In the recent case of Torre Asset Funding Ltd & anr v. The Royal Bank of Scotland plc the High Court looked at the duties of a facility agent appointed on LMA "market standard" terms (LMA terms).
The case involved a multi-tiered complex financing, with interlocking finance documents. The judgment inevitably related to the complex facts. This article will not explore the background facts. Nonetheless, it is still possible to extract from the judgment three principles likely to apply to most agents appointed on LMA terms.
Read the agreement to find out what specific duties the agent has
When the lenders appoint an agent on LMA terms, the agency provisions in the agreement will dictate its duties. If the agreement doesn't expressly oblige an agent to do something, it almost certainly won't have to do it.
In the Torre Asset case Mr Justice Sales looked at whether an agent appointed on LMA terms should be subject to common law or implied duties.
In common with most agency arrangements on LMA terms, the agency provisions in this case stated the agent was not a fiduciary for the lenders. Mr Justice Sales also made the following remark: "Where the parties have entered into detailed commercial agreements of the type at issue here, it is not plausible to suppose that they intended that some potential additional set of vague and unspecific duties might apply over and above those specified in the agreements themselves". So, it seems clear that an agent appointed on LMA terms will not normally need to concern itself with common law fiduciary duties.
Moreover, in cases such as this one, involving interpretation of "complex, interlocking financial transactional documents", a lender shouldn't expect the court to imply additional and unspecific duties on the agent. The line of case law on contractual interpretation would not support such an approach.
Don't expect an agent to police a borrower's compliance
Each lender should police a borrower's compliance with its obligations under the loan agreement, as they would for a bilateral loan. An agent appointed on LMA terms must notify the lenders if it becomes aware there has been a non-payment. But it does not generally have to notify the lenders of any other breach, unless a party tells the agent that the breach is a default under the agreement.
In the Torre Asset case the borrower had undertaken to provide an annual budget to the agent, in enough copies for all the lenders. Mr Justice Sales made it clear that, if the borrower didn't provide this annual budget, it would be for the lenders to complain to the borrower about it. On the facts of this case, the lenders had made no such complaint. However, the agent had no obligation to tell the lenders about the failure of the borrower to provide the information, or to chase for it. This would be in excess of the "solely mechanical and administrative" nature of the role of an agent appointed on LMA terms. It would also conflict with the usual LMA term requiring the lenders to be "solely responsible" for the adequacy and completeness of information supplied by the borrower.
Despite coming to these conclusions, the judge made one further comment on this point, which is less helpful for agents. He suggested that, because the LMA terms expressly allow an agent to pass on information it receives to the (other) parties, there might be limited circumstances where it would have to do so (for example if it would be irrational not to). Our view is that there are strong arguments against this interpretation. None of the parties put it forward in Torre Asset.
In certain circumstances agents may have to exercise a judgment or discretion, but they will have limited duties when doing so
Almost all agency appointments on LMA terms will contain a provision stating that the duties of the agent are "solely mechanical and administrative in nature". The judge in Torre Asset noted that this will not always enable an agent to take a completely passive role. The agreement may envisage the agent exercising its own judgment or exercising a discretion, such as determining whether a document is "in form and substance satisfactory" to it. When exercising a discretion, agents need to bear the following in mind:
- The discretion will usually not be unlimited. If the agent exercises a discretion, it must do so in a way consistent with the principles set out by the Court of Appeal in Socimer International Bank Ltd v. Standard Bank London Ltd, as any other party with a discretion under a contract must. That is to say, concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality will usually limit its discretion. In a financing transaction, the principal role of the agent is to facilitate the lenders in the exercise of their rights and powers under the facility agreement. So, a court will decide what would be rational or irrational for the agent to do in light of that.
- In deciding how to exercise the discretion, the agent can take instructions from the majority lenders. In the absence of any instructions, it must act as it considers to be in the best interests of the lenders.
Ultimately, the Torre Asset case is good news for agents. In Torre Asset the agency team had not even read the relevant agency provisions in the finance documents, and had just assumed their role was limited to that of a passive post-box. Clearly this is not an approach to be advocated and the agent was lucky that it had not breached any obligations. Nonetheless, it does serve to show just what effective protection an LMA-style agency appointment can provide an agent.
Conversely, so far as lenders are concerned, the case serves as a reminder that the scope of what an agent appointed on LMA terms must do is, in reality, very limited indeed.
Law stated as at 5 December 2013.