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A bank called Bigbank, a company called Alpha (incorporated in Ruritania), a company called coma, a bank called Deltabank, a Ruritanian law firm called gammas.
Legal issues arise from the case
What is the governing law for this case?
Is Bigbank as an agent liable for providing a standard information memorandum if it has false and misleading information as Delta bank’s claimed?
Can alpha sue Gammas for providing a legal opinion that shows incorrect opinions since an expert of Ruritanian law has said that the terms of the syndicated loan agreement are void?
Could bigbank the entire lenders except delta bank about any issue in regarded of the syndicated loan? And if the majority have agreed to sign a waiver letter under the terms of which any cross default was waived and a further E30M is to be drown down to repay the more expensive bilateral loan in months time, will the minority be liable on it or not?
Can Deltabank refuse to pay the remaining part of the syndicated loan which is E5M according to his disagreement on the waiver letter?
Alpha is unhappy about the terms of the syndicated loan.
The governing law of the case:
– “The London Market Association is an association of international banks active in the London syndicated market. The recommended forms assume primarily London syndication with a London-based agent, English corporate obligors whose parent is of investment grade credit rating and an unsecured agreement governed by English law, although there is some extension to other markets”  .
– English long-arm jurisdiction.
The information memorandum:
The potential liabilities:
-statuary liability-s2(1)of the misrepresentation act 1967 which states that: “Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.”
-Liability in tort of negligence – Hedley Byrne & Co Limited v Heller & Partners Limited
Disclaimer of liability – the Unfair Contract Terms Act 1977 (“UCTA”), IFE Fund SA v Goldman Sechs International (2006).
Provisions in the syndicated loan agreement
Liability of the lawyer providing the legal opinion:
Liability in tort of negligence
The applicable law
Most jurisdictions give the parties of a contract the right to choose the governing law. Art 3(1) of the Rome convention/draft Regulation permits parties to express their choice of the applicable law  . Hence parties can chose their contract’s governing law expressly or by imply. The governing law, however, may not govern every single claim relating to the contract. For example, an asset that is located outside the country of the jurisdiction.
The case did not show any clear expressed choice of law from parties. However, it gives the information that the syndicated loan agreement was in LMA form. LMA is taken from the Loan Market Association which is an association in the London syndicated market. Wood wrote that “The recommended forms assume primarily London syndication with a London-based agent, English corporate obligors whose parent is of investment grade credit rating and an unsecured agreement governed by English law, although there is some extension to other markets”  . Thus by looking to what it has been said by wood it is clear that the LMA form made by parties through an agent in London.
The governing law in this case is still not clear since there is no an expressed choice of law. In addition, the applicable law might be identified by other ways, a long-arm jurisdiction for instance. English law can govern many contracts by the English long-arm jurisdiction in different relations such as the contractual and by tort. Under English long-arm jurisdiction Wood has stated “the following are the main cases set out in CPR r 6.20 whereby the High Court may exercise a long-arm jurisdiction.
Contract connected with England Outside the EU Judgments Regulation, under CPR r 20(5) the court may assume jurisdiction if the claim is made in respect of a contract where the contract,
Was made in England
Was made or through an agent trading or residing in England
Is governed by English law. The choice may be expressed or implied
Tort in England The court may assume jurisdiction if the claim is made in tort where “the damage was sustained in England” or “the damage sustained resulted from an act committed within England”: see CPR r 6.20(8).examples are negligence by an agent bank in the administration of a loan on behalf of a syndicate of lenders, misrepresentation by a borrower or managing bank in inducing participants into a loan, or misrepresentation in a prospectus for a bond issue.”  . As a result of the evidences it can be said that the governing law of this syndicated contract is the English law.
The information memorandum is a document which has to be addressed to the lenders in a syndicated loan by the arranger bank. The document usually contains some information about the loan, the borrower financial and business history and details of the borrower’s management  .
In the case of Delta bank claiming that the information memorandum circulated by big bank as an agent contained false and misleading information about the borrower. There are some positions and under some circumstance that the arranger bank could be liable.
The common law positions
Big bank might be liable to the other parties (delta bank) for negligence under the rules of the case Hedley Byrne & Co Limited v Heller & Partners Limited  . In that case the house of lords stated that a person may owe a duty of care in making a statement or providing information if there was a special relationship between parties  .in addition, in the case Caparo Industries plc v Dickman the house of lords indicated the three norms for an action to be negligence which are the forseeability of damage, a special relationship and the sensibility of the duty of care  . Accordingly, the three criteria must be exist to claim a negligence in the information memorandum.
Deceit or fraudulent misrepresentation
Under this heading a lead manager must be proved by the claimer that he made or provided false or misleading information memorandum knowingly and not out of his knowledge. Any claim might be based on this reason would be under the rules of the case Derry v Peek  .
The statutory position
Liability for a lead bank in a syndicated loan agreement for the information memorandum’s content towards the other parties might be under the misrepresentation Act 1967, section 2(1) which states that: “Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.”  . The lead manger under this position must prove that he is not negligence in order to escape liability.
On the other hand Bigbank as an agent would be not liable under some circumstances:
Exclusion of liability
Disclaimer in the information memorandum
In a syndicated loan agreement the arrangers attempt to escape liability by providing a disclaimer in the information memorandum. The disclaimer usually has four aims  :
To reject any legal responsibility in the information provided in the information memorandum.
To state that the bank that provided the information has not verified them.
To require the addressees of the information memorandum to verify the content.
To prevent any responsibility for any further dissemination to parties other than the addressees.
The disclaimer might be ineffective since it could be counts as a fraudulent misrepresentation. However, this declaration is void according to the Unfair Contract Terms Act 1977, section 2(2). This section states that a person cannot restrict liability for negligence under a contractual relation or a notice giving to others except if the notice comply the requirements of reasonability  . The relation between the parties on the time of providing the information memorandum is not a contractual relationship and the notice of a disclaimer usually is counted as a reasonable.
The recent case of IFE Fund SA v Goldman Sechs International  emphasized the effectiveness of a disclaimer in an information memorandum. Golden has partly participated in an acquisition by a syndicated loan. Golden provided IFE an information memorandum which has some financial information about the target. The target’s account offered confusing information about its financial position and then it become insolvent. The information memorandum contained a disclaimer that the arranger did not verify the information. The judge said that “there was no implied representation as alleged by IFE, to imply such a representation would be inconsistent with the express language of the information memorandum. In addition, Goldman did not owe any duty in tort to IFE of any facts which showed that the information might be incorrect in any material way – the court should be very slow to superimpose any obligations in negligence going beyond those carefully defined in the documentation.”  .
Provisions in the syndicated loan agreement
In most syndicated loans there is a close which states that each member of the syndicate is responsible of doing an investigation about the borrower’s financial position and to verify the accuracy of the information memorandum’s contents. Also the lead manger is not liable for misrepresentation  . This close might be based on the reasonable test under either the Unfair Contract Terms Act 1977, section 2 or the Unfair Contract Terms Act 1977, section 3  .
After looking at the information about the potential liability in regard to the information memorandum and delta bank’s claim it can be said that delta bank could based its claim on negligence if they could prove the three norms. Since there is no information giving in the case that big bank know about the false and misleading information in memorandum delta bank cannot based its claim on deceit. However, if the information memorandum contained a disclaimer or there was a provision in the syndicated loan agreement big bank is not liable. Moreover, a standard form information memorandum always contains a disclaimer which excludes the agent from liability.
Legal opinion is a contract between a lawyer usually in the same jurisdiction of the borrower and the arranger bank in a syndicated loan. This contract entitles the lawyer to provide a legal opinion about the borrower where it can enter the contract or not under the law of the borrower and weather the local law would be conflict with the applicable law. It is to verify the transaction and an opinion but not a guarantee.
Liability of the lawyer for providing the legal opinion:
The lawyer may be liable in a legal opinion to the addressees under the contractual relationship. The lawyer is not contractually liable towards a third party and this should not be treated as a disclaimer. Wood states “this should not be treated as a disclaimer of liability which would otherwise be subject to vitiating rules restricting the effect of disclaimers”  . Hence the lawyer is not responsible to any party except the addressees.
Liability in tort of negligence
A lawyer may be liable to a third party for negligence if the lawyer owes a duty of care. Under the case Sykes v Midland Bank  the third party must prove: “(a) a duty of care was owed to him, (b) that the lawyer broke that duty of care, (c) the third party relied on the opinion, (d) that the negligence caused the loss”  . Accordingly, the third party must satisfy the four elements in order to base his claim in negligence and make the lawyer liable. However, in practice it is very difficult to satisfy these requirements. Moreover, the pure economic loss is excluded in the tort of negligence according to the case Murphy v Brentwood District Council  .
According to the potential liabilities upon the lawyer who produced the legal opinion and applying them to the case it can be stated that Gammas (the law firm in Ruritania) is not liable towards Alpha since there is no contractual relationship between them. However, Gammas may be liable for negligence towards Alpha if alpha could satisfy the four conditions. Alpha, in addition, should show that it would not sign the contract if they knew about the false legal opinion. Yet and under the information giving in this case it seems that alpha could not reach these conditions and gammas seems to be not liable for the legal opinion.
The syndicated democracy
In most syndicated contract there is a term concerning making decisions between banks. Generally, the vote’s measurement is based on the percentage of the share for a bank in the loan. The common percentage of majority is either 50% or 66%  . Many decisions will be binding for all the lenders if the majority agreed upon them such as waivers of breach of covenant and the acceleration. However, there are some decisions need to be agreed on by all lenders as wood states “waiver of the conditions precedent to the advance of loans”  .
In the case of the unsatisfied attitude of Delta bank about Big banks agreeing the waiver letter, there are two situations. First, if the decision that has been made is counted as binding if the majority agreed upon it according to what is indicated in the syndicated democracy, Delta bank does not have the right to disagree since its percentage in the loan is less than 10%. Secondly, if the decision is needed to be agreed on by all lenders, Delta bank has the right to disagree with it.
Cross-default counts as one of the events of default. Wood stats that cross-default provides: ” the borrower fails to pay other financial debt when due, or other financial debt is accelerated, or a commitment to lend other financial debt is cancelled, an event of default or pending event of default occurs in relation to any other financial debt …..”  . Hence if the borrower made any cross-default then is a default occurred.
As Alpha informed big bank that it was unable to pay the next interest payment under the bilateral loan which was payable that day, it is clear that there is a failing of paying another financial debt when due. This clearly confirms that there was a cross-default.
The conditions precedent are the conditions which should be completed in order to the bank to be obliged to lend  . There are some special conditions to all loans such as circulation of the legal opinion by the agent bank. On the other hand, there are conditions to each loan separately as been said in wood’s book ” the bank is not obliged to make a loan unless, at the time of the request for the loan and the borrowing of the loan, and immediately after the loan is made:
The representations and warranties are true on an up-dated basis;
No event of default or event which with giving of notice, lapse of time or other conditions that would constitute an event of default has occurred;
(sometimes) there has been no material adverse change in the borrower’s financial condition”  .
So if there is an event of default the conditions precedent are not satisfied. The bank is not obliged to make a loan.
By looking at the circumstances in the case of bigbank, deltabank and alpha and in regard to the ability of a majority to make a decision and whether it is binding or not it can be concluded that there was a cross-default occurred by alpha which is not paying the interest in the payment due. Also a cross-default is one picture of events of default. The conditions precedent should be satisfied in order to the bank to be obliged to lend money. In this case these conditions are not satisfied since there is an event of default. The majority cannot make a decision binding if it concerns a waiver of the conditions precedent. As a result, the decision that has been made is void since not all the lenders have agreed upon it.
The effects of defaults
There are four fundamental effects of an event of default under the terms of the loan contract. Firstly, a bank is permitted to accelerate outstanding loans. Secondly, the bank is permitted to cancel its obligations to lend further loans. Thirdly, under the “conditions precedent” close the bank is enabling to suspend further loans. The last one is “an event may constitute a default under other credit agreement of the borrower under a cross-default clause”  .
Since it has been proved that there was an event of default which the cross-default by Alpha and it is not happy that delta bank refused to pay the remaining E5M it can be said the followings. Delta bank is not obliged to advance the remaining E5M since one of the effects of an event of default is that the bank has the right to cancel the obligations upon him to lend further money. So it is one of his rights to refuse to pay the E5M to protect himself from the results of Alpha’s event of default.
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