresentation and deceit claims. It alleged implied representations concerning the absence of equity support, the transaction’s unwinding, compliance with US accounting requirements and legality.

The principal issues were whether those representations were made, understood, false and causative. The court also considered contractual estoppel, statutory controls on disclaimers, the legal status of the assurances, accounting treatment, dishonesty and damages.

1. The claim failed. The alleged representations were neither made nor understood to have been made. The information memorandum principally explained the senior debt and its Enron credit risk. Its limited references to equity did not imply disclosure of every bilateral equity arrangement. An arranging bank’s materials did not provide an expert assurance of legality or accounting compliance. Monetisation meant converting value into cash, rather than confirming a particular accounting treatment (paras 104–136).

2. The oral assurances were deliberately non-binding. Both parties understood that binding equity protection would defeat the intended accounting treatment. Their strength and commercial importance did not alter that intention. The investment remained equity, subordinate to the special-purpose entity’s debts. The pleaded representation that equity was at risk was substantially correct, although an absolute statement that no support of any kind existed would have been false (paras 105; 139–152).

3. Inducement required a real and substantial causative contribution. For these non-fraudulent claims, the claimant had to establish that without the representation it would not have contracted on the same terms. Mere encouragement, or a possibility of acting differently, was insufficient. Questions about truthful information could assist, but ordinarily should correct the alleged falsity rather than introduce additional disclosures. The contemporary credit papers showed reliance on Enron’s creditworthiness. The claimant would have participated without the alleged absence-of-support representation (paras 153–219).

4. The contractual provisions covered information within the arranger’s own knowledge. Parties could agree a factual basis for their dealings, including past facts, without satisfying the requirements of evidential estoppel. The court followed Peekay Intermark v Australia and New Zealand Banking Group. It construed Lowe v Lombank narrowly and conditionally rejected any wider reading barring contractual estoppel concerning past facts (paras 230–270).

5. Section 3 of the Misrepresentation Act 1967 required examination of substance. The initial confidentiality agreement and memorandum genuinely defined the relationship and the character of subsequently supplied information. They did not retrospectively exclude liability for an existing representation. If statutory reasonableness was required, the provisions satisfied section 11(1) of the Unfair Contract Terms Act 1977. They allocated risk between sophisticated banks using established market terms and afforded no protection for fraud (paras 271–327).

6. The section 2(1) defence concerned belief in the facts objectively represented. Reasonable belief that equity remained at risk was available; belief that no assurance of any kind existed was not. Accounting impropriety was also unproved. Whether the equity met the relevant US GAAP requirements involved auditing judgment, and a competent auditor could accept the treatment adopted. The fraud allegations failed on affirmative findings of honesty (paras 328–385; Appendix 3).

7. Damages were addressed hypothetically. Under Royscot Trust Ltd v Rogerson, statutory damages would follow the deceit measure of transaction loss. Had liability been established, the stated recoverable loss was £5,249,263 plus interest (paras 386–388). The claimant was also permitted to rely on its pleaded case despite the differing agreed list of issues, because this caused no injustice (para 103).

This was a first-instance trial. Tomlinson J approved an agreed list of issues at a case management conference on 14 January 2009. The claimant amended its allegation concerning legality in September 2009. At trial, the court permitted reliance on the pleaded absence-of-support representation despite the differing list of issues, because this caused no injustice to the defendant.