The High Court decision of Torre v RBS has attracted much interest as a comprehensive judicial examination of the scope of an agent’s role in a complex structured finance transaction. Norton Rose Fulbright LLP acted for the agent in its successful defence against claims by an investor for loss of its investment, following the collapse of the finance vehicle in the financial crisis. In this note, we examine various aspects of Torre v RBS, including the scope of agent liability.
In summary, the High Court gave a narrow construction to the scope of an agent’s duties in a finance transaction. It also gave guidance on other issues of critical importance to participants in the financial markets, including the construction of some standard terms in the Loan Market Association (‘LMA’) loan agreements and the role of causation in limiting liability for misstatements and omissions.
The Royal Bank of Scotland plc (‘RBS’) successfully argued that it had no duty as agent to pass on to an investor information that constituted an event of default and that its omission to pass on this information did not cause any loss to the investor.
The claim concerned the investment by Torre Asset Funding Limited (‘Torre’) in the junior mezzanine tranche of a structured loan to a property company, Dunedin Property Industrial Fund (Holdings) Ltd (‘Dunedin’). RBS created the finance structure and took a number of roles including lender, equity participant and, in particular, agent at the junior mezzanine funding level.
During July 2007, there were a number of emails between Dunedin and RBS regarding the performance of the transaction and giving projections of future performance. It became clear that according to these projections the transaction would eventually not have sufficient cash flow to service the most junior layers of interest. The emails then discussed restructuring the transaction to roll up these interest payments. The restructuring never occurred because a senior lender withheld its consent and the transaction collapsed soon after the onset of the financial crisis in 2008.
Torre claimed that RBS, in its capacity as agent, should have informed it of the July 2007 discussions because they constituted an event of default, and that it would then have sold its interest in theloans before Dunedin collapsed in 2008. Torre also made a number of claims regarding other documents not forwarded by RBS to Torre and communications between RBS and Torre.
RBS argued that the discussions did not constitute an event of default, that it had no duty as agent to inform Torre of these discussions, and that its omission to inform Torre did not cause Torre’s subsequent loss of its investment.
Event of default
Mr Justice Sales held that the discussions with Dunedin in July 2007 fell within the standard LMA insolvency event of default: that is, Dunedin ‘…by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness…’. The financial projections which showed that Dunedin would eventually be unable to service the junior interest amounted to ‘anticipated financial difficulties’ and these difficulties were substantial.
This takes an extremely wide view of the LMA insolvency event of default. Certainly, none of the participants at the time contemplated that their email exchange might constitute a default. How can a borrower avoid a conservative approach to forecasting being interpreted as a statement of anticipated difficulties? Until this question is answered, the LMAinsolvency event of default may impede proper financial planning by borrowers. Perhaps the LMA will tighten the wording of this clause: a gloss on the word ‘anticipated’ to make it clear that it refers to a near certain expectation of a future event rather than a foreseeable possibility would be sufficient. Arguably, ‘anticipated’ could simply be removed entirely.
Breach of duty
Sales J held that there was no breach of duty by RBS in omitting to inform Torre of the July 2007 discussions, even though they constituted an event of default. The duties of the agent were defined exhaustively by the express terms of the agreement between the parties. The creation of an agency relationship did not automatically cause the common law to import a specific bundle of duties associated with an agency role. Nor was there an implied term importing a duty to inform. However, the contract did contain an express exclusion of fiduciary responsibilities of the agent – without this, presumably some obligations of this type may have been present.
Financial institutions acting as agents will welcome this decision. They may continue to regard their role as mainly ‘mechanical and administrative’ and circumscribed by the particular wording of the agreement. Sales J had no time for the role of agency imposing by itself any duties on the agent: this was far too vague for a commercial contract. However, he did add a reminder that agency was more than acting as a postbox and could involve requirements to exercise discretion appropriately.
Although it was not argued by the claimants, Sales J raised of his own volition a question as to whether an obligation to pass on information might have arisen not from a duty to do so but from a power to do so associated with a duty to exercise that power in a certain way. It will be interesting to see whether this argument is raised in a future case – it appears to face serious obstacles.
Sales J also considered the exclusion clause – again a standard LMA form – and found that it extended to omissions to act and would therefore have applied in this case.
Sales J found that even if there had been a breach of duty, the omission to inform Torre did not cause Torre’s loss. The purpose of the information duty was to enable Torre to exercise its rights under the loans effectively, not to help it decide whether or not to continue its investment. So losses in relation to investment decisions fell outside the scope of foreseeable losses flowing from breach of the duty and were not caused by it.
Where the claim is for an omission to pass on information, proving causation may be particularly problematical. A claimant has to show not only that on the counterfactual assumption that the information had been passed on that it would have acted differently and so avoided a loss, but also that the loss suffered fell within the scope of the duty to act. This latter point has not been sufficiently highlighted previously and is a substantial burden for a claimant to overcome.
Sales J also dealt in passing with a factual causation argument that would have defeated the claim. If it had come to light that an event of default had occurred, this would have reduced the price of the loans, thereby removing the incentive for Torre to sell them. In other words, telling Torre the event of default had occurred would not have caused them to sell the loans because the sale price would be reduced due to the event of default and they would accordingly obtain no advantage from a sale. Although it was only a brief discussion, this argument could be used in a wide variety of claims to negate causation.
Financial institutions will be encouraged by the strict, commercial approach to construction of the agency role. However, it is the ruminations on causation that may prove more significant. Torre v RBS illustrates the variety of robust causation-based defences to claims based on omissions and misstatements. Where liability for a breach of duty is admitted – consider cases based on LIBOR manipulation, for instance – then it may be difficulties in proving causation that close the floodgates.