Case Note
| Citation | (2011) 23 SAcLJ 390 |
| Published date | 01 December 2011 |
| Author | LOW Kee Yang LLB (National University of Singapore), LLM, PhD (King‘s College, London); Associate Professor of Law, Singapore Management University. |
| Date | 01 December 2011 |
MISREPRESENTATION AND CONTRACTUAL ESTOPPEL
The Raiffeisen clarifications
Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc
Misrepresentation continues to be one of the most commonly pleaded vitiating factors. When such a plea is made, the representor‘s reply has often been that there is a contractual clause which affects the matter at hand, and the legal inquiry turns to whether the clause excludes liability for misrepresentation and, if so, whether it is reasonable. In recent times, a somewhat surprising argument has surfaced - that the clause estops any allegation of misrepresentation. Such estoppel takes two forms. The first - estoppel by representation - is a reasonably well-established doctrine. The second - contractual estoppel - is a recent and controversial concept, and has been gaining judicial support. But the application of the doctrine of contractual estoppel raises serious questions and doubts. This case note considers how and the extent to which Mr Justice Clarke‘s judgment in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland [2010] EWHC 1392 (Comm) provides the clarification much needed in this area.
I. Introduction
1 The last decade has witnessed interesting developments in the judicial response to the increased use of contractual clauses that address the issue of misrepresentation. These clauses cover an array of matters, the more recent of which are acknowledgments of non-reliance on
representations (“non-reliance clauses”) and recitations of the basis of the contract (“basis clauses”). In the past, the legal effect of such clauses turned primarily on the question of whether the clause is an exclusion of misrepresentation liability1 and, if it is, whether it satisfies the requirement of reasonableness.
2 In recent times, the argumentation has taken a rather unexpected twist, with the assertion that the contractual clause operates as an estoppel and precludes an allegation that the contract was induced by misrepresentation. Two forms of estoppel have been relied upon: estoppel by representation (also referred to as evidential estoppel)2 and contractual estoppel.
3 The leading authority on the use of estoppel by representation in the context of misrepresentation is the English Court of Appeal decision in Lowe v Lombank3 (“Lowe”), where Diplock J (as he then was) stated the principle4 in the following way:5
In order to found an estoppel … the defendants must show:
(i) that [the statement] is clear and unambiguous;
(ii) that the plaintiff meant it to be acted on by the defendants or, at any rate, so conducted herself that a reasonable man in the position of the defendants would take the representation to be true and believe that it was meant that he should act on it …; [and]
(iii) that the defendants in fact believed it to be true and were induced by such belief to act on it.
4 In essence, the three requirements are a clear statement by the plaintiff, the plaintiff ‘s intention that the defendant would rely, and belief and reliance on the part of the defendant. That truth plays a critical role in this doctrine is clearly brought out by the learned judge‘s comment “[t]o call it an agreement as well as an acknowledgment by the plaintiff cannot convert a statement as to past facts known by both parties to be untrue into a contractual obligation …”.6 The Lowe principle has been cited and applied in several cases including, in the
English Court of Appeal, Cremdean Properties Ltd v Nash,7 EA Grimstead & Son Ltd v McGarrigan,8 Watford Electronics Ltd v Sanderson CFL Ltd9 and Peekay Intermark Ltd v ANZ Banking Group Ltd,10 and, in the English High Court, in Quest 4 Finance Ltd v Maxfield,11 JP Morgan Chase Bank v Springwell Navigation Corp12 and Peart Stevenson Associates Ltd v Holland.13
5 More recently, however, a new strand of estoppel - contractual estoppel - is being developed and applied. Delivering the leading judgment of the English Court of Appeal in Peekay Intermark Ltd v ANZ Banking Group Ltd14 (“Peekay”), Moore-Bick LJ declared that: There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not … Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed … The contract itself gives rise to an estoppel. [emphasis added]
6 The contractual estoppel principle enunciated in Peekay15 has been cited with approval and applied in a string of recent English High Court decisions in JP Morgan Chase Bank v Springwell, Navigation Corp,16 Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd17 (“Trident‘”), Titan Steel Wheels Ltd v Royal Bank of Scotland plc18 (“Titan Steel”) and Food Co UK LLP v Henry Boot Developments Ltd19 (“Henry Boot”).
II. Singapore cases
7 In Singapore, there has been limited judicial discussion of the application of either form of estoppel to contractual clauses which affect a plea of misrepresentation. In Orient Centre Investments Ltd v Societe
Generale20 (“Orient”), estoppel by representation21 and the Lowe22 requirements were cited and applied by the Singapore Court of Appeal; Peekay23 was also cited,24 though without any mention of contractual estoppel.25
8 In Jurong Shipyard Pte Ltd v BNP Paribas,26 in dealing with contractual estoppel, Lee Seiu Kin J surveyed the authorities, including Colchester Borough Council v Smith,27 Peekay28 and Orient29 but held that the doctrine applied only “in the absence of the normal vitiating factors such as duress, undue influence and misrepresentation”.
9 JP Morgan Chase Bank v Springwell Navigation Corp30 was cited with approval by the Singapore High Court in both Cr‚dit Industriel et Commercial v Teo Wai Cheong31 and Go Dante Yap v Bank Austria Creditanstalt AG,32 where the issue was not misrepresentation but rather the duty of a bank in tort (and in contract).
III. Controversy and uncertainty
10 Juxtaposing the two species of estoppel, it is clear that estoppel by representation is the more robust or rigorous of the two. Detrimental reliance, a traditional characteristic of estoppel,33 is evidenced in estoppel by representation by requiring, in addition to a clear statement, that the maker of the statement intended the recipient to rely, and that the recipient believed in the statement and relied. In contrast, contractual estoppel only requires a clear statement.
11 The emergence of the doctrine of contractual estoppel is a controversial one and raises a host of related questions, the foremost of which are:
(a) Has the repeated application of the doctrine confirmed its correctness and legitimacy?
(b) Does not the application of contractual estoppel undermine the importance and rigour of estoppel by representation?
(c) If a clause can found a contractual estoppel in a situation where a representation had in fact been made, does that not directly contradict Diplock J‘s statement in Lowe34 that a contract clause “cannot convert a statement as to past facts known by both parties to be untrue into a contractual obligation”?
(d) Whilst it may be appropriate to apply contractual estoppel to situations involving commercial parties of equal bargaining power, can the doctrine be fairly applied where the circumstances are very different?
(e) Where contractual estoppel is applied, is there a further need to consider whether the clause is in effect an exclusion of misrepresentation liability and therefore subject to s 3 of the Misrepresentation Act35 and the reasonableness requirement?
12 The recent decision of Mr Justice Christopher Clarke in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc36 (“Raiffeisen”) provides valuable insights as one seeks to answer the above questions. After examining Raiffeisen, we consider the extent to which Clarke J‘s analysis has been endorsed by the English Court of Appeal in Springwell Navigation Corp v JP Morgan Chase Bank.37
IV. The facts and the decision
13 The case involved a complex structured finance arrangement whereby the Royal Bank of Scotland (“RBS”) lent ¢138.5m to an Enron company. The structure was designed to achieve an accounting treatment (permissible at the time) that enabled Enron Corp to not account for its borrowing, yet be able to recognise a profit at the conclusion of the transaction. It involved RBS incorporating a special
purpose entity (“SPE”) capitalised by debt of ¢138.5m through a Syndicated Credit Facility (“SCF”) and equity of ¢4.9m (3.55%) (US accounting principles required at least 3% of an SPE‘s equity to be at risk). Whilst there was a clear legal obligation on the part of the Enron entities to be responsible for the debt, there was no such obligation as to the equity. During negotiations, RBS received informal assurances from Enron that it would ensure that RBS recovered its equity investment at the end of the transaction.
14 Raiffeisen Zentralbank Osterreich (“RZB”) participated in the syndication and lent ¢10m which, following Enron‘s collapse in December 2001, became unrecoverable. The gist of RZB‘s case was that RBS had impliedly represented that its equity in the SPE was at risk (whereas in reality it was not) and that the lending to Enron complied with accounting principles, and that these representations induced RZB to participate in the syndication.
15 In issue was the effect of provisions in the documentation. Clause 5 of the Confidentiality Agreement provided that:
The Recipient [ie, RZB] acknowledges and agrees that
(a) RBS and its Affiliates, officers … do not make any representation or warranty, express or implied as to, or assume any responsibility for, the accuracy, adequacy, reliability or completeness of any of the Confidential Information; …
(b) The Confidential Information is not...
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