Case No: 2006 FOLIO 1202
Neutral Citation Number: [2010] EWHC 1392 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 11/06/2010

Before:

MR JUSTICE CHRISTOPHER CLARKE
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Between:

	RAIFFEISEN ZENTRALBANK OSTERREICH AG
	Claimant	
	- and -		
	THE ROYAL BANK OF SCOTLAND PLC
	Defendant	

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Mr Jeffrey Gruder, QC, Mr Christopher Harrison, and Ms Nicola Timmins (instructed by Memery Crystal) for the Claimant
Mr Antony Zacaroli, QC, Mr Ben Valentin and Mr Jeremy Goldring (instructed by Travers Smith) for the Defendant

Hearing dates: 13th, 14th, 18th, 19th, 20th, 21st, 25th, 26th, 27th, 28th January; 1st, 2nd, 3rd, 8th, 9th, 10th, 11th February; 2nd, 3rd, and 4th March 2010
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Judgment
MR JUSTICE CHRISTOPHER CLARKE: 

                        INDEX		
Subject matter 	Para	
Overview	    1-16	
The history	  17- 79	
Misrepresentation – the law	  80-87	
The representations relied on	  88-89	
The context	  90-97	
Pleading issue in respect of the first and second representation	  98-103	
The first representation – was it made?	104-111	
The second representation – was it made?	112	
Mr Stuart-Prince’s understanding of what was represented	113-121	
The fourth representation – was it made?	122-128	
The third representation – was it made?	129-136	
Alleged falsity of the first two representations	137-138	
Were the assurances legally binding?	139-146	
The first representation – falsity?	147-151	
The second representation – falsity?	152	
Inducement: The Law	153-162	
“But for” causation	163-173	
 But for what?	174-194	
Is “might have” made a difference enough?	195-199	
Was RZB induced by the first two representations	200-219	
Intention to induce	220-227	
The Relevant Provisions	228-229	
The authorities on their effect	230-249	
Discussion	250-256	
Construction of the Relevant Provisions	257-270	
The Misrepresentation Act 1967 s 3 and the authorities thereon	271-303	
Discussion	304-315	
Do the Relevant Provisions purport to exclude liability so as to fall within section 3?	316-318	
Reasonableness	319-327	
The section 2 (1) defence to the first two representations	328-333	
The third and fourth representations – falsity?	334-336	
Fraud – the law	337-341	
Fraud – conclusions 	342-347	
Considerations leading to conclusions on fraud	348-385	
Damages	386-388	
Finale	389	
		
Evidence of Mr Stuart-Prince as to his understanding of the effect of the Relevant Provisions	App 1	
Tax Treatment of the Transaction from RBS’ perspective	App 2	
US GAAP	App 3	

 Overview
1.	The transaction at the heart of the present claim struck the Group Credit Committee of the Royal Bank of Scotland Plc (“RBS”) at its meeting on 22nd September 2000 as “21st Century Alchemy”.  The alchemist’s stone was reputed to turn base metal into gold.  Its 21st Century equivalent, if it worked, realised a profit in the accounts of Enron Corp (“Enron”) by the use of £138,500,000 borrowed from RBS, against what was in economic substance a guarantee by Enron, without the borrowing featuring in Enron’s accounts.  The relevant US Accounting Standard which was said to permit this treatment was FAS 125.  
2.	RBS lent the money itself.  It then syndicated the loan to other banks.  One of those banks was Raiffeisen Zentralbank Osterreich AG (“RZB”), the claimant, which lent £10,000,000.  It claims to have been induced to lend the money by several misrepresentations by RBS.  In this action it seeks to recover that part of the loan which it has lost (plus interest) as a result of Enron's collapse.
3.	The initial corporate structure, omitting intervening subsidiaries, was as follows:
ENRON CORP

EEL
[Enron Europe Ltd]

TOH4L
[Teesside Operations (Holdings) 4 Ltd]

ETOL
[Enron Teesside Operations Ltd]

4.	In order to put the proposed transaction into effect RBS formed a new Special Purpose Entity (“SPE”) - RBS Financial Trading Company Ltd (“RBSFT”).  On 1st November 2000 a series of transactions were effected as follows:
i)	TOH4L issued to Enron Sutton Bridge Funding Ltd (“ESBFL”), a wholly owned subsidiary of EEL, 141.6 million Class “B” £1 cumulative preference shares (“the preference shares”) carrying the right to a 13.5% dividend.  The dividend stream was funded by TOH4L’s right to receive dividends from ETOL.
ii)	RBSFT was capitalised with (a) £4.9 million equity provided by RBS pursuant to a Subscription Agreement between RBS and RBSFT and (b) a £138.5 million Senior Credit Facility (“SCF”) also provided by RBS.  The equity/debt ratio was therefore approximately 3.55%/96.45%.  The SCF was repayable on 10th January 2004.  
iii)	ESBFL sold the preference shares in TOH4L to RBSFT for £141.6 million provided as to £70.8million in cash; and as to £70.8million in 2001 Loan Notes, maturing on 26th October 2001, but callable at any time before then, issued by RBSFT.  RBSFT could make drawdowns under the SCF in order to finance the redemption of the Notes, 
iv)	Enron entered into a Total Return Swap with RBSFT the effect of which was to guarantee the SCF.
5.	The result may be represented diagrammatically as follows, the arrows representing the  flow of monies:

6.	In the result:
a)	TOH4L received dividends (indirectly) from ETOL and paid the dividends on the preference shares to RBSFT;
b)	96.45% of the dividends received by RBSFT was retained within an account charged with repaying the SCF/Loan Notes;
c)	3.55% of the dividends was paid to RBS;
d)	Any shortfall between the 96.45% of dividends received by RBSFT and the amount due under the SCF/Loan Notes was to be paid by Enron to RBSFT under the Total Return Swap and any surplus was to be paid by RBSFT to Enron; 
e)	Interest, principal and other amounts payable under the SCF and interest payable under the Loan Notes were paid to the lenders and the holders of the Loan Notes.  
7.	The reason for RBSFT being capitalised with 3.5% equity capital was that, in order for the scheme to work, US GAAP (Generally Accepted Accounting Principles) required the SPE to have at least 3% of substantive equity and for such equity to be “at risk”.  
8.	The Articles of RBSFT provided that RBSFT might sell its interest in the preference shares to any third party other than a competitor or ESBFL or a subsidiary (otherwise than pursuant to the Put Option referred to below), in any manner it elected, including doing so in accordance with certain Auction Procedures.  Under those Procedures there was to be a sale of the preference shares in TOH4L over a period of 100 days beginning 70 days before 10th January 2004.  Enron as Auction Agent was bound to solicit cash bids for the shares from purchasers (which could include itself and its affiliates other than ESBFL) and was bound to accept the highest cash bid provided that it was at least equal to the lower of the Fair Market Value (as defined) as at the start of the Sale Period and the Book Value Amount, which was defined as the aggregate subscription price and all accrued and unpaid dividends, and provided for payment by the Relevant Payment Date.  
9.	A Put Option agreement was entered into between RBSFT and ESBFL under which RBSFT had the right to require ESBFL to purchase the preference shares in the event that no bid for the shares was accepted by Enron under the Auction Procedures by the 40th day before 10th January 2004 at a price which was to be the lower of the Fair Market Value calculated in accordance with a schedule or the Book Value of the shares.  Enron guaranteed the performance of that agreement.  
10.	Under the Total Return Swap (“TRS”) entered into between Enron and RBSFT the Floating Amount with respect to any Interest Payment Date included the Interest Payable on any outstanding principal under the loans made pursuant to the SCF and on any outstanding principal of the Loan Notes.  The Total Return Amount meant 96.45% of all monies actually received by RBSFT by way of dividend or distribution with respect to the preference shares.  On each Interest Payment Date Enron was obliged to pay RBSFT if the Floating Amount exceeded the Total Return Amount.  The TRS also provided that on 10th January 2004 Enron would pay RBSFT the amount by which aggregate outstanding principal on the monies advanced under the SCF and on the Loan Notes, together, in each case, with unpaid interest, exceeded 96.45% of the proceeds of sale of the preference shares pursuant to the auction procedure laid down in the Articles or the Put Option or, if there were no sale proceeds, 96.45% of the Fair Market Value of the preference shares, as defined.  
11.	The effect of the above was that, at the maturity of the transaction, there would be an auction of the preference shares or the exercise of a Fair Market Value Put Option guaranteed by Enron, which would bring in funds to RBSFT.  If such funds were insufficient to repay the debt of £138million, the shortfall would be covered under the TRS.  So the SCF was an Enron risk.  
12.	The TRS did not, however, apply to the equity.  If such funds were insufficient to repay the equity in RBSFT of £4.9million, then on the face of the transaction RBS would lose the equity.
13.	However, Enron gave oral assurances to RBS to the effect that it would see that RBS would recover the full amount of its equity as well as a return on the equity of 13.5% p.a.  This was expected to be achieved by Enron making a bid in the auction of the preference shares of an amount sufficient to provide RBSFT with enough to repay the equity and the 13.5% p.a. return.  Enron would make a bid at this level even though the Fair Market Value of the shares might be less.  Whether or not those assurances had any contractual effect is in dispute.
14.	RBS committed itself to providing the full amount of the £138.5million facility and then   syndicated that facility to a number of banks including RZB.
15.	The transaction was to be accounted for on the basis that, in compliance (or purported compliance) with US GAAP, Enron would show in its accounts the profit on the sale of the preference shares to RBSFT but would not have to account for the loan to RBSFT.  RZB contends that, because of the oral assurances, RBSFT ought to have been consolidated with Enron with the consequence that the profit should have been eliminated and RBSFT’s liability under the SCF revealed in the balance sheet.  It is common ground that, if the assurances were legally binding, such consolidation would be necessary.  
16.	When RZB agreed to take a £10,000,000 share of the facility it was not told about the oral assurances and, on that account, claims that RBS misrepresented the position to it.  
The history 

Enron’s original investment in Teesside
17.	Enron Corp was the parent of the Group.  On 31st December 1998 one of its many subsidiaries - Enron Europe Ltd (“EEL”) – purchased from ICI a power plant and associated distribution facilities located on the Wilton Chemical Complex in Teesside through its new subsidiary - Enron Teesside Operations Ltd (“ETOL”) - for £294 million.  The purchase was in part financed by a Senior Credit Facility of £186,000,000 which was arranged and syndicated by Greenwich NatWest Ltd and Credit Lyonnais.  RBS participated as to £20 million.  Some time later EEL transferred 50% of the voting control and 2% of the economic rights in ETOL to third parties.  
18.	In about May 1999 Enron approached, and in June 1999 it engaged, Greenwich NatWest to arrange finance for what became the Sutton Bridge transaction relating to a gas turbine power plant in Lincolnshire.  The transaction involved the creation of a wholly owned Special Purpose Vehicle (SPV).  The structure was explained in an RBS internal memorandum of 25th June 1999, written by Andrew Jameson (Head of Power Team, Project and Export Finance) when it was apparent that the deal would be carried out by another bank (Greenwich NatWest) as follows:
“Had we done the deal... it would have required RBS to provide 100% of the SPV’s capital for a period of 3 to 6 months, at which point the SPV would be unwound.  The SPV’s capital would be made up as follows:

•	Lend approx.  £48.5m to the SPV, supported by a full Enron parent corporation guarantee.

•	Provide approx £1.5 m equity to the SPV.   There was to be no Enron support for this equity or source of any dividend cashflow.  Instead, we would simply have had to rely on a ‘promise’ by Enron to unwind the deal to redeem the equity and provide an equity return in the form of a back-end lump sum payment 

The purpose of the structure from Enron’s point of view was to permit a transfer of the ownership of its share in Sutton Bridge Power (SBP) to a non-Enron entity (the RBS owned SPV) so that when it was transferred back after 3 to 6 months, it could go back on the books at a higher value generating an earnings benefit to Enron.

The brief outline above reveals the nature of the equity risk which Enron is asking banks to take.  We are being asked to accept Enron’s promise that it will unwind the structure, but with no supporting documentation, and in the event of Enron liquidation during the life of the SPV then we could expect to lose the entire equity contribution.  Providing balance to the ‘promise’ aspect is Enron’s strong commercial incentive to unwind the deal and book an earnings benefit and also the relationship and reputational risk it runs from breaking such  ‘promises’.  

[Bold in this and all other entries added]

The memorandum asked Johnny Cameron, who was the Head of Corporate Banking,   whether “the kind of short term equity ‘promise’ risk mentioned above is the sort of business we can consider”.  
19.	This transaction, described as an FASB 125 Equity Sale, was carried out in July by NatWest.  It involved a sale to a NatWest owned SPV, financed by £1.325million of equity and £41.475million of debt (guaranteed by Enron), of preference shares in an Enron subsidiary which held, indirectly, a 50% interest in the company which owned the Sutton Bridge plant.  The aim was to enable the capital gain from the sale (but not the loan) to be booked in order to boost half year earnings.  The transaction was unwound in December 1999 when the debt was repaid and the NatWest SPV was sold to an Enron company at a price which produced a return of £478,176 on the capital of £1,325,000 outstanding from 14th June to 1st December 1999.
20.	In March 2000 RBS acquired NatWest.  
The ETOL transaction
21.	By 2000 the economic value of ETOL was said to have increased on account of cost savings and operating efficiencies. Enron/EEL sought to “monetise” this value i.e. to turn it into cash (or the equivalent), so as to be able, as in the case of Sutton Bridge, to book in Enron’s 2000 financial statements for the fourth quarter a sum of about $91 million as the profit attributable to the increase in value of its investment, without having to show in the accounts any debt incurred in order to achieve the profit, and to do so without losing its 50% control.  
22.	On 25th July Mr Schardin of EEL approached Mr Jameson of RBS to find out whether RBS would be interested in what Mr Jameson characterised as an “FAS 125 Monetisation” of Enron’s equity interest in ETOL.   
23.	On 10th August 2000 Sue Milton (“Ms Milton”), Director, Power Team, and Nicola Goss (“Ms Goss”), Associate Director, Power Team, sent a memorandum to Thomas Hardy, Iain Houston and Peter Commons of RBS, which was plainly modelled on Mr Jameson’s memorandum of 25th June 1999.  Tom Hardy was Global Head of Project and Export Finance.  Iain Houston was Head of Structured Finance.  Peter Commons was Head of Structured and Specialized Credit.  The memorandum included the following: 
“We have been approached by Enron to provide c. £100-120m in a structured transaction involving to fund 100% of the capital (i.e. both debt and equity) for a special purpose vehicle (SPV).  

This transaction is aimed at monetisation of the dividend flows from [ETOL], a power and steam CHP plant in Teesside.  The purpose of the structure from Enron’s point of view is that it permits a transfer of the ownership of ETOL (currently 100%) to a non-Enron entity (an RBS owned SPV) so that when it is transferred back after 3 to 6 months, it could go back on the books at a higher value, generating an earnings benefit to Enron.

The tenor will be no more than 364 days, although most likely to be 3 to 6 months over Enron’s financial year end (31st December) after which the SPV would be unwound.  The SPV’s capital structure would be as follows:-
•	Approximately £116.4m senior debt (97%) to the SPV as Borrower supported by a full Enron parent corporate guarantee.

•	Fund approximately £3.6m as equity (3%) to the SPV.  There would be no Enron support for this equity or source of any dividend cashflow.   Instead we would simply have to rely on a ‘promise’ by Enron to unwind the deal to redeem the equity and provide an equity return in the form of a back-ended lump sum payment.
…

Although the senior debt element of this transaction may be viewed as straight Enron corporate risk, with regard to the £ 3.6 m equity, we are being asked to accept Enron’s promise that it will unwind the structure, with no supporting documentation. Therefore, in the event of Enron liquidation during the life of the SPV, we could expect to lose the entire equity contribution. Enron’s strong commercial incentive to unwind the deal and book an earnings benefit, in addition to the relationship and reputational risks it would run for breaking such arrangements provide a degree of comfort.  

In terms of remuneration, because Enron derive significant value for these types of structured transactions and the equity portion is a small element of it they are prepared to provide a high level of return…”
24.	The proposed transaction was discussed in a number of internal RBS e-mails.  In one of them Iain Houston replied:
“I have no issue doing this type of deal in view of the verbal assurances we have been given consistently by senior Enron staff – most recently by Andy Fastow to ISR [Robertson], JANC [Cameron] and other leading lights.  We can seriously differentiate ourselves from the crowd by looking keenly at equity risk, especially where the risk is for less than 364 days.  The question for debate is quantum…”
25.	Peter Commons replied :
“This is exactly aligned to the Sutton Bridge deal we did last year – as has already been referenced, the whole thing hinges on an ‘understanding’ with Enron they will buy it all back but we have no reason to believe this would not be delivered on.  The only rider I would add is that we should protect ourselves (probably through the pricing) against Plan B emerging at some point in Enron's fertile mind whereby they may subsequently decide to roll Teesside into “son of margaux” (or something similar) and, as a result, we then find ourselves locked into something a bit longer term – or be reliant on supporting (under the usual heavy relationship pressure!!) the “son of” structure in order to get ourselves out.”
26.	Andrew Jameson replied:
“I’d like to keep the lot, but have the ability to sell out of some of the Senior Debt as and when we need to, because:

(i)	It will be our first deal in London with the new RBS.
(ii)	As the Debt pricing is 10-(ish) basis points above standard corporate pricing, it should be easier to sell than other stuff, and essentially short term.
(iii)	Keep the Equity regardless as our real return is here and if we believe them on repayment for £1 m, we may as well believe them for £ 3m and reap the rewards.  Risk is not that great as it should only be 364 day max.
(iv)	I don’t want to (sic) rest of the market to see the structure as it is not that intellectually difficult and we are getting a very nice return (thank you very much)”
27.	Adam Pettifer (Manager, Power Team) replied referring to an e-mail from Thomas Hardy  which suggested (wrongly) that RBS would acquire ownership of the plant:
“Looks like all systems go on this one…Tom isn’t quite tright (sic) in thinking we’d have access to assets in a liquidation – essentially we have to assume we’d end up with nothing if Enron walked away from the structure"
28.	On 15th August Ms Milton and Ms Goss of RBS made, subject to various conditions, an indicative proposal to Mr Schardin of EEL to finance the sale of EEL’s interest in ETOL by way of an FAS 125 Equity Purchase Agreement.  The letter set out proposed pricing terms.  These were revised on 24th August when RBS indicated that they expected a return on the £3.6million equity of 12%/17.5%/20% in years 1-3 (revised to 12.5%/13.5%/15% in a draft mandate of 29th August).  The letter observed:
“We assume that the return on the preference shares will be achieved via a semi-annual cumulative fixed coupon with any potential shortfall being picked up in the repurchasing agreement…”
29.	On 25th August Mr Schardin confirmed that RBS had the mandate.  

Linklaters
30.	On the same day Linklaters were instructed as RBS’ legal advisors.  They had been involved in all of Enron’s FAS 125 deals in Europe.  On 5th September 2000 a meeting took place at Enron attended by representatives of Enron, RBS and Linklaters.  Ms Hoe of Linklaters’ note contains the following: 
“can’t put stated return explicitly on equity 
if do thru TRS, …Enron would book TRS @ a loss
equity gets pay off from A share cash flow only (can’t be from TRS)
….  Sensitivity from SEC as to Rx of 3% - they don’t think 3% equity suff for non-consolidation”. 
31.	Another note of the meeting includes the following:
“Outstanding Issues
2.	 Return of 3% equity.  Expecting 12.5%/13,5%/15%
…
RBS accept this is their risk” 
32.	Following that meeting Ms Goss on 6th September 2000 sent a memorandum to Peter Whitby (Financial Control) which was copied to others to bring them up to date.  The memorandum set out an outline of the proposed transaction which included the following:
“The transaction is aimed at monetisation of the dividend flows from ETOL …Enron’s aim is to effect a “true sale” of its assets under …FAS 125.  If Enron can effect a transfer of the economic interest of ownership of ETOL (currently 50%) via the sale of preference shares to a non-Enron entity, which will be an RBS owned Special Purpose Entity (SPE) this will allow Enron to realise the increased value in the project as a result of cost savings.
…
Equity element of the transaction will be dealt with by means of a side letter between RBS and [EEL] with our return on the equity averaging 13.5% via a semi annual cumulative coupon.  This will be serviced by approximately 3% of the preference share dividend (the remaining 97% being swapped under the total return swap for the Debt).
There will be an understanding between Enron and RBS that any coupon not being met will be  made up at the end of the 3 years and that the Equity will be financed at the same time as the debt, although for FAS 125 purposes this will not be documented.”
Credit Committee application
33.	On 18th September 2000 Ms Goss and Ms Milton, supported by Mr Hardy,  signed off on an application to the RBS Corporate Banking and Financial Markets Credit Committee (“CBFM Credit Committee”) for approval of the key commercial points of what was described as the “[ETOL]: Proposed £145m Equity Purchase Financing”.  At that time the transaction was said to require closure by 30th September with a tenor of 3.5 years.  The application stated that the Fair Market Value of EEL’s interest in ETOL was currently calculated at £145m.  It explained the proposed transaction and that it was aimed at effecting a “true sale” of the preference shares carrying EEL’s economic interests in ETOL (i.e. 98% of the dividend flow).  It pointed out that interest and principal on the loan were effectively guaranteed and viewed as Enron corporation risk.  
34.	It then observed:
“1.9	Base case economics over the 3.25 year life of the proposed transaction illustrate that preference dividends received by the SPE do not cover the amounts required to service either the Senior Debt or the Equity.  Senior Debt Service will total c. £29.71 compared with £24.58 paid under the TRS to Enron (i.e.97% of the preference dividend).  This is a shortfall to Enron of £5.31, as Senior Debt Service is guaranteed under the terms of the TRS.  

1.10	The required return on equity over 3.25 years will total £ 1.92m compared with actual receipts of £ 0.77 under the base case, leaving a shortfall in our required return of £1.15m. The process for achieving our required return on equity and principal amount will be based on the auction process (with Enron aiming to be the highest bidder in order to make us whole), with the FMV Put Option as a backstop protection.  

1.11	Enron have made an informal agreement to ensure that we achieve our required return and are made whole on the equity principal at transaction maturity. However, their desired accounting treatment does not permit any formal arrangements to be made.  We therefore rely on Enron’s undertaking to make us whole.  Our ability to accept Enron’s ‘promise’ as sufficient comfort on the transaction is based on the strength of the relationship with the client.  Senior management at EEL have made verbal assurances at a high level within the bank on this basis.  

2.5	Under the terms of the TRS, the Senior Debt may be viewed as Enron Corporation risk.  The risk to the Equity is that the 3% of preference dividends is insufficient to meet our required return of 13.5% p.a. and that the FMV of the shares at the end of the transaction will be insufficient to meet our equity principal.  US Accounting regulations do not permit any formal arrangements between us and Enron to ensure refinancing of the equity at the same time as the Senior Debt, the required return on equity or repayment of principal”. 
35.	The paper attached a Project Economics report and included a summary of the position under the forecast base case in respect of the preference dividends in years 1 – 4.  The total in respect of those years is set out below:
	Cashflow	Total	
Preference Share Dividend	£31.37m 	
Amount swapped to Enron under TRS (97%)	£24.58m	
Senior Debt Service (i.e.  amount serviced by TRS)	£29.71m	
Shortfall to Enron (i.e. difference between payment and receipt under TRS)	£ 5.13m 	
Equity Required Return (13.5% on £4.35m p.a.)	£ 1.92m	
Amount paid to Equity (3%)	£ 0.77m	
Shortfall to SPE (required return less actual return)	£ 1.15m	

The shortfall of £1.15million was a substantial part of the overall profit of £3million which RBS hoped to achieve in the transaction.
36.	The paper went on to say that things must go seriously wrong before RBS got no return on it's equity and contained the following:
“7.0	Risk Analysis
As detailed in Appendix 4, the risk associated with Enron Corporation under the proposed structure (i.e. the Senior Debt element) is considered acceptable.  On this basis, our principal risk is the residual loss of our Equity stake and non-payment of the required return on the Equity.  The risks associated with this are analysed as follows.
7.1	Enron Relationship/Informal Agreement with Enron
As detailed in section 1.10, our key source of comfort that the expected return on equity is achieved and that the auction process provides Enron with the opportunity to make us whole at the end of the transaction…. Given the strength of our relationship with the company, the high level assurances that have been made and the reputational risk to Enron of not honouring this arrangement, we believe that this is acceptable.  

7.2	However, to the extent that we become unable to rely upon our relationship with Enron to achieve our required return and repay our Equity we take comfort from the following...”

 	     A number of considerations were then set out.
37.	The paper concluded by stating that Enron was a key relationship client for the new RBS, that ETOL’s business had a stable operating track record and had shown significant improvement under Enron management, and that the authors “take considerable comfort from Enron’s informal undertaking to keep us whole with regard to the Equity required in the proposed transaction”.  However additional comfort could be taken from RBS’ familiarity with the project, its role as agent, the stability of the project economics and other matters, and the fact that the proposed transaction was highly remunerative.  
38.	Appendix 6 to the paper contained a countersignature from three personnel from Loan Syndications, the department which would be responsible for syndicating any loan.  This pointed out that banks who might be asked to participate would view the senior debt facilities as short term Enron exposure.  
39.	In anticipation of the Committee meeting on 20th September Ms Goss sought to arrange a call between Paul Chivers (EEL’s Chief Financial Officer) and Tom Hardy and recorded the view of the latter that it would be useful for Ben Glisan (Treasurer)/Andy Fastow (Chief Financial Officer) of Enron to talk to Johnny Cameron or Iain Robertson, who was Chief Executive of CBFM.   
40.	On 19th September Christopher Clarke, who was a senior manager in Corporate Institutional Credit, produced a paper for the CBFM Credit Committee on the proposed transaction.  In it he referred to the fact that “The definitional aspects of the exit FMV have yet to be agreed upon and … no actual numeric number, to effect full recovery of the initial equity investment, can be incorporated due to the need to meet Enron’s ‘true sale’ criteria”.  It contained the following:
“Dividend Income: Sourced from 3% of expected preference share dividend flow the model clearly demonstrates ETOL’s inability to service the annual 13.5 % coupon and given the accelerated payback period.  We are, therefore, looking to verbal undertakings (they cannot be formally documented for accounting reasons) from Enron that they will ensure that RBS is kept whole through the exit strategy.
Exit Strategy:	The proposal to hold an auction to find a buyer for the preference shares or failing that exercising a Put Option back to Enron at FMV, whilst not ideal provides a mechanism to trigger the debate with Enron.”
and later:
“….notwithstanding ETOL equity control mechanism that will restrict Enron’s ability to sell their management (voting rights) interest in ETOL, considerable reliance will still have to be placed on Enron’s verbal undertakings to see RBS whole of the equity tranche. Previous understandings with Enron have always been delivered upon and there is no reason to believe that this particular transaction will prove to be the exception to the rule.”	           	  
41.	On 20th September Mr Hardy of RBS spoke with Mr Chivers of Enron.  He took a practically verbatim note of the assurance that he was given:
“We will not leave you hanging.  We will absolutely get you the 13.5 % return of principal.”
Mr Chivers said that Enron had done 12 similar deals in Europe and that you:

“absolutely have my commitment.”
In a typed up note of the call of 22nd September 2000 he referred to Mr Chivers as saying:
“…Enron Corporation will not leave RBS hanging out to dry on this deal.  It will ensure that your principal and 13.5% return are paid”
and
“that, insofar as we were prepared to take further comfort “…you have my absolute commitment (as CFO, Enron Europe) to ensure that RBS does not suffer a loss from its equity investment in the ETOL transaction”.
The CBFM Credit Committee
42.	The CBFM Credit Committee met on 20th September.  When it came to the ETOL transaction Ms Milton introduced the proposal and summarised the background.  She said that Project Finance was comfortable given the quality of the underlying project asset and that Loan Syndication gave strong support.  She referred to the fact that the definition of Fair Market Value was under negotiation but explained that as further protection “very strong assurances have been received from Enron that via the auction process governing sale of the equity stake, the Bank will be made whole.” 
43.	Mr Hardy then spoke of the “very structured and hands-on approach [of Enron] to management of its banking relationships” and that it fully recognised the importance of its banks.  He explained that:
“the verbal assurances from Enron have come from a very high level and are unequivocal.  It was emphasised that this is a mechanism with which the group is very familiar, having undertaken 12 transactions in Europe alone.  The Committee was advised that further discussions will be held with the group’s Houston based Treasurer.”  [i.e.  Mr Glisan] 
44.	Mr Donald Workman, who was the Chairman of the meeting, then asked a number of questions and sought to analyse the individual risk components.  He summarised the position by emphasising that there was always an element of concern over heavily structured transactions driven by tax/accounting issues.  But this was a mechanism seen in the market before and there was an underlying asset of very high quality.  The upshot was that the Committee was content with the proposal subject to due diligence and complete satisfaction with documentation.  Mr Workman emphasised that approval should be subject to a satisfactory outcome from the imminent visit to Enron headquarters by Peter Commons and Philip Carraro, Head of Transactions, Group Credit Risk, and on that basis the Committee agreed to recommend the loan and the equity (then contemplated as being £4.35m) to the RBS Group Credit Committee for approval.
The Group Credit Committee
45.	The Group Credit Committee met on Friday 22nd September 2000.  It had before it the CBFM Credit Committee minute and an updated countersignature from Loan Syndications supporting the transaction on the footing that RBS would end up holding debt of £25.6million after syndication.  Mr Robertson was in the Chair.  Ms Milton introduced the submission in respect of ETOL by reference to the CBFM Credit Committee minute.  She again referred to the fact that “very strong verbal assurances had been received from Enron that, via the auction process governing the sale of the equity stake, the Bank would be made whole”.   When Mr Robertson questioned whether there was an element of hidden off balance sheet exposure resulting in higher gearing he was told by Mr Commons that all off and on balance sheet exposure had been aggregated in the credit rating assessment by the rating agencies.  Mr Robertson is recorded as questioning whether a second level of off balance sheet exposure had been created and said that he awaited the findings of Mr Carraro and Mr Commons after their visit to Enron on 25th and 26th September.  It is at this point that the minutes record that:
 “The structure struck the Committee as “21st Century Alchemy”.”  
46.	Mr Robertson raised the “Armageddon” possibility of Enron failing.  At this point the Committee seems to have been under a misapprehension that the bank would have a right over some asset although that misunderstanding was soon corrected.  In summing up the position Mr Robertson said that the transaction stood or fell on the TRS and he was “conscious of the financial engineering involved in the proposal”.  He expressed a preference for a “full stop” position rather than that proposed.  The upshot was that the Committee was sufficiently satisfied to warrant the relationship team continuing to negotiate the terms and working on the deal to which agreement was given in principle subject to the team liaising with Mr Carraro on the sustainability of Enron’s trading performance and to the project team reverting to the Committee in due course.  Mr Robertson later indicated that he was expecting Ms Goss/Milton to revert to him on the outstanding issues.  
47.	After the meeting Ms Milton and Ms Goss sent a memorandum of 25th September to Peter Commons/Christopher Clarke, which was copied to others.  In a paragraph dealing with documentary issues they wrote as follows:
“(ii)	Fair Market Value (FMV) Put Option
In addition to the Enron “promise” to make us whole on the Equity at the end of the transaction, we also have the Fair Market Value (FMV) Put Option, which provides comfort that there is a market in which to dispose of the preference shares.   This must be demonstrated as being an “arm’s length” calculation in order to achieve Enron’s accounting treatment.  We believe that the option will only be exercised in the event that Enron do not bid under the auction process, or where the FMV calculation provides for the value of the shares to be sufficient to make us whole on the Equity.  The calculation of the FMV is detailed below...”
48.	The memorandum then set out a calculation of the value of the Put Option (using the contemplated FMV formula).  This showed that, assuming an Equity of £4.35million, the shortfall, on the base case figures,  between the dividends to be received and the required return was £1.07million; so that the Equity Put was required to cover the equity (£4.35million) plus the £1.07million shortfall, making £5.42million in all, and that there was a shortfall in the Equity Put of £0.74million.  The memorandum commented that: 
“The above illustrates that under basecase economics, based on a valuation of the FMV today, we would not be made whole under the Put Option and highlights our reliance on Enron to make us whole under the auction process”.
49.	In a memorandum of 25th September 2000 to Mr Robertson Ms Milton and Ms Goss provided a calculation of the value of the underlying dividend flows long term, which predicted that assuming that ETOL continued to perform at the same levels as seen historically, then, even in the extreme case of Enron failing during the 3.25 years of the proposed transaction, RBS could expect to receive repayment of the principal in full        (i.e. £145million – Equity and debt) by 2022.  
The visit to Houston
50.	Between 25th and 26th September three RBS representatives – Kevin Howard, Peter Commons and Phil Carraro – visited Enron’s Head Office in Houston.  Kevin Howard was RBS' representative in Houston.  He knew a lot about Enron and spent a large amount of his time dealing with it.  The relationship between him and Enron was very strong.  Phil Carraro was Head of Transactions, Group Risk.  There they met Ben Glisan, Enron’s Treasurer, and several others.  Enron impressed upon them its position as (to quote its Annual Report):
“the consummate innovator because of our extraordinary people.  It is our intellectual capital – not only our physical assets – that makes us Enron”.  
As the Carraro/Commons joint note of the meeting records, Mr Glisan told them that Enron had a very active dialogue with the Rating Agencies and maintained an “open book” to external parties, which should be taken to mean “if you do not ask you will not receive”.   He said that he did not believe that the recognition of income through monetisation represented more than 15-20% of reported earnings at most; the level of on-balance and off-balance sheet obligations was fully disclosed and factored into Rating Agency assessments.  The level of Put Options such as the one contemplated in the ETOL transaction was minuscule in total.  He saw no natural limits to the monetisation activities as further assets continued to be acquired.  He expanded at length on Enron’s philosophy of rotating capital aggressively to monetise activities as a way of making the most efficient use of capital and to protect revenue streams.   
51.	He said that RBS was among the few institutions Enron trusted to execute special deals, placing importance in reliable partners to work hard and understand transactions.   As the note records:
“Finally, Ben assured us that the Put Option being provided in the ETOL transaction is not only a real obligation on the part of Enron in terms of seeing us out, but also at the agreed return.” 
This was said as the meeting was about to conclude.  The authors of that note did not intend to signify (nor did they understand) that Enron was undertaking a binding legal obligation as opposed to what he described as a “commercial assurance” to make RBS whole.  Enron had, however, made plain their commitment to their bankers.  The same note records:
“Enron continue to underline their recognition that the strategy being pursued can only be continued with the co-operation/understanding of its bankers and investors.   As such, we can continue to recognise ‘their word is their bond’ and they would always take every step necessary to avoid lenders/investors suffering losses, notwithstanding the non-recourse of much of their overall obligations.”
52.	It is plain from the memorandum and from subsequent e-mails that Mr Carraro formed, overall, a very good impression of Enron and the responsibility which it claimed to acknowledge of ensuring that transactions worked to everyone’s expectations and of its’ statements that it had demonstrated repeatedly over the years that it had the capacity and resources to fix/mitigate situations.  
53.	On 28th September arrangements were made with Mr Schardin for a telephone call to take place between Mr Robertson and either Andy Fastow or Ben Glisan.  Before that took place Mr Robertson signified his approval to the transaction in an e-mail to Nicola Goss and Sue Milton.   
54.	Mr Robertson's evidence was that Enron’s assurances about making RBS whole were of little if any significance to him because he was more interested in the fact that Enron had given assurances that they would continue to manage the project and put in the necessary resources to continue its successful operation.  His evidence was that at the time of the transaction the ETOL transaction was performing better than expected and he believed that ETOL itself would allow RBS to get its return on its investment when the preference shares were sold at FMV, which would reflect the continuing improvements in performance that ETOL was making.  RZB submit that this evidence is not credible.  Mr Robertson was an honest witness.  He plainly did not regard the assurances as legally binding, although useful.  I see no reason to doubt that he thought that ETOL would do better than the base case forecast although that may have been optimistic.  
The ETOL transaction completes
55.	On 31st October there were two Board meetings of RBSFT.  The minutes of the first meeting record that the purchase of the preference shares in TOHL4 was considered and that “the meeting considered the potential profit for the Company of a sale of the shares and concluded that it was in the Company’s best interests to undertake this trading transaction”.  The minutes of the second record that the two directors resolved that RBSFT should enter into the documents giving effect to the transaction and should issue and allot 149,999,999 £1 shares to RBS.
56.	On 1st November the Facility Agreement, the Share Purchase Agreement, the Put Option and the other transactional documents were completed.  One of those documents was a comfort letter from EEL to RBS by which EEL recognised that RBS’ return on its investment was largely dependent on the profits of ETOL which were distributed on ETOL’s A shares, and agreed that if there was a refinancing of ETOL’s current debt structure EEL would in good faith discuss with RBS ways in which RBS’ return on its investment might not be adversely affected by such restructuring.  The letter said that it was “not intended to, and does not, create any legally binding obligation on out part”.
The Information Memorandum
57.	It then became necessary for RBS to draft an Information Memorandum to be given to potential participants in the syndication of the SCF.  This was a document prepared by RBS which took responsibility for everything except the Summary of Terms and Conditions, which was for Linklaters, the Summary of Enron’s obligations, which was for Linklaters and Slaughter and May, and two items headed “ETOL update (including cashflows)”and “Enron Corp”, which were for Enron, and RBS co-ordinated the completion of the whole.  The documents and in particular the Executive Summary and the Transaction Summary went through several drafts.  In one of the drafts of the Executive Summary (8th November) the opening paragraph read:
“[RBS] has been mandated by [Enron] to arrange and underwrite Project Magpie, a £143.5 million financing in order to enable Enron to realise its economic interest in [ETOL] for US accounting purposes.”
And a later paragraph:
“In order for Enron to achieve a sale of its economic interest in ETOL for US accounting purposes, they must be sold to an independent third party with a minimum capitalisation of 3% equity.”
58.	There was, also, a paragraph, not included in the final version, which read:
“Three per cent of dividend flows is retained by the SPE as its return on equity, and our required return is 13.5%.  At maturity, the SPE is guaranteed a sale of the preference shares via an auction in the first instance and failing that, a Fair Market Value (“FMV”) Put Option, which will be guaranteed by Enron Corporation.”
59.	In another draft of the Executive Summary (9th November) Ms Hoe proposed to omit the words “for US accounting purposes” from the first paragraph, on the footing that it might be sensitive to mention them and to omit the paragraph about the 3% equity on the ground that Enron might not want to say it.  In another draft (10th November) by Ms Goss the first paragraph ended “…its economic interests in [ETOL] in accordance with FASB 125, allowing Enron to obtain the true sale opinion required for sale treatment under US GAAP”.
60.	On 11th November Mr Schardin sent a redraft of the Executive Summary under cover of an e-mail which said that the aim was for it to work more as a marketing document and “to provide a relatively simple info memo that will give the reader a basic understanding of the deal and the risk profile of the Lenders without getting bogged down in the details of the structure”.  
61.	On 22nd November Enron suggested RZB to RBS as a potential Lender and gave RBS the name of Eunice Warren at RZB’s London branch.  This was probably the result of a meeting at EEL attended by Paul Chivers and Eunice Warren, amongst others.  On the same day RBS (Chris Parsons) duly e-mailed her a confidentiality agreement, invitation letter and information memorandum, which Ms Warren forwarded to Mr Stuart-Prince who read the documents.  RZB returned the confidentiality agreement, signed, the next day.
The Invitation Letter
62.	The invitation letter recorded that EEL had mandated RBS to arrange and underwrite a £138,500,000 Structured Senior Credit Facility to enable EEL to monetise its economic interest in ETOL and that the financing structure included a Total Return Swap, which effectively guaranteed the interest, principal and any other amount payable under the Facility.  It invited the recipients to participate in the facility either as Co-Arranger for £20,000,000 or as Lead Manager for £15,000,000.  
The Confidentiality Agreement
63.	In the Confidentiality Agreement, in which the SCF was “the Transaction” and EEL was “the Company”, “Confidential Information” was defined as meaning:
“(a)	all written, oral or computer generated information relating to the Company or the Transaction received by you (the “Recipient”) from RBS or the Company (or any of their Affiliates or any of their respective officers, employees agents or professional advisers) in connection with the Transaction; and 
(b)	any documents or computer generated information produced by the Recipient which contain or reflect any information specified in paragraph (a).”
64.	By clause 2 the Recipient (.e. RZB) undertook to RBS and EEL that it would:
“(a)	keep and safeguard as private and confidential all the Confidential Information; 
(b)	use the Confidential Information solely for the purpose of evaluating the Company with a view to participating in the Transaction; …”
   Clause 5 provided:
“The Recipient [i.e. RZB] acknowledges and agrees that:
(a)	RBS and its Affiliates, officers, employees, agents, and professional advisers 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)	RBS and its Affiliates, officers, employees, agents and professional advisers shall be under no obligation to update or correct any inaccuracy in the Confidential Information or be otherwise liable in respect of the Confidential Information; and
(c)	The Confidential Information is not intended to provide the sole basis of any credit evaluation and should not be considered to be a recommendation that the Recipient participate in the Transaction.”
The Information Memorandum 
65.	At the beginning of the Information Memorandum (“IM”) there was what was headed an “Important Notice” which stated amongst other things:
“..This Information Memorandum (the “Memorandum”) has been prepared from Information supplied by the Company [EEL being defined as the Company].  
The contents of this Memorandum have not been independently verified.   No representation, warranty or undertaking (express or implied) is made, and no responsibility is accepted as to the adequacy, accuracy, completeness or reasonableness of this Memorandum or any further information, notice or other document at any time supplied in connection with the Facility.”
“This Memorandum is being provided for information purposes only and is not intended to provide the basis of any credit decision or other evaluation and should not be considered as a recommendation that any recipient of this Memorandum should participate in the Facility.  Each potential participant should determine its interest in participating in the Facility based upon such investigations and analysis as it deems necessary for such purpose.
No undertaking is given to assess or keep under review the business, financial condition, prospects, creditworthiness, status or affairs of the Company, the Borrower or any other person now or at any time during the life of the Facility or (except as specifically provided in the Facility Agreement) to provide any recipient or participant in the Facility with any information relating to the Company, the Borrower or otherwise.
...
This Memorandum is being made available to potential participants on the strict understanding that it is confidential.  Recipients shall not be entitled to use any of the information contained in this Memorandum other than for the purpose of deciding whether or not to participate in the Facility.  Recipients are reminded that this Memorandum is subject to the confidentiality undertaking signed by them.” 
66.	The Executive Summary stated, inter alia:
“The Senior Credit Facility of £138.5 million that forms the subject of the Information Memorandum (together with an equity investment of £4.9 million) has been arranged for the monetisation of Enron Europe Ltd’s (“EEL”) economic interest in Enron Teesside Operations Ltd (“ETOL”).
Since its acquisition by EEL in December 1998, the economic value of ETOL has increased due to cost savings and operating efficiencies.  For the purpose of monetising this value, The Royal Bank of Scotland plc (“RBS”) was mandated by EEL to set up a special purpose entity, RBS Financial Trading Company Ltd (“RBSFT”), capitalised with approximately 3.5% equity and 96.5% debt, to buy newly issued security, the Class “B” Preference Shares which carry the rights of a dividend stream funded by the interest in ETOL.
RBSFT has also entered into a Total Return Swap (“TRS”) with Enron Corp that effectively guarantees the interest, principal and any other amount payable by RBSFT under the lenders’ Senior Credit Facility.  Therefore, this limited recourse structure results in the lenders taking the credit risk of Enron Corp with no reliance on ETOL.”
67.	The Memorandum then contained a Summary Transaction Diagram which was said to “highlight the main points of the transaction discussed above”.  The diagram showed RBSFT receiving the SCF from the banks and servicing the debt; and receiving the interest, principal and any other amounts payable under the SCF from Enron under the TRS in exchange for 96.45% of the dividends on the preference shares, with 3.55% of the dividends being paid to RBS.  The diagram did not show anything in respect of the link between RBS and RBSFT, so far as the equity was concerned, other than a straight line.  No flow of funds is shown going from Enron to RBS in respect of the equity; nor is any source of income identified for the repayment of the equity or any return other than the funds which were to come into RBSFT through its ownership of the preference shares in TOH4L.   
68.	Section 2 of the Memorandum gave further details of the ETOL monetisation.  Having referred to Enron as the “Equity Investor” it referred to the SCF and explained the terms of the TRS and observed that:
“In this way, the lenders under the Senior Credit Facility effectively look to Enron for payment of principal, interest, commitment fees and other costs and are not exposed to any operational or other risks relating to ETOL”.
69.	Section 3 contained a Summary of the Transaction Structure essentially in the terms set out at paragraphs 4 and 6 of this judgment.  
70.	RZB accepts that the IM falls within the definition of Confidential Information in the Confidentiality Agreement.  
71.	On 27th November there was a presentation to RZB at Enron House by Enron and RBS personnel.  Eunice Warren and Gunter Kreuzhuber of RZB attended as did Mr Stuart-Prince, a Credit Analyst who became responsible for progressing RZB’s proposed participation in the SCF.  This involved a power point presentation containing much the same information as in the Information Memorandum.  
Application to RZB’s London Credit Committee
72.	On 4th December 2000 Mr Stuart-Prince put a substantial submission to the RZB London Credit Committee asking for approval to participate in the syndication for £20,000,000.  His application made it plain that the loan was being viewed as Enron Corp risk due to the security being provided.  For that reason the submission contained an extensive commentary on Enron Corp and details of its financial situation.  It set out six “key risks” the first five of which were said to be mitigated by the TRS and the sixth of which was the failure of Enron itself, which would mitigated by the sale of the preference shares.  The submission strongly recommended participation at the £20million level on the grounds that the transaction “is well structured and all the risks in the structure are effectively guaranteed by Enron Corp”, which was “investment grade” rated “with a stable outlook” and that the Group had a very strong management team.  
73.	On 5th December the London Credit Committee (which only had authority to make recommendations to Vienna) met, with Mr Stuart-Prince in attendance.  It recommended for approval by the Vienna Credit Committee a £20million participation subject to receipt of a satisfactory legal opinion with regard to RZB’s pari passu status in the event of Enron’s liquidation i.e. that RZB would be on a par with other Enron creditors in that event.  Such an opinion was subsequently obtained in the course of the syndication.  Neither the London nor the Vienna Committees had any communication with RBS or any direct information from it.  
The RZB Head Office Credit Committee 
74.	On 7th December Mr Stuart-Prince e-mailed to RZB in Vienna for the Vienna Credit Committee an amended paper in which the proposed participation was £15,000,000.  The paper again referred to the exposure being viewed as Enron risk.  It referred to Enron as an existing client of RZB and said that as at 27th November 2000 Enron had a market capitalisation at US$58.9 billion and that, of the 11 brokers who followed the group, six rated the stock as “Buy”, four as a “Strong Buy” and one as a “Hold”.   
75.	On 11th December RZB’s Head Office Credit Committee met in Vienna.  The participation was approved on condition that best efforts were made to ensure that the final participation was for £10,000,000 (it was – correctly – expected that participations would be scaled down).  On 13th December RZB informed RBS that RZB would commit to £15,000,000 subject to completion of satisfactory documentation.  
76.	On 12th February 2001 RBS notified the syndicate banks of their allocations, that of RZB being £10,000,000.  
The Syndication
77.	The syndication of the Loan was effected by a Syndication Agreement of 23rd February 2001 by which the New Lenders, including RZB, became Lenders under the Facility Agreement of 1st November 2000.  The Syndication Agreement provided that on 28th February 2001 (the Transfer Date) each New Lender should become a Lender under the Facility Agreement with a Commitment (and all the rights and obligations relative to such Commitment) in the amount set out in the Schedule and that the Commitment of the Original Lender’s (i.e. RBS' Commitment) should be reduced to the amount set out in the Schedule and that each New Lender should acquire all the rights and obligations of a Lender in respect of the rights transferred to it.  
78.	Under this agreement RBS’ Commitment became £18,548, 241 and RZB’s Commitment £10,000,000.  RZB paid its £10,000,000 on 28th February 2001.
The demise of Enron
79.	Enron entered into Chapter 11 bankruptcy on 2nd December 2001.  
Misrepresentation 
80.	In order to succeed in its claim RZB must show:
(a)	that  RBS made representations to it;

(b)	that it understood that those representations were being made;

(c)	that such representations were false;

(d)	that it was induced by those representations, or one or more of them,  to subscribe to the Syndication Agreement and thus to lend RBSFT £10,000,000;

(e)	that RBS intended that such representations should induce RZB to enter into the contract; 

(f)	that RZB is not precluded by the terms of certain provisions in the IM and the Confidentiality Agreement and elsewhere (“the Relevant Provisions”) from advancing its claim.  
Making a representation
81.	RZB must show that RBS made to it a statement which amounts to a representation, that is to say a statement of fact upon which RBS was entitled to rely.  Whether any and if so what representation was made has to be “judged objectively according to the impact that whatever is said may be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee”.  MCI WorldCom International Inc v Primus Telecommunications Inc [2004] EWCA Civ 957, per Mance LJ, [30].  The reference to the characteristics of the representee is important.  The Court may regard a sophisticated commercial party who is told that no representations are being made to him quite differently than it would a consumer.   
82.	In the case of an express statement, “the court has to consider what a reasonable person would have understood from the words used in the	context in which they were used”: IFE Fund SA v Goldman Sachs International [2007] 1 Lloyd’s Rep 264, per Toulson J at [50] (upheld by the Court of Appeal at [2007] 2 Lloyd’s Rep 449).  The answer to that question may depend on the nature and content of the statement, the context in which it was made, the characteristics of the maker and of the person to whom it was made, and the relationship between them.  
83.	In the present case the representations alleged are said to be implicit in what was expressly said in the Information Memorandum.  In the case of an implied statement, “the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor’s words and conduct in their context” : ibid.
84.	Silence by itself cannot found a claim in misrepresentation (fraudulent or otherwise).  But an express statement may impliedly represent something.  A possible implication of a statement may be that what has been expressly stated is complete, i.e. covers everything material or relevant on a particular matter such that something which has not been referred to does not exist.  It is, however, necessary to distinguish between what a document does not say and what it impliedly represents.  
85.	The essential question is whether in all the circumstances it has been impliedly represented by the defendant that there exists some state of facts different from the truth.  In evaluating the effect of what was said a helpful test is whether a reasonable representee would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it: Geest plc v. Fyffes plc [1999] 1 All ER (Comm) 672, at 683 (per Colman J).  Further, if the claim is under s 2(1) of the Misrepresentation Act 1967, it is necessary to heed the warning of Rix J that because of the broad measure of damages currently available in the light of Royscot Trust Ltd v Rogerson [1991] 2 QB 297: “where there is room for an exercise of judgement, a misrepresentation should not be too easily found”:  Avon Insurance Plc v Swire Fraser Limited [2000] 1 All ER (Comm) 573 at [200].
86.	It is also necessary for the statement relied on to have the character of a statement upon which the representee was intended, and was entitled, to rely.  In some cases the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it.  Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on.
87.	Lastly the claimant must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it: Arkwright v Newbold (1881) 17 Ch D 301; Smith v Chadwick (1884) 9 App.Cas 187; and that, having that understanding, he relied on it.  This may be of particular significance in the case of implied statements.  
The representations relied on
88.	RZB’s pleaded case (Amended Particulars of Claim, para 60), which has not remained constant, is that four separate representations were made to it by RBS.  Each of them is said to have been made by RBS “in presenting the ETOL transaction to RZB by the Invitation Letter, the Information Memorandum and the Presentation.” These representations (as re-ordered in RZB’s opening submissions) are: 
(a)	that RBS’ equity in RBSFT was “at risk”, in that there was no support for the returns thereon and the repayment of the capital other than as identified in the transactional materials;
(b)	that the manner in which the ETOL transaction was to be unwound at its conclusion, including the price to be paid for the preference shares, was as stated in the materials provided to RZB; 
(c)	that the transaction had the effect actually and legally of ‘monetising’ Enron’s future dividend stream from ETOL, while at the same time retaining Enron’s voting rights, and thus satisfied the accounting principles necessary to be complied with in order to achieve its intended purpose lawfully; and
(d)	there was nothing improper or unlawful about the transaction and the way in which it was to be treated and accounted for by Enron.
The “intended purpose” was that the transaction should be accounted for in the manner which Enron desired to adopt.  Neither the first nor the second representation featured in the original Particulars of Claim of March 2007.  They first appeared in a draft amended Particulars of Claim of January 2008.  
89.	RZB maintains that it can recover in respect of all four representations.  But it relied   principally on the first two of these representations and I shall, therefore, address them first.  
The context 
90.	The context in which the representations are said to have been made had certain key features.
91.	Firstly, the syndication proposed was a syndication of the SCF to RBSFT, and not of the RBSFT equity, which would inevitably rank behind any debt.  Any reader of the IM would realise that its primary purpose was to provide information as to the SCF (“that forms the subject of this information memorandum”), and as to how, by virtue of the TRS, the credit risk was an Enron risk with no reliance on ETOL being necessary.  The complicated ETOL transaction had to be explained in order to show why there was no loan to Enron direct and why the SCF could be regarded as Enron risk.  But the reference to the equity was modest.  
92.	Secondly, RZB and RBS were both sophisticated participants in the syndicated loans market.  Within that market Information Memoranda are commonly used to provide to would-be participants in a given loan a summary of the loan transaction in which they are being invited to participate together with information on the principal credit issues arising in relation to the loan and details of the pricing structure, as the basis upon which potential lenders start their credit process (i.e. the process within the bank by which they decide whether to participate and if so to what extent): see para 10 of the Joint Statement of the Experts and pp 247-8 of “Syndicated Lending – Practice and Documentation , 5th Edition”, of which Mr Rhodes, RZB’s banking expert, is General Editor and an Author.
93.	Thirdly, as any bank would know, exactly what is included in the IM is for the Arranger and the Borrower and their advisers to decide.  The IM is a summary prepared by the Arranger of what it regards as relevant.  Whilst a bank could reasonably expect that the principal credit issues were addressed, it could not reasonably assume that the IM contained everything that anyone might think relevant (even on credit issues); nor that everything relating to what was stated or referred to in the IM had been said, particularly in the case of a part of the overall transaction other than the debt or any security therefor.
94.	In this connection a passage from the cross-examination of Mr Stuart-Prince is material:
“16	Q	In fact it necessarily involves, does it not, a process
17		of selection of information by the borrower and the
18		arranger?
19	A.	Yes.
20	Q.	So far as the arranger's concerned, if you are asking
21		what information he or she is going to put into the
22		document, it contains, doesn't it, necessarily, those
23		things which that arranger, a particular individual
24		within RBS in this case, considered might be relevant to
25		banks being asked to participate?
1	A.	Yes.
2	Q	So the precise information to be revealed will always
3		depend on what that arranger thought was material in the
4		circumstances?
5	A.	Yes.
6	Q.	So if a piece of information is not there, if the
7		document is silent about something, you can't assume,
8		can you, that the only reason it's not there is because
9		it doesn't exist; it might not be there because the
10		arranger didn't think it was material?
11	A.	Yes.
……
17	Q.	…You couldn't possibly assume, could
18		you, that whenever the information memorandum mentioned
19		something, a particular topic, it was necessarily
20		stating everything about that topic fully and
21		completely?
22	A.	No.
23	Q.	Where the information memorandum contains any
24		information at all, it's only going to be that which is
25		material in the mind of the arranger to the subject
1		matter of that information memorandum?
2	A.	Yes.
3	Q.	They won't be seeking to put information which is not
4		actually -- in their view not relevant to that subject
5		matter.  So you don't suggest, do you, that you
6		implicitly understood RBS to be saying to you when this
7		information was presented: take it from us, this
8		information memorandum contains every piece of
9		information which you might think is material to your
10		decision?
11	A.	Correct.
12	Q.	Indeed, you can't have understood, if you thought about
13		it at all, RBS to be representing anything other
14		than: this information is what we believe is material
15		for you to know about?
16	A.	Yes”.
95.	Fourthly, in the syndicated loans market, it was (as Mr Stuart-Prince was aware) standard for the Arranger to disclaim in the IM any responsibility for its contents, and for potential participants to sign a confidentiality agreement under which they would receive information about or relevant to the proposed loan on the basis that the Arranger made no representations or warranties of any kind as to the accuracy or completeness of the information with which they were being provided.  Clause 6 of the Loan Market Association’s standard form of Confidentiality and Front Running Letter for Primary Syndication (referred to in Mr Rhodes' book on Syndicated Lending as “a recommended form document”) provides that the arranger “does not make any representation or warranty, express or implied, as to, or assume any responsibility for, the accuracy of any of the Confidential Information or any other information supplied by us”.  The Confidentiality Agreement is in similar terms.  
96.	Fifthly, banks in a syndication, including the Arranger, will often have pre-existing relationships with the Borrower.  Oral assurances may be given by the customer to his banker and neither these, nor details of the Arranger’s relationship with the Borrower, would be expected to be revealed unless they impacted on the debt being syndicated.  Nor was it to be expected that the returns which RBS anticipated making on the equity (or on the SCF) would be disclosed to other banks.  
97.	Whether any  representations were made has to be decided by reference to the provisions of the IM and the Confidentiality Agreement: IFE Fund v Goldman Sachs International [2007] 1 Lloyd’s Rep 264, 273-274, per Toulson J [70] and [2007] 2 Lloyd’s Rep 449,461 per Gage LJ [67]; JP Morgan Chase Bank v Springwell Navigation Corp [2008] EWCA 1186, per Gloster J [669-670] and [674-5] since, whatever their contractual efficacy, these form an important part of the context in which the representations are said to have been made, and are thus relevant to any inquiry as to what representation a reasonable reader of the IM would regard as having been made.  It is relevant to note that Mr Stuart-Prince in his evidence accepted that he would have understood at the time that the Relevant Provisions precluded the alleged representations being made.  The relevant passage is set out in Appendix 1.  
The first and second representations - what is RZB entitled to contend? 
98.	There is a dispute in respect of the first representation as to what representation RZB is entitled to assert.  The representations put forward in RZB’s opening are as set out in paragraph 88 above.  In para 1 (1) of its closing submissions RZB contended that it was entitled to succeed in respect of the first two representations on the basis that the effect of these two representations was that RBS represented that there was no support for the equity investment in RBSFT.
99.	 RBS contends that RZB has changed its case from the one specified in the list of issues, which had been agreed (so far as presently material) by Memery Crystal for RZB and approved by Tomlinson J on 14th January 2009   The agreed list, which was  later presented to Mr Stuart-Prince and Mr Rhodes, RZB's expert banking witness for comment stated that the first representation was:
“That RBS’ equity in RBSFT was “at risk” (as that term is understood for the purposes of relevant US accounting requirements) in that there was no support for the returns thereon and the repayment of capital other than as identified in the transactional materials.”
And thereby made it clear that “at risk” was being used in the sense in which that expression was used under US GAAP.    The list of issues had been agreed following a letter of Travers Smith, for RBS, to RZB of 19th December 2008 which was expressly intended to clarify that “at risk” in the first representation had a meaning derived from US accounting principles.  
100.	RZB say that they are entitled to rely on their pleadings, in which the “at risk” representation is not linked to US GAAP.  Even though the report of the Commercial Court Long Trials Working Party applicable when the list of issues was drafted indicated that the list should be the basis on which decisions would be made about provision of witness statements and the shape of the trial, the April 2009 version of the Commercial Court Guide made it clear that the list of issues was not intended to supersede the pleadings.  
101.	RBS contends that RZB ought not to be allowed to depart from the list by decoupling the “at risk” representation from its GAAP attachment, so as to enable RZB to argue that the misrepresentation was false, even if the equity was at risk for GAAP purposes.  RZB contends that the reference to “(as that term is understood for the purposes of relevant US accounting requirements)” was not intended to allege a representation that the equity was at risk in accordance with what the court might find the US accounting requirements to be as opposed to a representation that there was no support (which is what para 36.1 of the APOC had alleged was required if the US accounting rules were to be complied with).   
102.	I did not find this distinction convincing.  The list had been amended, at the behest of Travers Smith for RBS, so as to make clear that “at risk” was intended to have a particular meaning related to US accounting principles.  If the representation alleged was simply that there was no support for the equity that could have been plainly stated.  At the lowest, if the position was as RZB claims, the list was confusing.  
103.	It seems to me apparent that when the draft list of issues was approved in January 2009, all concerned were proceeding on the basis that it would be the definitive document.  In the result the pleading says one thing.  The agreed and approved list of issues, which was intended to clarify matters, says another.  RZB seeks to proceed on the basis of the original pleading, relying on a later version of the Guide, and now contends that the “List of Issues erroneously introduces a gloss on the first representation”.  It also contends that the gloss was simply a reference back to what it had always said namely that the equity was at risk meaning that there was no support.  This state of affairs is manifestly unsatisfactory.  (It also illustrates the difficulty of discerning what exactly, if anything, was impliedly represented).  Nevertheless it seems to me that RZB is entitled to rely on what their pleading alleges.  I am satisfied that that can be done without injustice to RBS.
The first representation – was it made?
104.	RZB contended in its written closing submissions that the statement in the IM that RBS had equity necessarily implied (as an inherent characteristic of equity) that it was an “unsupported investment without any certainty of repayment and without any certainty of any particular rate of return and that it is last in line to be repaid”; and that since the IM shows no support from Enron under the TRS it implicitly represented that no such support existed.  
Characteristics of equity
105.	I do not accept that the assurances given by Enron to RBS meant that RBS’ investment in RBSFT was not equity, or not true equity.  RBS acquired all the RBSFT share capital.  It enjoyed vis-à-vis RBSFT rights only as a shareholder.  It could not recover from RBSFT any part of its capital until after payment by RBSFT of its debts.  RBS had a “promise” from Enron that, to the extent necessary, Enron would see that RBS was made whole i.e. received all its capital back plus a 13.5% p.a. return.  Such an arrangement, even if contractual, would not mean that RBS’ holding in RBSFT was anything other than equity.  As it is, the “promise”, in my judgment, came as close as possible to, but was not, a contractual undertaking: see paras 139-148 below.  So it would not rank for any payment in Enron’s bankruptcy.  Nor could the equity properly be classified as a loan to or a debt owed or guaranteed by Enron.
106.	RZB suggested that the character of RBS’ equity investment in RBSFT was shown by RBS’ own accounting treatment of the equity as debt.  RBS did not account for its equity in RBSFT as a loan.  Mr Hing, Chairman of RBSFT as well as RBS' Director of Business Support Structured Finance, set out the position in a letter to Ms Goss of 1 November 2000.  The equity in RBSFT was to be accounted for as equity in the accounts of RBS.  In the RBS group accounts RBS’ equity is effectively ignored because RBSFT is consolidated within the group.  The group accounts address the transaction insofar as it resulted in dealings outside the group – i.e. the acquisition of the preference shares.  RBS was to account for this aspect of the transaction as a loan, on the basis that the economic substance of the acquisition of the preference shares was best characterised in that way, rather than an equity purchase as the TRS covering 97% of the investment in the preference shares effectively gave RBSFT certainty that there would be fixed loan returns on those shares.   
Suppressio veri, suggestio falsi?
107.	The next question is whether the references to RBS’ £4.9m equity (without saying any more about it) and to Enron’s effective guarantee of the loan (by virtue of the TRS), and the absence of reference to any source of repayment of the equity or any return on it other than the dividend on the preference shares and the proceeds of their sale, necessarily implied that there was no support from Enron in the sense that RBS had no promise or assurance from anyone of any kind that it would get its capital back or achieve any given rate of return.  Put more simply, did the IM necessarily imply that RBS was in the same position as a standard holder of equity who looks to the company alone to repay his equity to him?   
108.	I am not persuaded that a reasonable reader of the IM in the position of RZB would conclude that RBS was making a representation to that effect.  Such a reader might assume that that there was no support, since the IM contained no reference to anything supporting the equity.   But, I do not accept that he would have understood that that was what RBS was necessarily telling him or that, if there was such support, he would necessarily have been informed of it.  
109.	There are a number of reasons why he would not necessarily have been so informed: 
(i) 	the principal subject matter of the IM was the debt, and credit issues relating to it.  It was not the function of the IM to describe the nature of the equity risk, which had no impact on the debt.  

(ii) 	the reference to the equity was minimal – to the effect that RBS had equity in RBSFT, which provided 3.55% of its total capital (loan and equity), and was entitled to 3.5% of the ETOL dividend stream - and was there to show putative lenders how they were acquiring Enron risk and were thus not exposed to any operational or other risks relating to ETOL.

(iii) 	details relating to the equity and the return thereon, were, or, at the lowest, could reasonably be thought to be, of no material interest to a lender to RBSFT against an Enron guarantee.  A lending bank would not ordinarily be looking to an IM to inform it as to the level of risk which another bank was taking in respect of the equity;  

(v) 	it was inherently possible that the IM, a summary document directed to credit issues, would not contain information about any support for the equity because the Arranger and its customer did not think it was of relevance to potential lenders.  The reader could not assume he was being told everything that he might think it relevant to know about the equity;

(vii)	the arrangements in relation to the equity were bilateral as between RBS and Enron.  Bilateral arrangements between an Arranger and the Borrower, which are not uncommon, are generally understood to be confidential (see the evidence of Mr Rhodes: Day 16/17-21).  This applies to arrangements in respect of the return in respect of the debt (thus fees are always dealt with by a side letter) and would apply, a fortiori, in relation to any return on the equity.  The return which RBS might be expected to get on the equity was (as Mr Stuart-Prince recognised) a commercial matter confidential to RBS.  Mr Rhodes would not have expected the anticipated returns to be disclosed unless RBS believed that they impacted on Enron’s accounting treatment (which RBS did not believe) or on the debt.

(viii)	It was Mr Rhodes’ view that an oral assurance would only be of concern if it related to a material matter, which he defined as being something that would appear in the term sheet which would be submitted to the banks as part of the invitation to join the transaction.  But he also accepted that he would not expect to see anything relating to the equity in the term sheet.  
110.	That no representation of an absence of support was impliedly being made is underscored by the terms of the IM and Confidentiality Agreement.  Regardless of any question of contract or estoppel these indicated to the banks to whom they were presented that no representation express or implied was being made as to the accuracy or, most importantly, completeness of the information.  Even express statements are not to be treated as representations “where, having regard to all the circumstances it is unreasonable of the representee to rely on the representor’s statements rather than his own judgement” – Chitty, 30th Ed, para 6-012; and the case of implied statements is a fortiori.   In the light of the Relevant Provisions it was not reasonable for RZB to assume that a “no support” representation was impliedly being made.  
111.	The meaning of “no support” is, in any event, unclear.  If, as RZB contends, it means that there was no support of any kind it is extremely wide.  The representation would be falsified if RBS had any arrangement with anyone which would or might provide it with any compensation if the value of the shares fell or was not realised or any particular rate of return was not achieved.  If the scope of the implied representation is to be narrowed the ambit of the reduction is not clear.  “No support” could signify no contractual undertaking or something different.  If it means the former, which would be consistent with the sense in which RBS used the expression “support” in relation to the Sutton Bridge transaction (see para 23 above), there would have been no misrepresentation.  This elasticity of possible meaning is a factor against regarding the representation that there was “no support” as necessarily implied.  
The second representation – was it made?
112.	RZB’s claim in respect of the second representation is bound up with its claim in respect of the first.  Their combined effect is said to amount to a representation of “no support” which for the reasons I have stated I reject.   
Mr Stuart-Prince’s understanding of what was being represented
113.	In order to succeed RZB must show that it understood that the first and second representations had been made.  The only direct evidence as to what RZB understood to be being represented is that of Mr Stuart-Prince.  He was shown the list of issues (which contained the representations that RZB’s lawyers had formulated) and in para 74 of his witness statement he said that he had been asked to comment on them.  He did not state in terms that he understood the representations now relied on to have been made.   
114.	In his cross-examination he was asked this:
24   Q.   Is it your evidence, sitting here today -- I know it's
25       a long time ago now -- but is it your evidence sitting
 1       here today that you actually recall understanding during
 2       the syndication process of the ETOL transaction, that
 3       RBS actually made statements to you on which you then
 4       relied, in recommending this transaction, as opposed to
 5       you making assumptions about Enron and the transaction
 6       yourself?
 7   A.   From my recollection of the process, they made
 8       statements to us that effectively gave us additional
 9       comfort that the transaction was in accordance with --
10       was lawful and everything was above board.   
11   Q.   So let me just understand: again, from your
12       recollection, what it is you say the substance of the
13       statements you understood RBS to be making to you were?
14       What you just said was something along the lines of --
15       I can read it back to you.   What you said was they made
16       statements that effectively gave you comfort the
17       transaction was in accordance with -- was lawful and
18       everything above board.   Is that what you are saying you
19       understood RBS to be telling you?
20   A.   Yes.
21   Q.   Is that it?
22   A.   Yes.
23   Q.   There was nothing else you understood them to be saying
24       to you at the time?
25   A.   No.” 
115.	He was asked the following question about clause 5 (a) and (b) of the Confidentiality Agreement and said:
“23 Q.	Reading those clauses, you would have understood at the
24	time, would you not, that RBS was expressly telling you
25	that it was not making any statements on which you could
1	rely in relation to the information supplied?
2    A.	Yes.”
116.	His later evidence was to a similar effect:
“19   Just to round off a point, which I think I know what
20    you are going to say, can you go back to bundle A2/84.
21    If you could read paragraphs – well actually, first of
22    all, can you take the other document, the hand out
23   document.   I think you have already said to me that the
24   only representation you now think you would have been –
25  you had heard RBS to be telling you implicitly was as to
1    the lawfulness of the transaction generally.
2  	A.   Yes.
3 Q.   So can we take it that none of the other representations
4       suggested here are ones which you can now recall you
5       understood to be made at the time and relied upon?
6   A.   Yes.
7   Q.   That’s correct, and you have looked at the various –
8         the four representations?
9   A.   Yes.”  
117.	I do not accept that, in the passage quoted in para 114 above (including the words “they made statements to us that effectively gave us additional comfort”) Mr Stuart-Prince was saying that he understood that RBS was making all four of the representations relied on and that those four gave RZB comfort.  He was explaining what statements he understood RBS to be making to RZB as appears from what he was asked at lines 11-25 and from the passage cited at para 116.  There are, moreover, two further passages in his cross-examination (Day 2/52:13-23 and 78:19 to 79.19) where he agreed that his previous answers had been to the effect that he only understood RBS to be telling him one thing namely that the transaction was lawful and proper.  
118.	In re-examination he was asked this: 
“24   Q.   Mr Zacaroli put to you, statements from a list of issues
25       and asked you whether you thought that that statement
1       was being made to you.   I want to ask you to look at
 2       60.2 and ask you whether as a result of your reading the
 3       information memorandum and the other things you referred
 4       to in your witness statement, you thought 60.2, whether
 5       60.2 accurately sets out your thinking?
 6   A.   Yes.
 7   Q.   Can I ask you the same question about 60.3?
 8   A.   Yes.
 9   MR JUSTICE CHRISTOPHER CLARKE:  The question that you were
10       asked was whether those two sentences, or parts of
11       sentences, set out your thinking?
12   A.   Yes.
13   MR JUSTICE CHRISTOPHER CLARKE:  So are you saying that that
14       is what you assumed, or that that is what you were told?
15       Or that is what you thought -- I mean, what are you
16       saying?
17   A.   Well, I assumed that both of these were correct.
18   MR JUSTICE CHRISTOPHER CLARKE:  Right.
19   A.   From the information memorandum provided.
20   MR JUSTICE CHRISTOPHER CLARKE:  Right!.
119.	The evidence down to line 8, given in response to leading questions, goes some way towards suggesting that he understood the representations pleaded to have been made.  But the passage taken as a whole and in context (namely that Mr Stuart-Prince was alive to the distinction between making an assumption and impliedly being told something and accepted that he was only being told what the Arranger thought it material to state in a memorandum relating to the debt, any arrangements in relation to return on the equity or on the loan transaction being confidential) does not, in my judgment, establish that he understood that RBS was actually making those representations.   
120.	In any event I prefer to base myself on Mr Stuart-Prince’s answers to more open ended questions (and his repeated confirmation of his original answers thereafter), which are consistent with his evidence that he appreciated that the IM was not seeking to provide information in relation to RBS’ equity and would not have expected RBS to tell the banks anything about the return thereon.  
121.	In short, RZB has not established on the balance of probabilities that it understood RBS to be making the first or second representation to it.
The third and fourth representations
The fourth representation – was it made?
122.	The fourth representation relied on, which it is convenient to take first, is that:
“there was nothing improper or unlawful about the ETOL transaction and the way in which it was to be treated and accounted for by Enron”.
123.	No such statement is contained expressly in the IM, as Mr Stuart-Prince acknowledged.
124.	There is a history to the development of this allegation.  A representation in these terms was included in the original Particulars of Claim dated 14 March 2007.  In December 2008, after Travers Smith for RBS had asserted the impossibility of such a representation being implied, the representation was amended so as to read:
“to RBS’ knowledge there was nothing improper or unlawful about the ETOL transaction...” 
125.	It was this formulation which appeared in the List of Issues approved by Tomlinson J at the CMC on 14 January 2009.   It was only by an amendment made in September 2009 that the original formulation was re-introduced (so that the representation was, once again, that there was objectively nothing improper or unlawful about the ETOL transaction or the way in which it was to be accounted for).
126.	I do not accept that by the IM RBS was impliedly representing that the transaction was legal and that the way in which it was proposed to be accounted for was neither improper nor unlawful.  No bank receiving the IM would reasonably understand that that was what RBS, as Arranger, was representing to them.  Assurances as to the legality of a transaction or any matter related to it are, in this field, obtained by legal opinions from lawyers with expertise in respect of the relevant laws (not, so far as presently relevant, English) who accept professional responsibility and liability for what they represent to those to whom their opinions are addressed.  Assurances in respect of compliance with relevant accountancy rules, principles and standards are obtained, if required, from an accountancy expert.  An arranging bank would not regard itself as giving, nor would a bank reading the IM (which does not refer to the accounting treatment proposed), reasonably regard itself as receiving, a representation that as a matter of objective fact the ETOL transaction and the method of accounting for it was lawful and proper in all respects.
127.	Mr Stuart Prince’s evidence made clear that he did not understand RBS to be making any such representation.  The most that he could have thought at the time was to assume that RBS did not believe that the transaction failed to comply with GAAP and that RBS did not believe that there was anything unlawful or improper about it.  
128.	I hold, therefore, that the fourth representation was neither made nor understood to have been made.  
The third representation – was it made?
129.	The third alleged representation is as follows: 
“The transaction had the effect actually and legally of monetising Enron’s future dividend stream from ETOL while at the same time retaining Enron’s 50% voting rights and thus the transaction satisfied the accounting principles necessary to be complied with in order to achieve its purpose lawfully.”
130.	The basis on which this representation is said to have impliedly been made arises from section 2 of the IM where under the heading “ETOL  Monetisation” there is a passage which reads:
“EEL and certain of its subsidiaries entered into a series of transactions on 1 November, 2000 … whereby it achieved a monetisation of its future dividend stream from ETOL, while at the same time retaining its 50% voting rights.”
RZB contends that the ‘monetisation’ here referred to was “clearly intended to refer to a monetisation which complied with the relevant accounting principles”.
131.	I accept Mr Zacaroli’s submission that in order to make good that submission RBS would need to establish (a) that “monetisation” means the recording of the sale of preference shares in the books of Enron as a profit, without accounting for the amount borrowed under the SCF as an obligation;  (b) that “monetisation had been achieved” implied that the recording of the transaction in this way was or would be fully compliant with US GAAP; and (c) that because this phrase appeared in the IM, RBS made an actionable representation to RBS to this effect.
132.	I do not accept that RZB can surmount any of these hurdles.  As to the first “monetisation” is not a technical term, much less a technical accounting term.  It meant turning the value of the future dividend stream from ETOL into cash, an aim which was achieved on or shortly after 1st November 2000.  
133.	That was how Mr Stuart-Prince (and other witnesses) understood it as appears from his evidence at Day 2/39:12 – 40:24 and also from the following passage:
16   Q.   Can I ask you, what did you understand when you read it,
17       by the statement " ...  whereby it achieved monetisation
18       of its future dividend stream from ETOL"?
19   A.   i.e., that the structure that had already been put in
20       place by RBS and funded by RBS, effectively achieved the
21       monetisation that had been the purpose of the deal.
22   MR JUSTICE CHRISTOPHER CLARKE:  What does that mean?
23   A.   Well, that they'd managed to get the -- they got the
24       money out early from an asset that they didn't want to
25       sell.
He did not understand it to refer to the way in which the transaction was recorded in Enron’s accounts – not least because the accounts in which the transaction would be recorded were those for the year ending 31st December 2000, a date after the monetisation was said to have been achieved.  
134.	As to the second hurdle, I do not accept that RBS should be taken as impliedly making any representation about compliance with US GAAP for the same reasons as apply in respect of the fourth representation.  As to the third hurdle, on RZB’s construction the disclaimer in the IM and the Confidentiality Agreement applies (but only applies) to information supplied by third parties.  Information about compliance with US GAAP could only come from a third party.  In the light of that disclaimer a reasonable banker would not understand RBS to be making any such representation.   
135.	In any event Mr Stuart-Prince did not understand this representation to be being made to him.
136.	In those circumstances RZB has not made good its case in respect of the third and fourth representations.
Alleged falsity of the first and second representations
137.	RZB contends that the first and second representations were false because there was support for the repayment of the equity and for payment of a fixed return other than as identified in the transactional materials, so that RBS’ investment in RBSFT “was no longer equity at all but a loan”.
138.	In determining whether the alleged representations were false it may be relevant to determine whether the assurances given by Enron were intended by the parties to be legally binding.  If they were they would give rise to legally enforceable obligations on the part of Enron to make RBS whole, which could be enforced by judgment and execution, or the invocation of applicable insolvency processes.  If they were not, whether the assurances were honoured would depend on whether Enron decided to honour them.  The risks inherent in accepting the two different types of undertaking are significantly different, as any banker would appreciate.  If the assurances were not legally binding RBS ran the risk not only that Enron could not pay (at the time thought to be a very remote contingency) but, also, that for whatever reason (whether a change of mind, management or fortunes) it decided not to, in which case RBS would be left with nothing (not even a dividend).   
Were the assurances legally binding?
139.	I have come to the clear conclusion that both Enron and RBS intended and understood that Enron’s assurances were not to be legally binding obligations and that they did so because, if they were, the accountancy treatment which Enron intended to adopt could not apply.  Enron made clear to RBS that the accounting position was such that there could not be a legally binding agreement.  For Enron then to have given RBS a legally binding assurance (even one which in practice would be dealt with dehors the courts: see Coastal (Bermuda) Petroleum Ltd v VTT Vulcan Petroleum SA (No 2) [1994] 2 Lloyd's Rep 629) would have undermined the purpose of the transaction and denied Enron the very benefit which it was designed to secure.  It was for that reason that, from the start, Enron’s “promise” was referred to in inverted commas as had been the case in respect of the Sutton Bridge transaction: see the memorandum of 25th June 1999 referred to at para 18  above (“There was to be no Enron support for this equity or source of any dividend cashflow.  Instead we would have to rely on a ‘promise’ by Enron to unwind the deal to redeem the equity and provide an equity return...”).  The ETOL transaction was modelled on the Sutton Bridge transaction and the understanding that there could be no legal right against Enron in respect of the return on equity continued to apply.   
140.	RBS’ understanding that Enron’s assurance in relation to the equity could not give rise to any legal obligation was confirmed by the evidence of many witnesses (e.g.  Ms Goss, Ms Milton, Mr Hardy, Mr Houston, Mr Robertson, Mr Sach, Mr Taylor, Mr Workman, Mr Parsons, Mr Gee, Mr Jameson, Mr Pettifer, Mr Clarke, Ms Milton, Mr Commons, together with Ms Hoe of Linklaters).  I accept that that understanding was genuine and that it was held at the time.  Much of the evidence is helpfully set out in Schedule A to RBS’ closing submissions.  RZB submits that these witnesses were expounding, mantra like, a party line which does not reflect what they thought at the time but is something of which they have now persuaded themselves.  I disagree.  
141.	Some of the documentation refers to the fact that Enron’s “promise” could not or would not be documented or that the arrangement would be informal or could not be formal.  That gave rise to some debate with the witnesses as to whether the absence of documentation or of any formal arrangement arose because there was no contractual assurance, or because there was one but its existence could not be publicly revealed.  RZB relies on the legal truisms that an oral agreement can be binding and a written agreement can be non-binding.   Some of the witnesses, of whom Ms Goss was the most notable example, whilst constrained to accept that an oral agreement could be binding, did not readily grasp the notion in this context of an oral binding contract.  I did not regard this as feigned.  In a tax context Mr Taylor, RBS’ Senior Tax Consultant, regarded “undocumented” and “non contractual” as going hand in hand.
142.	The significance of an absence of documentation will vary according to the circumstances.  The syndicated loans market is a documented market.  In that context RBS (and I have no doubt Enron and others) would naturally, and in this case did, regard that which was unwritten as non-contractual.  If something was intended to be legally binding, it would be embodied in the formal arrangement of a written agreement (or the like); if it was not intended to be binding, it would be an informal arrangement and not contained in any document.  Exceptionally, the documentation could state that it was not to give rise to legal obligations.  Thus, when the draftswomen of the Credit Application of 10th August 2000 said that Enron’s “desired accounting treatment does not permit any formal arrangements to be made” they were not saying that there would be a legal obligation but that it could not be put down in writing.  They were saying that there would be no legally binding obligation.  
143.	The assurances that were given (more than once) were given in very strong terms and at a very high level.  They were intended to be relied upon, and were relied upon, as a means (so it was hoped and expected) of ensuring that RBS would get the required return.  In a different context there would be no difficulty in inferring that they had been intended to have contractual effect, particularly given that the words used were words of promise in a business setting.   In the present context, for the reasons already stated, it was important that they should not have contractual effect.  For that very reason it was desirable that they should be given in terms as absolute, and at a level as high, as was possible; so that, although the assurances were not contractual undertakings, they were the next best thing.   In that way the likelihood of Enron reneging on them was reduced.  Several RBS witnesses regarded it as unthinkable for Enron to walk away from such assurances and something which would impact very badly on its strategy for dealing with banks.  That was how relationship banking – in which oral assurances are not uncommon - worked.   It is clear from the terms of the Credit Application (see para 7.2) that RBS’ reliance was on its relationship with Enron.  It is also clear from the evidence of Mr Hardy that he did not regard what Mr Chivers said to him on 20th September 2000 as a legally binding promise (“the very point of this transaction was that any support from Enron to the bank could not be binding”).   
144.	RZB submits that, if the assurances were genuinely intended not to be legally binding, they could have been contained in a comfort letter such as the one in the transaction bible (see para 56 above), which was expressed not to be legally binding.  It submits that the assurances were deliberately left undocumented lest their existence be revealed to the auditors or the US authorities; and that a letter of comfort stating that the assurances were not legally binding would have been useless to RBS because such a letter would have deprived it of the ability to enforce the obligation if it ever became necessary to do so.  There is, it submits, no other sensible reason why the assurances were undocumented.
145.	I do not accept this.  Whilst RBS would, no doubt, have forcefully urged Enron to stand by its strong assurances, it was not contemplating that it would sue on them.  It did not fail to have them embodied in non-binding form in a comfort letter in order to preserve the option of bringing suit.  I do not find it particularly surprising or suspicious that RBS, which was   depending on a relationship assurance from a major client, whilst keeping a careful note itself, did not regard it as essential for the client to write it down; or that, as matters progressed, it did not occur to RBS to include it in a comfort letter.  
 A change of gear?
146.	RZB contends that even if the assurances were not legally binding from the time that they were given, they were unarguably so from 20th September 2000 onwards as a result of developments which arose in the second half of September in relation to the potential tax treatment of the transaction.  I disagree.  The nature of those developments and my conclusions are set out in Appendix 2.
The first representation – falsity?
147.	RBS submits that, in those circumstances, even if the first and second representations were made, they were not false.  
148.	Given that I have determined that no representation of the type relied on was impliedly made (or understood to have been made), there is a degree of artificiality in determining, in the alternative, whether any such representation was false.  For the purposes of an alternative finding it seems to me that I should, in the first instance, assume that the first representation made was exactly as pleaded namely that RBS' equity in RBSFT was at risk in that there was no support for the return thereon and the repayment of the capital other than as identified in the transactional materials.  This representation, as RZB was keen to point out, has “nothing to do with the requirements of US GAAP”.  
149.	So far as the test of falsity is concerned I respectfully adopt the analysis made by Rix J in Avon Insurance v Swire Fraser [2000] 1 All ER (Comm) 573, [17].  It is not necessary for what was said to be entirely correct, provided it is substantially correct, and the difference between what is represented and what is actually correct would not have been likely to induce a reasonable person in the position of the claimant to enter into the contract.  The claimant must show that the difference between what was represented and the truth would have been likely to induce a reasonable person in its position to enter into the contract.  
150.	Applying that test it seems to me that the first representation was substantially correct.   RBS had no contractual rights in respect of the equity.  Whilst it was not correct to say that there was no support for the equity, if “support” is to mean any form of assurance, the equity was in fact at risk.  If RBSFT could not repay the equity and Enron chose not to (as it was entitled to do) RBS would lose it all.  Insofar as it is necessary to consider the position of a reasonable bank in the position of RZB, I am not persuaded that such a bank, which would have agreed to take a £10,000,000 participation in the Senior Credit Facility if there was no Enron assurance to RBS at all, would not be prepared to do so if RBS was the beneficiary of a strong but non-binding assurance.  RBS' equity would still be at risk.  Accordingly RZB has not established to my satisfaction the falsity of the first representation if it was in the terms pleaded.  
151.	That analysis assumes that the gist of the representation is that the equity was at risk.  In the course of submissions it became apparent that RZB sought not merely to decouple the first representation from any link to US GAAP but also from the expression “at risk”.  In essence, RZB submitted, the representation was simply that there was no support of any kind (that being the meaning of “at risk”).  If that was the representation, it was false.  
The second representation – falsity?
152.	The second representation alleged is that the manner in which the ETOL transaction was to be unwound at its conclusion, including the price to be paid for the underlying shares was as stated in the materials provided to RZB.  The transaction bible included the Put Option, which specifies a price (the lower of FMV and Book Value), and the Articles of Association of RBSFT, which provide for the Auction Process, which specifies a minimum auction price of the lower of those two values.  The ETOL transaction was likely to be unwound either by the Put Option, which RBSFT would be entitled to invoke, or by Enron using the Auction Process to make RBS whole, or possibly by a private sale of the preference shares.  A supplement to the IM of November 2000 stated that at transaction maturity RBSFT was free to dispose of the preference shares to a third party who was not a competitor of Enron.  In those circumstances it does not seem to me that the alleged representation as to the manner in which the transaction would be unwound, taken on its own, was in substance false.  The representation on which RZB seeks to found is the one that I have rejected viz that there was no support for the equity and the second representation needs no separate life of its own.
Inducement – the Law 
153.	The authorities establish the following:
(a)	A claimant who seeks to claim damages for misrepresentation must show that the representation in question played a real and substantial part in inducing him to enter into the contract in question; 

(b)	But it is not necessary  for him to prove that the representation was the sole inducement to his decision or that it played a decisive part; 

(c)	It is not, however, sufficient for him to show merely that he was supported or encouraged in reaching his decision by the representation in question.  
See Dadourian v Simms [2009] EWCA Civ 169 at paras 99 and 100.  
154.	Thus, in Edgington v Fitzmaurice (1882) 29 Ch Div 459 the directors of a company issued a prospectus inviting subscriptions for debentures, which stated that the object of the issue of debentures was to develop the trade of the company, which ran a provision market in Regent Street,  in the direct supply of cheap fish from the coast.  The real object of the loan was to enable the directors to pay off pressing liabilities.  The plaintiff advanced money on some of the debentures under the erroneous belief that the prospectus offered a charge upon the property of the company, and stated in his evidence that he would not have advanced his money but for such belief, but that he also relied upon the statements contained in the prospectus.  The Court held that the directors were liable to the plaintiff in damages for deceit.
155.	Cotton LJ said (page 481):
“...It is true that if he had not supposed he would have a charge he would not have taken the debentures; but if he also relied on the misstatement in the prospectus, his loss none the less resulted from that misstatement.  It is not necessary to show that the misstatement was the sole cause of his acting as he did.  If he acted on that misstatement, though he was also influenced by an erroneous supposition, the Defendants will be still liable...”
156.	At page 482, Bowen LJ said:
“…when you have proved the statement was false, you must further show that the plaintiff has acted upon it and has sustained damage by so doing: you must show that the statement was either the sole cause of the plaintiff’s act or materially contributed to his so acting.”
and at page 483:
“[Counsel] contended that the Plaintiff admits that he would not have taken the debentures unless he had thought they would give him a charge on the property, and therefore he was induced to take them by his own mistake, and the misstatement in the circular was not material.  But such misstatement was material if it was actively present to his mind when he decided to advance his money.  The real question is, what was the state of the Plaintiff's mind, and if his mind was disturbed by the misstatement of the Defendants, and such disturbance was in part the cause of what he did, the mere fact of his also making a mistake himself could make no difference...”
157.	 In JEB Fasteners v Marks Bloom & Co (a firm) [1983] 1 All ER 583, Donaldson LJ observed:
“… In real life decisions are made on the basis of a complex of assumptions of fact.  Some of these may be fundamental to the validity of the decision.  “But for” that assumption, the decision would not be made.  Others may be important factors in reaching the decisions and collectively, but not individually, fundamental to its validity.  Yet others may be subsidiary factors which support or encourage the taking of the decision.   If these latter assumptions are falsified in the event, whether individually or collectively, this will be a cause for disappointment to the decision taker, but will not affect the essential validity of his decision in the sense that if the truth had been known or suspected before the decision had been taken the same  decision would still have been made.”  
158.	Stephenson LJ said this:
“But, as long as a misrepresentation plays a real and substantial part, though not by itself a decisive part, in inducing a plaintiff to act, it is a cause of his loss and he relies on it, no matter how strong or how many other matters which play their part in inducing him to act….  And it is only because the judge complicated the matter by introducing what would have encouraged for what did induce, and so finding reliance where no true reliance was, that he has given counsel for the plaintiffs any real ground for appealing his judgment that the defendants did not cause the plaintiffs loss.” 
(Bold is Stephenson LJ’s emphasis).
Real and substantial part – meaning.
159.	In Avon Insurance v Swire Fraser Ltd [2000] 1 All ER (Comm) 573 Rix J derived from JEB Fasteners the distinction between a factor which is observed or considered by a plaintiff or even supports or encourages his decision, and a factor which is sufficiently important to be called a real and substantial part of what induced him to enter into the transaction.  
160.	There is a potential ambiguity in the expressions “real and substantial part” (which is sufficient) and “a decisive part” (which is unnecessary), in that the word “part” does not of itself make clear whether (a) it is necessary that the representation should have been a cause of the making of the relevant contract in the sense that, without it, the relevant contract would not have been made (even though the contract would not have been made without other representations or assumptions as well); or whether, without that being established, (b) it is sufficient that the representation was one of the several matters that led to the making of the decision to contract: see, in this respect, the observations of Warren J in Dadourian, paras 544-6.  The difference between the two formulations may be critical when X enters into a contract in the light of several factors whose importance, and relative importance, to him is debatable.  
161.	A similar ambiguity appears in relation to the expression that the representation must have been “actively present” in the mind of the representee – which on its own would cover a spectrum from encouraging factor to sole cause of the representee entering into the contract.  
162.	In this context it is, in my judgment, necessary to remember,  as the authorities to which I have referred show, that the representation must play a causative part in inducing the contract and, as will appear, that involves “but for” causation.
“But for” causation
163.	In Assicurazioni Generali SpA v Arab Insurance Group [2003] 1 All ER (Comm) 140 the claimant reinsurer retroceded certain risks to the defendant.  One of the grounds on which the defendant claimed to be entitled to refuse to pay was that the claimant had misled the defendant by a misrepresentation that Munich Re was a participant in all sections of the relevant policy.  A majority of the Court of Appeal held that the judge was entitled to conclude that the defendant would have entered into the contract whether Munich Re was a participant or not.  In determining whether an insurer or reinsurer was induced to enter into the contract the court would not embark on the exercise of finding the decisive or main reason but any misrepresentation would have to be an effective or a real and substantial cause of the decision to enter into the contract.   
164.	In paragraph 59 Clarke LJ, as he then was, said:
“It seems to me that the true position is that the misrepresentation must be an effective cause of the particular insurer or reinsurer entering into the contract but need not of course be the sole cause.  If the insurer would have entered into the contract on the same terms in any event, the representation or non-disclosure will not, however material, be an effective cause of the making of the contract and the insurer or reinsurer will not be entitled to avoid the contract.  Thus I agree with Sir Christopher Staughton, whose judgment I have seen in draft, that, in this context at least, causation cannot exist when even the ‘but for’ test is not satisfied...”
165.	In his judgment Sir Christopher Staughton said:
“86 … I conclude that the representation as to the participation of Munich Re did not induce the participation of Arig on the terms which they agreed to.  
187  In reaching that conclusion I have had regard to the classic speech of Lord Mustill in Panatlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (1995) 1 AC 501 at p549, and I hope that I have followed it.  A misrepresentation or non-disclosure which did not make any difference, in the sense that the underwriter would have agreed to the same contract on the same terms if it had never been made, cannot be an inducement.  Benjamin Franklin once wrote that for want of a nail a shoe was lost; for want of a shoe the horse was lost; and for want of a horse the rider was lost (Poor Richard’s Almanac).   But in my view, causation cannot in law exist when even the "but for" test is not satisfied.” 
166.	In paragraph 62 Clarke LJ summarised the relevant principles of inducement in the context of that case in this way: 
“(i) 	In order to be entitled to avoid a contract of insurance or reinsurance, an insurer or reinsurer must prove on the balance of probabilities that he was induced to enter into the contract by a material non-disclosure or by a material misrepresentation.
(ii)	There is no presumption of law that an insurer or reinsurer is induced to enter in the contract by a material non-disclosure or misrepresentation. 
(iii)	The facts may, however, be such that it is to be inferred that the particular insurer or reinsurer was so induced even in the absence of evidence from him.  
(iv)	In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did.  He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms.  On the other hand, he does not have to show that it was the sole effective cause of his doing so.”
167.	At paragraph 78, Clarke LJ commented on the judgment of Ward LJ:
“...I agree with Ward LJ that in determining whether the insurer or reinsurer was induced to enter into the contract the court does not embark upon the exercise of finding the decisive cause or the main reason.  However, I remain of the view that the non-disclosure must be an effective (or as Arnould puts it in the passage quoted in paragraph 58 above) a real and substantial cause of the decision to enter into the contract.  That conclusion seems to me to be supported by the passages from the judgments in Edgington v Fitzmaurice quoted by Ward LJ ...”
168.	At paragraph 79 he said: 
“...Having reconsidered the evidence I also remain of the view that it was open to the judge to conclude that what was said (or written) about the participation of Munich Re played no part in ARIG’s decision to participate.  In short, it was open to the judge to hold that ARIG had not shown that, if it had known that Munich Re was participating only in section A, it would not have entered into the contracts or would have taken some other share and I can see no basis upon which this court could properly interfere with that conclusion...”
and at paragraph 153:
“I would dismiss the appeal on the Munich Re point on the ground summarised in paragraph 80 above, namely that the judge was correct to hold that ARIG had not shown that, if it had known that Munich Re was participating only in section A, it would not have entered into the contracts or would have taken some other share and I can see no basis upon which this court could properly interfere with that conclusion...”
169.	Ward LJ dissented.  He said at para 215: 
“... I take the law to be this: if it is established that the representee did not allow the representation to affect his judgment in any way then he could not make it a ground for relief.  If on the other hand the representee relied on the misrepresentation, then the representor cannot defeat his claim to relief by showing that there were other more weighty causes which contributed to his decision to enter into the contract.  In this field the court does not allow an examination into the relative importance of contributory causes.  In other words, it is sufficient if the representation is a cause even if it is not the cause operating on the mind of the representee when he enters into the contract...”
and at paragraphs 218 and 219:
“218 I am happy to express my agreement with the analysis of the law conducted by Clarke LJ subject to this reservation.  I am not entirely sure that it is necessary to require the misrepresentation to be an effective cause of a party’s entering into the contract on the terms on which he did.  If by that qualification my Lord means no more than that it did actually play upon his mind and influence his decision then I have no argument.  In other words I readily accept it must have some causative effect.  I would be concerned if the insistence on an effective cause were to lead to an evaluation of the weight placed by the representee upon the various matters which in combination lead to the agreement.  We must be careful not to be led back into the error that the cause has to be a decisive cause.  
219  The crucial question has now become, adopting the language of Bowen L.J., a mere question of fact: was Arig’s corporate mind disturbed by the misstatement of Generali and was such disturbance in part the cause of what it did? ...”
170.	Mr Zacaroli submitted that, whilst there may be more than one “but for” cause, in order to establish that any particular representation was a real and substantial cause it is necessary to show that but for such misrepresentation the claimant would not have entered into the contract on the terms on which he did, even though there were other matters but for which he would not have done so either.  
171.	In the light of decision of the majority in Assicurazioni and the authorities to which I have referred, I accept that submission.  The authorities shows that inducement is, in essence, a question of causation and that the misrepresentation must be an effective cause of the representee entering into the contract in the “but for” sense.  “But for” causation means that unless the alleged cause (X) had come about the alleged result (Y) would not have occurred.  In the present context that means showing that, unless the representee had had the representation made to him, he would not have contracted (or would not have done so on the same terms).  If such causation is necessary in respect of a single misrepresentation, it must also be necessary in relation to an individual representation which is one of several.  
172.	That conclusion is consistent with the decision of the House of Lords in Pan Atlantic Insurance Ltd v Pine Top Ltd [1995] 1 AC 502 in which the majority of the House held (i) that a “material circumstance” was one that would have an effect on the mind of the prudent insurer in estimating the risk; but that, for a circumstance to be material, it was not necessary that it should have a decisive influence (such that but for the misrepresentation or non-disclosure the insurer would have declined the risk or accepted it only on different terms).  But before an underwriter could avoid for non disclosure he had to show that he had actually been induced by the non-disclosure to enter into the policy on the relevant terms (i.e. that if the full facts had been disclosed he would not have entered into it or would have done so only on different terms).  It is apparent from the speeches of the majority that the “actual inducement test” applies to misrepresentation (516 E-G); and is an application to marine insurance of the common law as to inducement (549 D-E; 569 A-C).
173.	In Assicurazioni Ward LJ referred to the fact that the “court does not allow an examination into the relative importance of contributory causes” and was concerned that the decision of the majority might lead the courts back to the error that the misrepresentation must be a decisive cause.  In the light of the decision of the majority it cannot be the case that the representation does not have to be a cause at all.  It need not be the sole effective cause but it must be an effective cause.  A misrepresentation is not an effective cause if the representee would have gone ahead even if it had not been made.    
What does “but for” causation mean – but for what?
174.	A defendant will be innocent of misrepresentation in two circumstances (a) when what he represents is true; and (b) when he does not make any representation at all.  Is the relevant question: what would the representee have done (a) if he had been told the truth; or (b) if no representation had been made to him at all?  
175.	The difference in approach is apparent in Assicurazioni.   Ward LJ, relied on the following exchange as showing inducement:
“Q:  If you had been told that Munich Re was on section A and section B at the time you assessed the risk, and then just before you accepted the line you were told that Munich Re was not, in fact, on section B, what view would you have taken?
A:  I would have been very puzzled, asking "why", because this was a profitable account and I would have gone back to the producer and asked them for clarification of why Munich Re did not participate in section B, which was actually, as far as I remember, when we were asking for the premium split it generated, on the advice premium volume of twenty million, it actually generated 75%.  Why should Munich Re not participate on the 75% of the twenty million if it was a profitable account with good prospects? That would have been my immediate reaction.  If I would not have got any clarification which I could buy, I would have declined participation."
176.	Sir Christopher Staughton said that:
“ ...  the question in re-examination which Ward LJ quotes in paragraph 35 of his judgment is, I would suppose, one that was very likely to attract the answer which 	did come from Mr Anderberg: "If I would not have got any clarification which I could buy, I would have declined participation." But was that the right question?  Should it not have been, "would you have participated if you had not been told anything about Munich Re participating? Or that they were participating only to a limited extent?" 
177.	I suspect that Sir Christopher regarded the question posed in para 175 above as inapposite because it assumed a correction at the moment of contracting of a misrepresentation previously made which, according to the answer, would have led to an inquiry as to why Munich Re had only participated to a limited extent, a matter which was not the subject of the misrepresentation.  The two questions which Sir Christopher suggested were as to the position if nothing had been said or if all that had been said was the minimum necessary to prevent any misrepresentation.  
178.	In many cases the answer to the two questions will be the same.  But not all.  It is convenient to take an example.  P buys a house from V.  He had been considering several houses.  He is minded to buy the one which he eventually buys because of its size, shape and character.  Shortly before he makes his final decision V’s agent tells him that a particular celebrity has the house next door, a circumstance which he regards as advantageous.  It is one of the matters he takes into account in deciding to purchase.  He had not previously addressed his mind to the characteristics of his potential neighbour.  In fact, as it turns out, there is no celebrity next door.  Moreover the next door neighbour – Z – whom the agent knows to be the neighbour is one of the few persons, or types of persons, of whom P would never willingly be a neighbour.  If he had never been told that there was a celebrity next door, or, having been so told, was then told that there had been a mistake and the celebrity in question did not live there, he would still have bought the house.  If he had been told that Z lived there he would not have done so.
179.	In determining whether or not P was induced by the representation to purchase, is it relevant to inquire what P would have done if he had been told:
(a)	nothing at all; 

(b)	that there was no celebrity next door;

(c)	that Z lived next door? 
Question (a) assumes that no representation, and, therefore no misrepresentation, had been made.  Question (b) assumes that the representee is told no more than is necessary to ensure that he has not been told an untruth.  Question (c) assumes that the representee is given full information as to who actually lives there.  In many cases the truth is nothing more than the flip side of the misrepresentation, but, as the above facts show this is not always so.  The example taken shows that the representee’s state of mind may be different according to whether or not he was given answer (b) or (c).  
180.	Mr Zacaroli submitted that a claim for misrepresentation requires consideration of what the representee would have done if no representation had been made to him.  That is, in my judgment, generally speaking, correct because the claimant must establish the causative impact of the representation on his decision.  His essential complaint must be that he entered into the contract on the terms on which he did as a result of what he was told i.e. that, had he not been told what he was told, he would not have done so.  If he would have entered into the relevant contract even if the representation had not been made, he has no valid complaint: McGregor on Damages, 18th Ed para 41-002; Sir Christopher Staughton in Assicurazioni [187] (see para 165 above).  That does not mean that a claimant who does not say in terms that, if the relevant statements had not been made, he would not have entered into the contract, necessarily fails: see In re London and Leeds Bank [1887] 56 LJ Ch 321.  There the plaintiff had subscribed for shares in what was in fact an insolvent bank on (as he said in his affidavit) “the faith of” fraudulent statements in the prospectus as to its circumstances and Stirling J rejected a submission that the claim must fail in the absence of evidence in those terms.
181.	Counsel defending claims for misrepresentation habitually ask claimants what they would have done if they had been told the truth and judges use their answers (or the judge’s own conclusion on the question) to decide whether inducement has been established.  Thus in Assicurazioni Clarke LJ allowed the appeal on the ground that it was:
“open to the judge to hold that ARIG had not shown that, if it had known that Munich Re was participating only in section A, it would not have entered into the contracts or would have taken some other share”.  
182.	There is, however, authority that, at any rate where fraud is shown, the question – what would you have done if you had been told the truth? -  is not the relevant (or possibly even a permitted) question: see Smith v Kay (1859) 7 HL Cas 750, 759 (“Can it be permitted to a party who has procured a deception with a view to a particular end which has been attained by it to speculate on what might have been the result if there had been full communication of the facts?” – Lord Chelmsford); Re Imperial Mercantile Credit Association (1869) LR 9 Eq 225n, 226n  (“I do not think a Court of Equity is in the habit of considering that a falsehood is not to be looked at because, if the truth had been told, the same thing might have resulted”);  Downs v Chappell [1997] 1 WLR 426, 433C (“The judge was wrong to ask how [the plaintiffs] would have acted if they had been told the truth”) Hobhouse LJ.
183.	In my judgment the relevance of the question – what would you have done if you had been told the truth? – depends on the circumstances and on who is asking the question and for what purpose. 
184.	A claimant who gives credible evidence that, if he had been told the truth (there is no celebrity next door), he would not have entered into the contract is likely to establish that if the misrepresentation had not been made he would not have contracted and that it was thus an effective cause of his doing so, since such evidence is likely to establish both the importance to him of what he was told and its effect on his mind: see Assicurazioni; Dadourian Group International v Simms [2006] EWHC 2973, para 546; and Parabola Investments Ltd v Browallia Cal Ltd [2009] EWHC 901, paras 104-7.  In the latter case Flaux J observed that Hobhouse LJ’s dictum in Downs v Chappell did not mean that if the claimant demonstrated that he would not have acted as he did if he had known the true position (namely that the profits were not as stated), he could not have relied on that as evidence of inducement.  In Dadourian Warren J described such a question as “strictly irrelevant although it may be of some assistance in testing whether there was inducement or not”.
185.	Per contra, a claimant who says that even if he had been told the whole truth it would have made no difference to his readiness to enter into the contract will be likely to fail to establish that he was induced to enter into the contract by the misrepresentation in question.  There is an inherent contradiction in someone saying that a representation was an inducing cause and accepting that, if the truth had been told, he would have contracted on the same terms anyway.
186.	If, however, it is clear that, unless the representation had been made to him, the claimant would not have entered into the contract it is irrelevant to ask what would have happened if he had been told the truth.  In those circumstances, the court will not speculate on what might have happened in that event: see Spencer Bower, op.cit, para 122.   In Downs v Chappell [1997] 1 WLR 426 the trial judge accepted Mr Downs’ evidence that he would not have contracted to buy the business if he had not received  verification of certain profit figures which were fraudulently misrepresented to him.  This conclusion was not surprising since an earlier set of figures had shown insufficient profits to persuade him to buy.  So inducement had been established.  That being so, it was not then material to consider what he would have done if he had been given the true profit figures – a situation which had never arisen and to which he would not have given thought (except in the context of the subsequent litigation).  
187.	It is not, therefore, necessary for the representee to establish that he would have acted differently if he had known the truth.  And it may not be sufficient either.  If it were, a claimant who gave no thought to any representation, or did not understand it to have been made, might be entitled to recover.
188.	In BP Exploration Operating Co Ltd v Chevron Transport (Scotland) [2001] UKHL 50 Lord Millett made some observations which on one view suggest that it is not material to inquire what would have happened if the representation had never been made.  In that case BP failed to bring proceedings within the applicable limitation period and relied on a provision of the relevant Scottish limitation statute that time should not run during:
"(a) any period during which by reason of - (i) fraud on the part of the debtor or any person acting on his behalf, or (ii) error induced by words or conduct of the debtor or any person acting on his behalf, the creditor was induced to refrain from making a relevant claim in relation to the obligation….”
189.	The question was whether BP was misled and what effect that had on limitation.  Lord Millett said (paras 103 to 105): 
“This raises a question of some importance.  Is it sufficient for the creditor to identify the period during which he was induced by the error to refrain from making the claim, or must he go further and identify the date on which he would have made the claim but for the error?
I am satisfied that he need not take this further step which involves a hypothetical inquiry which can never be answered precisely and may sometimes be incapable of being answered at all.   A representee can say why he acted as he did.  He can say that it was, inter alia, because of the representation.  But he can only speculate on what he would have done if the representation had not been made.  
As a matter of English law, a representee must always be prepared to prove that the representation had an effect on his mind.  But it is sufficient for him to prove that the representation was an inducing cause which led him to act as he did; he need not prove that it was the inducing cause: Edgington v Fitzmaurice....  
Whether, if a full disclosure of the truth had been made, he would or would not have acted differently is a question to which English law does not require an answer; it is sufficient that he might have done so: see Spencer Bower and Turner….  There are many authorities to this effect.” 
190.	I do not regard those observations, given in the context of a question as to whether the claimant was induced to do nothing, as rendering an inquiry as to what the representee would have done, absent the representation, irrelevant.  On the contrary, since the representee must show that the representation was an inducing cause it will be relevant to ask what he would have done if no representation had been made to him since the answer to that question is likely to determine whether the representation was a cause of his contracting or only an encouragement to him to do so.   
191.	A difficult question may arise if, had the representation not been made, a particular factor would never have entered the representee’s head; but the effect of the representation was that it did, so that when he contracted it was of importance to him.  Suppose that, in the example given in para 178 the buyer would have gone ahead anyway if he had not been told about the celebrity next door but that, once he was told, the identity of his neighbour became an important factor to him such that he would not have gone ahead unless he had been told exactly who the neighbour was.  In such circumstances, as it seems to me, it would no longer be relevant simply to inquire what would have happened if, originally, there had been no mention of the celebrity.  It is otherwise if the identity of the neighbour was always a matter of indifference to him, or, at best, only an encouragement to him to make his decision: see, in this respect, the discussion at para 548 of Dadourian where Warren J took the example of information volunteered by the vendor that a neighbouring farmer was intending to create a wildlife haven when in truth he was about to turn it into a pig farm.  He thought that, in such a case, the representor would need to show that the representee, if told that what had been represented was not correct, would not have inquired as to the true position.  
What is “the truth”?
192.	Mr Zacaroli submitted that, if a witness is to be asked what he would have done if he had been told the truth - as an aid to discovery of what he would have done if the representation had not been made - it is necessary to be exact as to what “the truth” means.  A relevant inquiry is as to what the representee would have done if he had been given sufficient information to correct the falsity of what had been said.  Any other question would not relate to the falsity of the representation but to what the representee would have done if he was given further information (of uncertain extent) beyond that necessary to ensure that there was no misrepresentation.  That would involve asking what the representee would have done if he had been given a representation different to the one which he was actually given.
193.	In the case of contracts of insurance the position is different.  The insured has a duty of disclosure of all material facts and, when non-disclosure is relied on no reliance on any statement has to be proved.  In that context the question “what would you have done if you had been told the truth?” is directly relevant and the “truth” constitutes everything that it is material for the insurer to know.  But in a non insurance context liability arises because of the falsity of the statement.  The relevant test is what would have been done in the absence of the statement and a relevant question is what would the representee have done if given sufficient information to dispel its inaccuracy?  
194.	In my judgment, Mr Zacaroli’s approach is essentially correct.   
Is “might have” made a difference enough?
195.	Mr Gruder submitted that it was sufficient for a claimant to show that but for the misrepresentation he might have acted differently.  I do not agree.  Assicurazioni shows (see paras 166 and 181 above) that the question is whether had the representation not been made to him, the representee would not have contracted; not whether he might not have done so.  I do not accept the submission that the “would not” formulation applies in insurance cases but that in other cases “might not” is the appropriate test.  
196.	Mr Gruder drew attention to Barton v Armstrong.  The parties were the major shareholders in a company.  The appellant agreed with the respondent the terms on which he would buy out the respondent's interest in the company.  The appellant then brought a suit in equity against the respondent and other interested parties alleging that the respondent had coerced him into agreeing to the matters dealt with in the deed by threatening to have him murdered and by otherwise exerting unlawful pressure on him.  He sought a declaration that a deed of January 17th 1967, and certain ancillary deeds executed by him were void so far as concerned him.  The trial judge found that the respondent had threatened the appellant, but that the primary and predominant reason why the appellant had entered into the agreement and executed the deeds was because of commercial necessity and that the threats did not in fact coerce the appellant into executing the deeds.  He accordingly dismissed the suit.  On appeal the New South Wales Court of Appeal agreed substantially with, but also modified, the trial judge's findings of fact, and held that the appellant was not entitled to succeed unless he established that but for the threats he would not have signed the agreement, and as he had failed to do so, dismissed his appeal.  The Privy Council, by a majority, allowed the appeal.
197.	Lord Cross delivering the judgment of the majority commented:
“...But this is a most unusual case and the findings of fact made below do undoubtedly raise the question whether it was necessary for Barton in order to obtain relief to establish that he would not have executed the deed in question but for the threats…”
	He said:
“...Had Armstrong made a fraudulent misrepresentation to Barton for the purpose of inducing him to execute the deed of January 17, 1967, the answer to the problem which has arisen would have been clear.  If it were established that Barton did not allow the representation to affect his judgment then he could not make it a ground for relief even though the representation was designed and known by Barton to be designed to affect his judgment.  If on the other hand Barton relied on the misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision to execute the deed, for in this field the court does not allow an examination into the relative importance of contributory causes. ‘Once make out that there has been anything like deception, and no contract resting in any degree on that foundation can stand’: per Lord Cranworth LJ in  Reynell v Sprye  (1852) 1 De G.M. & G. 660, 708 - see also the other cases referred to in Cheshire and Fifoot's Law of Contract, 8th ed. (1972), pp250-251.  Their Lordships think that the same rule should apply in cases of duress and that if Armstrong's threats were "a" reason for Barton's executing the deed he is entitled to relief even though he might well have entered into the contract if Armstrong had uttered no threats to induce him to do so...” 
Lord Cross’s conclusion on the facts is also instructive:
“...The proper inference to be drawn from the facts found is, their Lordships think, that though it may be that Barton would have executed the documents even if Armstrong had made no threats and exerted no unlawful pressure to induce him to do so the threats and unlawful pressure in fact contributed to his decision to sign the documents and to recommend their execution by Landmark and the other parties to them...”
198.	That was a case in which the claimant sought to rescind a contract for duress in which the Privy Council treated authorities on deceit as analogous.  There are sound reasons of policy why those who threaten to murder or who set out to deceive should bear a liability even if it might well have been the case that, but for such behaviour, the contract would still have been made.  I do not, however, regard that authority as compelling the conclusion that in a case where the representation is not shown to be fraudulent it is unnecessary to establish “but for” causation.  In addition the case may perhaps be looked at as one where the presumption of inducement (applicable in the case of a fraudulent representation or duress) is not rebutted if all that can be said is that the representee might well have contracted without the duress.   
199.	Mr Gruder also referred to Barton v County NatWest [1999] Lloyd's Rep Bank 408 and Australian Steel Mining v Corben [1974] 2 NSWLR 202, both of which were fraud cases in which the result of the representation relied on was that the representee persevered in a decision previously made.  It does not seem to me that either of those cases establishes that, where the case is not one of fraud, it is sufficient merely to show that the misrepresentation was actively present to the representee's mind and that but for it the representee might have acted differently.  In Barton the presumption of inducement arising from the fraudulent statement was not rebutted.  In Australian Steel the statement (as to the identity of a purchaser to whom Mr Corben, who had decided to sell, was to give an option to purchase) was a “but for” cause of the agreement.  Mr Corben would not have persevered with the deal if he had not known the identity of the purchaser.
Was RZB induced by the first two  misrepresentations?
200.	If, contrary to my view, RBS represented to RZB that there was no support of any kind for the RBSFT equity, and Mr Stuart-Prince understood that that was being represented to him.  The relevant question is whether, absent such a representation, RZB would have entered into the Syndication Agreement.  In order to try to answer that question it is meaningless to inquire what RZB would have done if it had been told nothing about the equity.  Some statement about the equity was necessary to explain how the loan was Enron backed and what the structure and nature of the transaction was.  The relevant inquiry is to ask what the position would have been if the Information Memorandum had given no indication as to whether there was any support for the equity or had indicated that it was not dealing with any arrangements relating to the equity.
201.	It is also relevant to consider what RZB would have done if it had been told that Enron had given RBS a strong non-binding assurance that RBS would be made whole in respect of its equity and a 13.5% return.   
202.	There are obvious difficulties in evaluating, ten years later, in the alternative, what someone in the position of RZB would have done if it had not received a negative representation (“there is no support for the equity”) which I have found was neither made nor understood to have been made.   
203.	Mr Zacaroli submitted, in my view correctly, that the best evidence on the question is to be found in the contemporaneous documents which record RZB’s decision making process. 
The Credit Paper
204.	Mr Stuart-Prince’s credit paper of 4th December 2000 was at pains to demonstrate to the Credit Committees that RZB could rely on Enron Corp risk, which was a good credit risk.  Thus:
(a)	The first page of the application stated (emphasis in original): “BEING VIEWED AS ENRON CORP RISK DUE TO THE SECURITY PROVIDED”;
(b)	The Synopsis included the following: “While the facility is being provided to a special purpose vehicle (RBSFT) owned by RBS, due to the Total Return Swap mechanism … entered into between RBSFT and Enron Corp, the exposure is being viewed as Enron risk”;
(c)	Under the heading “Business Environment” it stated that “As RBSFT is a special purpose vehicle, the following commentary is on Enron Corp”;
(d)	Under the heading “Financial Situation”, the financial details set out, together with the “Comment” and “Outlook”, related only to Enron Corp.  The paper noted that “No past financials have been provided on ETOL.  EEL have provided forward forecasts and these are highlighted within the Appendices. However, as this is an indirect source of servicing and repayment no comment is made here”.
(e)	The first bullet under “Recommendation” stated: “The transaction is well structured and all the risks are effectively guaranteed by Enron Corp.”  The third bullet stated: “The structure is not dependent upon the performance of ETOL”.  The final bullet point pointed out that the transaction “offers good opportunity to build a broader and more active relationship with Enron Group”.
(f)	Section A of the Annex contained edited extracts from the IM, including the section on “Transaction Flows” which stated that “RBSFT’s cash flow profile means that the lenders in the SCF effectively look to Enron Corp for payment”.
205.	The paper did not refer to RBS having made any representations or to any reliance on them by Mr Stuart-Prince; nor to the fact that RZB had, in the Confidentiality Agreement, agreed that RBS had assumed no responsibility for the accuracy or completeness of the information provided.  Nor did it refer to RBS' equity being unsupported.  Such references as there were to RBS having equity in RBSFT consisted of the fact that the facility was being provided to a special purpose vehicle (RBSFT) owned by RBS and established to facilitate the ownership of the “B” Preference shares issued by TOH4L.  There was no reference in the list of factors identified as supporting its recommendation to the fact that RBS had assumed an equity risk.  
The London Credit Committee
206.	The minutes of the London Credit Committee of 5th December 2000 make clear that it viewed the risk as Enron Corp risk.  Its sole concern as expressed in the minutes was to obtain an opinion confirming that RZB would have pari passu status in the event of a liquidation of Enron.
The Vienna Credit Committee
207.	The principal documents provided to the Vienna Credit Committee were the credit application to the London Credit Committee prepared by Mr Stuart-Prince (slightly amended) and the CRM (Credit Risk Management) Statement dated 7th December 2000, drafted by Andreas Engels of RZB’s International Credit Management in Vienna.  References to RBS’ equity in RBSFT appeared in a Comment box which read:
“Purpose of facility is to provide additional funds for Enron Group, dressed as a purchase of preference shares to be issued by an UK subsidiary and purchased by a SPV using the requested facility.  Amount of shares issued reflects discounted expected dividends of UK subsidiary of next 10 years.  Most probably repayment of facility through Put Option of pledged shares against Enron Corp (USA) at 1/2004.”
A box marked “Collateral” read:
“unsecured, however:”
•	Supported by pledge of preference shares combined with Put Option against Enron Corp (USA) at the end of tenor.
•	Based on Enron Corp.  (USA) risk through “Total Return Swap”.”
The factors identified in the risk analysis related exclusively to Enron Corp.   
208.	In his witness statement Mr Stuart-Prince said (a) that he would have expected the oral arrangement to be disclosed in the IM (para 47); (b) that, if he had been told about it, he would have wanted to know whether it had any effect on the transaction and the accounting treatment and, if it appeared to have any adverse effect, he would have been concerned that the transaction did not have a legitimate structure and was not being accounted for correctly and would have advised RZB not to participate ( para 48); and (c) that he would have been concerned to learn that a component of the transaction had been dealt with orally which would have made him suspicious of the bona fides of the transaction (para 49).  In a later passage (para 77) he indicated that he would not have recommended that RZB enter into the transaction because he did not think it proper not to mention arrangements for a complex structured transaction which differed from the description in the IM and that if he had thought there was any doubt about whether the transaction achieved its accounting purpose he would not have recommended that RZB enter into it (para 79).
209.	It was put to him that it would have made no difference if RBS had explained to him the whole background and told him that, while it had not entered into any legally binding agreement entitling it to a return on the equity, it had a very strong binding assurance from Enron.  
210.	He said that it would have made a difference: 
“the equity – the fact that the equity was being supported by a ‘trust me, we will see you all right’ issue smacked – a lot of the fun that went around the Guinness acquisition back in the late 80s, that the purpose of the underlying facility would have been called into question, i.e. it being done for accounting purposes, and that for a conservative institution like RZB, they would have rather lent directly into Enron rather than looked at a structure like this.  I think they would have walked away from something like this that would have been too cutting edge”.
211.	He indicated that this type of “I will see you all right type of arrangements” in relation to equity smacked of an improper transaction.  He regarded the fact that RBS had 3.55% equity in RBSFT, which it would lose if the structure failed, as showing that RBS had confidence in Enron to such an extent that it would risk the amount represented by the equity.  The structure showed a high level of confidence by RBS in RBSFT and in its capacity to repay principal and interest.  
212.	The evidence of Dr Winkelbauer, the Head of RZB's International Business Unit Department, was that there were three reasons for his approving the transaction: 
(a)	the effect of the TRS was to impose liability on Enron Corp for the Senior Facility, so that a participation in the SCF could be viewed as Enron Corp.  risk;

(b)	Enron was rated A- on RBS’ scales and its Standard and Poors rating was BBB+; and 

(c)	the return offered was attractive for an asset which consisted of Enron debt;

and that he would not have entered into the transaction if there had been any doubt as to its propriety and legality.
213.	The absence of any extensive reference in the Credit Committee papers to the RBSFT equity as a significant factor is not conclusive.  A bank which is told (expressly or impliedly) that something is not the case may not record what it has been told does not exist, when its existence would have been an important (and recorded) negative.  At the same time if the character of the equity was important some reference to that could be expected.
Conclusion on inducement
214.	I have come to the conclusion that any representation that there was no support for the equity was not a real and substantial cause of RZB entering into the Syndication Agreement.  I am unpersuaded, that absent a representation to that effect RZB would have declined to participate.  
215.	I have reached that conclusion in the light of the following: 
(a)	the restricted reference to the equity in the Credit Committee documents and  the emphasis on the fact that the debt was to be an Enron risk;  

(b)	RBSFT was a special purpose vehicle, whose essential function was to enable lenders to take on Enron Corp risk; the equity in RBSFT, and any support for it, was of peripheral relevance to any participation in the Senior Credit Facility, which would rank before the equity; 

(c)	I find it difficult to accept that, as argued, RZB's preparedness to participate in an Enron guaranteed loan to RBSFT was causatively influenced by any perception that RBS' unsupported equity investment in RBSFT showed a degree of confidence in RBSFT and its ability to pay off the debt or that RBS would do more than they might otherwise have done to ensure full repayment of the SCF.  There is no hint of this in the papers before either Committee.  RBS had underwritten the entire debt of about £ 138 million.  In that context the £ 4.9 million was pretty insignificant.  Further RZB would not know what particular factors had led RBS to take equity as part of the overall transaction, and in particular whether any, and if so what, relationship factors had been taken into account.    
216.	As to (c), the IM had told potential participants that they were “not exposed to any operational or other risks related to ETOL” so that they need not be troubled as to whether the preference shares, payment under which depended on ETOL's performance, were a sufficient source of payment.  The documentation before the Credit Committees stressed that this was in reality Enron risk.  Whilst RBSFT, as the principal debtor, was in one sense the primary source of payment, as were the preference shares it owned, I do not accept that RZB was relying on ETOL’s financial performance to ensure repayment.  Such information as Mr Stuart-Prince had as to ETOL’s financial position did not extend to any accounts.  It consisted of cashflow forecasts produced by EEL which were, as he recognised, inadequate because they did not reveal the assumptions on which they were based.  These showed that over the period of the SCF the cashflow was insufficient to enable RBSFT to repay the SCF in full.  In his paper to the Credit Committee Mr Stuart-Prince expressly did not comment on these forecasts.  The future fair market value of the preference shares the subject of the put was unknown.  His strong recommendation that RZB acquire a £20million participation was made because RZB could rely on repayment from Enron.  Had RZB known that RBS was also seeking to rely on an assurance from Enron in relation to its equity it seems to me unlikely that that would have been of any great significance.
217.	If RZB had been told that the IM was not dealing with any arrangements in respect of the equity it seems to me unlikely that RZB would have declined to participate.  If RZB had asked for and been given the full picture namely that RBS understood that for accountancy reasons no binding guarantee could be given but that Enron could give a relationship “promise” about the equity and still obtain the desired accounting benefit, as had happened in relation to Sutton Bridge, it seems to me unlikely that that would have caused RZB to resile from the deal.  
218.	Mr Stuart-Prince was plainly an honest witness.  But his view as to what he would have done in hypothetical circumstances, has, in my judgment, been heavily influenced by hindsight, and is unlikely to reflect the view that he would have taken at the time.  At the time Enron was known to be at the cutting edge of financial engineering and to have a very high proportion of off balance sheet debt.  Mr Stuart-Prince and others at RZB had great confidence in its management, which it regarded as outstanding (as well as honest) and its strong financial position.  RZB believed that Enron, advised by Arthur Andersen, complied with whatever accounting requirements applied to it.  Enron was a client of RZB US, which by August 2000 had already increased its exposure to Enron to $ 18 m.  RZB was keen to do further business with Enron in Houston, and particularly keen to do business with EEL in London, where all decisions were made for Enron’s European subsidiaries, because of the opportunities that such business offered in Central and Eastern Europe, where RZB sought to increase its lending.  RZB had at this stage recently opened a corporate banking department in London (it had had an office in London before) and Eunice Warren was seeking to increase the exposure of the London branch, in particular by participating in syndicated loans.  The potential overall credit limit resulting from the transaction of $ 65.6 million (which included a 364 day stand-by letter of credit which was submitted for approval in December 2000) was one with which RZB felt comfortable.  In my judgment it would have been quite prepared to participate in the SCF without the representation relied on.  
219.	Dr Winkelbauer, who sat on the Vienna Credit Committee, and was at the meeting which decided to recommend the transaction to the Vienna management board, of which he was not a member, stated in his oral evidence that he would not have recommended the deal but for the fact that he understood RBS to be taking a higher risk in the transaction than RZB was taking.  Dr Winkelbauer’s written statement did not advance this contention with any clarity but referred to three factors set out in para 212 above.  Whilst I do not doubt Dr Winkelbauer’s honesty either I am not persuaded that this would have been his view at the time.  No mention is made in the contemporaneous RZB documentation of RBS taking a greater risk or of the fact that it was doing so having any significance.  The additional risk in taking equity without any support was not very great.  If the support consisted of a non-binding relationship assurance, RBS was in fact taking a greater risk than RZB.  In any event the important question for any lending banker was who would be responsible for payment of the debt owed to it and not whether the equity would be repaid.    
Intention to induce
220.	In Nautamix BV v Jenkins of Retford Limited [1975] FSR 385 Oliver J approved the following passage from the third edition of Spencer Bower:
“Inducement in fact is shown by proof that the representation was made both with the object, and with the result, of inducing the representee to alter his position.  Neither element suffices without the other.  To prove the representor’s intention to produce the effect comes to nothing, unless the effect itself be proved; and to establish the result is idle, unless it be shown that the representor actually, or presumptively, intended to bring it about.”
221.	The requirement that a representation must be made with the intention that it should be acted on by the other party applies equally under s 2(1) of the Misrepresentation Act as in a fraud case: Banque Keyser SAA v Skandia (UK) Ltd [1990] 1 QB 665, 790 A-C.
222.	The rule is less easy to apply in respect of implied rather than express statements because the representor may not appreciate what a court later holds to be the implications of what he said.  Nevertheless if he intended what he said to be relied on by the representee in deciding whether to contract he must be taken to have intended that the representee should rely on the objective meaning of what he said.  
223.	RBS contends that RZB has not established that RBS intended to induce RZB to enter into the Syndication Agreement by making any of the alleged representations.  The Important Notice provided in terms:
“This Memorandum is being provided for information purposes only and is not intended to provide the basis of any credit decision or other evaluation and should not be considered as a recommendation that any recipient of this Memorandum should participate in the Facility.”
224.	The position, RBS submits, is a fortiori in relation to any statements in regard to RBS’ equity investment in RBSFT, since RBS thought that any information about the equity investment (as opposed to the TRS or a broad outline of the ETOL transaction) was irrelevant to a potential participant in the SCF.  
225.	The Confidentiality Agreement was in slightly different terms.  By clause 5 RZB acknowledged and agreed that:
“(c)	the Confidential Information is not intended to provide the sole basis of any credit evaluation and should not be considered to be a recommendation that the Recipient participate in the Transaction.”
226.	Intention is usually a live issue only where it is said that the representation was not addressed to the claimant or to a class of persons of whom the claimant was one, or that it was not intended to be acted on for the purposes of the transaction into which the claimant entered (e.g. if the representation was in a prospectus and he purchased in the open market) or any transaction - as in Tackey v McBain [1912] AC 186 when an official of a company fended off persistent inquiries by a broker in Shanghai as to whether the company had struck oil on its property in Sumatra by saying (untruthfully) that the company had received no news to that effect.  He did not intend that the plaintiff should do anything with the information.  In fact he sold shares in the company which then rose in value when the discovery of oil was publicly announced.  
227.	If I had concluded that the representations relied on had been made, I would not have denied RZB the right to recovery on the basis that RBS lacked the necessary intention.  The contents of the Memorandum are not conclusive on that question.  If there were representations as alleged RBS could not plausibly say that they were not intended to be acted upon, even if they were not intended to be the sole basis of decision.
The Relevant Provisions
228.	RBS relies on a number of provisions (“the Relevant Provisions”) as establishing not only that no representations were made but that RZB is estopped from contending that they were.
229.	The Relevant Provisions are these :
(1)	Clause 5 of the Confidentiality Agreement, agreed and accepted by RZB on 23    November 2000, which was in  terms nearly identical to the LMA market standard (as RZB knew) provides:

“The Recipient [i.e.  RZB] acknowledges and agrees that: 

(a)	RBS and its Affiliates, officers, employees, agents, and professional advisers 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)	RBS and its Affiliates, officers, employees, agents and professional advisers shall be under no obligation to update or correct any inaccuracy in the Confidential Information or be otherwise liable in respect of the Confidential Information; and
(c)	The Confidential Information is not intended to provide the sole basis of any credit evaluation and should not be considered to be a recommendation that the Recipient participate in the Transaction.”
“Confidential Information” was defined by clause 1 as “all written, oral or computer generated information relating to [Enron Europe Limited] or the transaction [the SCF] received by [RZB] from RBS or [Enron Europe Limited] in connection with the Transaction.”
(2)	The “Important Notice” at the front of the IM, which stated (amongst other things) as follows:
“[RBS] has been mandated by [EEL] (the Company) to arrange a structured senior credit facility for [RBSFT] (the Borrower).  The information memorandum has been prepared from information supplied by the company and others.
The contents of this Memorandum have not been independently verified.   No representation, warranty or undertaking (express or implied) is made, and no responsibility is accepted as to the adequacy, accuracy, completeness or reasonableness of this Memorandum or any further information, notice or other document at any time supplied in connection with the Facility.
This Memorandum is being provided for information purposes only and is not intended to provide the basis of any credit decision or other evaluation and should not be considered as a recommendation that any recipient of this Memorandum should participate in the Facility.  Each potential participant should determine its interest in participating in the Facility based upon such investigations and analysis as it deems necessary for such purpose.
No undertaking is given to assess or keep under review the business, financial condition, prospects, creditworthiness, status or affairs of the Company, the Borrower or any other person now or at any time during the life of the Facility or (except as specifically provided in the Facility Agreement) to provide any recipient or participant in the Facility with any information relating to the Company, the Borrower or otherwise.”
(3)	In a supplement to the IM on Transaction Maturity/Early Termination the footer indicated that the Important Notice in the IM applied equally to the contents of the supplement.  Similarly, in a Transaction Summary the header indicated that:

“the provisions of the ‘Important Notice’ in the Information Memorandum shall apply as if set out in full in this summary.”	
(4)	The documentation executed by RZB upon acquiring its participation in the SCF contained a number of provisions re-affirming the absence of any responsibility on the part of RBS, and the fact that RBS had not made any representations to RZB in connection with the transaction.
(a) By clause 5.1 of the Syndication Agreement, executed by RZB on 23 February2001, the rights and obligations of RBS as “Original Lender” under the Facility Agreement in respect of the SCF were novated to (among others) RZB.   By clause 5.1.4(iii), RZB agreed that:
“the Agent, the Arranger, each New Lender and the Original Lender shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had each New Lender been an Original Lender…”
(b)	By clause 22.4(a) of the Facility Agreement of 1st November 2000 (to which RZB thus became a party by novation) RZB agreed that RBS, as Existing Lender:
“…makes no representation or warranty and assumes no responsibility to [RZB] for: (i) the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other documents … (iv) the accuracy of any statements (whether written or oral) made in or in connection with any Finance Document or any other documents, and any representations or warranties implied by law are excluded.”
(c)	By clause 24.3 of the Facility Agreement, RZB agreed that: 
“except as specifically provided in the Finance Documents, the Arranger has no obligations of any kind to any other Party under or in connection with any Finance Document.”
(d)	By clause 24.8 of the Facility Agreement, RZB agreed that:
“Neither the Agent nor the Arranger: (a) is responsible for the adequacy, accuracy and/or completeness of any information (whether oral or written) supplied by the Agent, the Arranger, the Borrower or any other person given in or in connection with any Finance Document or any Operative Document; or (b) is responsible for the legality, validity, effectiveness, adequacy or enforceability of any Finance Document, any Operative Document or any other agreement, arrangement or document entered into, made or executed in anticipation of or in connection with any Finance Document or any Operative Document.”
(e) 	By clause 24.15(d) of the Facility Agreement RZB agreed:
“Without affecting the responsibility of the Borrower for information supplied by it or on its behalf in connection with any Finance Document, each Lender confirms to the Agent and the Arranger that it has been and will continue to be solely responsible for making its own independent appraisal and investigation of all risks arising under or in connection with any Finance Document including but not limited to … (d) the adequacy, accuracy and/or completeness of any other information provided by the Agent, any party or by any other person under or in connection with any Finance Document or Operative Document, the Transactions contemplated by the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, under or in connection with any Finance Document or Operative Document.”
The authorities on their effect
230.	Parties to a contract may agree that a particular state of affairs is to be the basis upon which they are contracting, regardless of whether or not that state of affairs is true.   A line of authority establishes that such an agreement may give rise to a contractual estoppel, precluding the assertion of facts inconsistent with those that have been agreed to form the basis of the contract.  If that is done the question arises as to whether or not the agreement constitutes an attempted exclusion of liability for misrepresentation to which section 3 of the Misrepresentation Act 1967 applies.  
231.	The chain of authority is now extended; but in several of the cases not all the relevant earlier authority appears to have been cited, with the result that the status of some of the authorities is less clear than it might be.
232.	In Colchester Borough Council v Smith [1991] Ch 448 the Council claimed possession of land in respect of which T asserted a title by adverse possession.  By clause 4 of an agreement in 1983 T had agreed that he had had no title to any part of the land except for the tenancy under the agreement.  Ferris J held that T was estopped by contract and by convention from asserting to the contrary and from relying on the provisions of the Limitation Act 1939 as a defence.  In so doing he referred to a passage in the 3rd edition of Spencer Bower and Turner, Estoppel by Representation, para 158 in which the author had said that:
“A convention of the parties, which binds them to adhere to an assumed state of facts, may amount to an express contract, in which case each party contracts with the other to be estopped.  Burroughs Adding Machine Ltd v Aspinall (1925) 41 TLR 276 C.A. is an example ….  It is not proposed to discuss estoppel by contract in this chapter, which is concerned with a type of estoppel by convention in which estoppel arises not as a matter of contract, but from a convention of the parties having less than contractual force.  But it has been of interest to notice, by way of introduction to the subject , that there may be an estoppel whereby parties are precluded, as a matter of contract, and not of a mere recital, from setting up a version of the facts different from that which they have agreed to assume.”
Ferris J accepted the submission that clause 4 was an example of a “perhaps rare” type of the estoppel described in Spencer Bower as arising from contract. His decision was affirmed by the Court of Appeal: [1992] Ch 421.
233.	In William Sindall Plc v Cambridgeshire County Council [1994] 1 WLR 1016 property was sold under a contract which incorporated the National Conditions of Sale (20th ed) including condition 14 and special condition 17:
“14.	Without prejudice to the duty of the vendor to disclose all latent easements and latent liabilities known to the vendor to affect the property , the property is sold subject to any rights of way and water, rights of common and other rights, easements, quasi-easements, liabilities and pubic rights affecting the same.
17.	The purchaser shall be deemed to purchase with full notice of and subject to: ….  (e) all easements, quasi-easements rights and privileges (whether of a public or private nature) now affecting the property but without any obligation on the part of the vendor to define the same.”
Hoffmann LJ, with whom the other members of the Court of Appeal agreed, held that the judge had been wrong to treat those conditions as exclusion clauses which had to satisfy the test of reasonableness in accordance with section 3, saying:
“In my judgment they are nothing of the kind.  Section 3 deals with provisions which exclude or restrict a party’s liability for “any misrepresentation made by him before the contract was made”.  The clauses in question do not exclude a liability for misrepresentation but go to the question of whether there was a misrepresentation in the first place.  They qualify the obligations to convey as beneficial owner and give vacant possession and therefore qualify any representation which could be implied from having undertaken those obligations.”
234.	A contractual estoppel is not the same as an estoppel by representation, sometimes known as an evidential estoppel, the nature of which is well established.  A number of authorities have considered the extent to which such an estoppel may effectively prevent a liability from arising.
235.	In Lowe v Lombank [1960] 1 WLR 196, a 65 year old widow bought a Standard motor car on hire purchase for less than £ 300.  The salesman described it as “perfect” or “near perfect”.  In fact it was unroadworthy and dangerous.   Clause 9 (ii) of the HP agreement, which she did not read and he did not explain, provided that the hirer acknowledged and agreed that he had examined the goods prior to the signing of the agreement; that they were of merchantable quality and that he had not “made known to the owners expressly or by implication the particular purpose for which the goods are required and that the goods are reasonably fit for the purpose for which they are in fact required”.  She also signed a delivery receipt which contained a statement that she acknowledged that she had read the whole agreement and that she had examined the goods and that they were in good order and condition.  
236.	Diplock J, giving the judgment of the Court of Appeal  said:
“[Clause 9 (ii)] is expressed to be an acknowledgement, that is to say a representation by the plaintiff that she had not made known by implication that the car was required for a particular purpose, and also as an agreement that she had not made that purpose known to the defendants.  Insofar as [clause 9 (ii)] was a representation it could operate only as an estoppel preventing the plaintiff from asserting the contrary, but Mr Roche expressly disclaims reliance upon it as an estoppel, no doubt for the very good reason that there was no evidence (and it is difficult to see how there could have been truthful evidence) that the defendants believed in the truth of the representation.  To 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, which is essentially a promise by the promisor to the promisee that acts will be done in the future or that facts exist at the time of the promise or will exist in the future.  To say that the hirer “agreed” that he has not done something in the past means no more than that the hirer, at the request of the owner, represents that he has not done that thing in the past.  If intended by the hirer to be acted upon by the person to whom the representation is made, believed to be true by such person and acted upon by such person to his detriment, it can give rise to an estoppel; it cannot give rise to any positive contractual obligation.  Although contained in the same document as the contract, it is not a contractual promise.  
There lies the fallacy in Mr Roche’s contention.  Whether or not the plaintiff made known to the defendants by implication the particular purpose for which she required the car is a pure question of fact as to the state of knowledge of the defendants to be inferred in the light of all the circumstances, including the terms of the contract itself.  On this issue the rule of construction relied on by Mr Roche that you cannot imply in a contract a promise, which is inconsistent with an express provision, is irrelevant for the inference to be drawn from the terms of the contract that the defendants knew the particular purpose for which the plaintiff required the car is not an implied promise, nor is the representation in clause 9 (ii) of the contract an express promise.”
237.	The Court held that the acknowledgement in the delivery receipt did not work as an estoppel since it failed all three of the tests namely that the statement relied on must be:
(a)	clear and unambiguous;

(b)	intended by the hirer to be acted upon by the defendants or that she had 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 they should act upon it; and 

(c)	that the defendants in fact believed it to be true and were induced by such belief to act upon it.

238.	In Peekay Intermark v Australia and New Zealand Banking Group [2006] EWCA Civ 386; [2006] 2 Lloyd’s Rep 511 the customer asserted that, contrary to express representations in the written contract, it had not understood the investment it was acquiring because it had been described incorrectly to him by the defendant in a conversation before he contracted to purchase the investment.  The agent of the customer had confirmed by his signature that he had read and understood a Risk Disclosure Statement which read:
“You should also ensure that you fully understand the nature of the transaction and contractual relationship into which you are entering”
           and 
“The issuer assumes that the customer is aware of the risks and practices described herein, and that prior to each transaction the customer has determined that such transaction is suitable for him.” 
239.	The Court of Appeal held that, where parties to a contract have agreed that a certain state of affairs will form the basis of their transactions, they are estopped by their contract from asserting that the true facts were different.  At paras 56 and 57 Moore-Bick LJ, with whom Chadwick and Collins LJJ agreed, said this:
“56  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.  For example, it may be desirable to settle a disagreement as to an existing state of affairs in order to establish a clear basis for the contract itself and its subsequent performance.  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, at least so far as concerns those aspects of their relationship to which the agreement was directed.  The contract itself gives rise to an estoppel: see Colchester Borough Council v Smith [1991] Ch 448, affirmed on appeal [1992] Ch 421.
57  It is common to include in certain kinds of contracts an express acknowledgment by each of the parties that they have not been induced to enter the contract by any representations other than those contained in the contract itself.  The effectiveness of a clause of that kind may be challenged on the grounds that the contract as a whole, including the clause in question, can be avoided if in fact one or other party was induced to enter into it by misrepresentation.  However, I can see no reason in principle why it should not be possible for parties to an agreement to give up any right to assert that they were induced to enter into it by misrepresentation, provided that they make their intention clear, or why a clause of that kind, if properly drafted, should not give rise to a contractual estoppel of the kind recognised in Colchester Borough Council v Smith…. However, that particular question does not arise in this case.  A clause of that kind may (depending on its terms) also be capable of giving rise to an estoppel by representation if the necessary elements can be established: see EA Grimstead & Son Ltd v McGarrigan (CA) [1999] EWCA Civ 3029.  
240.	Chadwick LJ observed (para 70):
“The Risk Disclosure Statement was a contractual document … ANZ accepted the investment instruction in that letter on the basis of the investor’s confirmation that it had read and understood the terms of the statement.  That confirmation, as it seems to me, operated as a contractual estoppel to prevent Peekay from asserting in litigation that it had not, in fact read and understood the Risk Disclosure Statement.   And if it had read and understood the Risk Disclosure statement, it must be taken to have accepted that ANZ would assume that it fully understood the nature of the transaction into which it was entering, was aware of the risks, and had determined that the transaction was suitable for its purposes.  Given that, Peekay could not be heard to say that Mr Pawani had assumed that the FTCs which he had signed on its behalf did not need to be read and understood.”
241.	The decision that there could be a contractual estoppel was not obiter.  One of the bases of the dismissal of the claim was that, in the light of what he had agreed, the claimant could not assert that he had not satisfied himself that the transaction was suitable for him or that he had assumed that he did not need to read or understand the final terms and conditions.  These were or included matters of past fact.  
242.	Lowe v Lombank was not cited nor referred to in the judgments.   Moore-Bick, LJ referred to Grimstead v McGarrigan (which proceeded on Lowe v Lombank lines) and Chadwick LJ gave the leading judgment in Grimstead and Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317.  The Court must necessarily have had the Lowe v Lombank type of estoppel in mind; but it is less clear to what extent it had in mind what Diplock J had said about the effect of agreements as to what had happened in the past.  Section 3 of the Misrepresentation Act was not in issue.   
243.	In Springwell Gloster J applied the principle of contractual estoppel from Peekay in a context similar to the present.  Springwell had claimed that, notwithstanding certain contractual representations and acknowledgments of fact in the Relevant Provisions in that case (such as that Springwell was a sophisticated investor, that the transaction had been conducted on an execution only basis, that Springwell had not received any advice from Chase in relation to the relevant transactions and had not relied on any advice from Chase)   Chase was in fact advising it on a regular basis and had even referred to itself as Springwell’s adviser in certain internal documents.   
244.	Gloster J held that Springwell could not set these facts up against the agreed facts which had formed the terms of its contract with Chase.  It could not challenge the contractually agreed position that it was a sophisticated investor, that it was making its own analysis of the investments, and that it was not relying on the bank to advise it or on any representation made by the bank.  Gloster J held that the basis of a contractual estoppel is a contractual representation, warranty or agreement forming the agreed and binding basis on which the parties will conduct their dealings (para 567).  She accepted Chase’s submissions that contractual estoppel is a separate species of estoppel from estoppel by representation, that it does not require detrimental reliance and that it can arise from an agreement or representation about past facts (para 556).   
245.	She noted that the reasoning of all three judges in Peekay was “firmly rooted in, and consistent with, the importance of freedom of contract and contractual certainty” and held that the principle extends to cover “any other form of contractual statement, for instance as to sophistication or non-reliance on advice generally” (para 559) and said:
“In conclusion on this topic, I see nothing inappropriate or commercially offensive about Chase being permitted to rely on the statements contained in the Relevant Provisions, even if it could be said that in some respects they did not accurately reflect every aspect of the dealing relationship.  All of the relevant terms of the contractual documentation fall squarely within the Peekay analysis, as contractual representations (and in some cases, warranties) or “agreements” as to the basis upon which the business was to be conducted.  Thus, for example, where the contract provided that, by placing an order, Springwell represented … that it was a sophisticated investor and that it had independently and without reliance on Chase made a decision to acquire the instrument, that was not a mere statement of historical fact, but a contractual representation forming the agreed and binding basis upon which the parties would transact every future purchase.   The same analysis applies in respect of every clause in every document to which Springwell takes this objection.  The fact that some statements are expressed in the language of representation or acknowledgement cannot, in my view, make any difference to the analysis that the statements give rise to a contractual estoppel.”
246.	Gloster J’s approach was applied by Aikens J, as he then was, in Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd [2008] EWHC 1686 (Comm); [2009] 1 All ER (Comm) 16, at para 36, affirmed [2009] EWCA Civ 290.  In that case the parties to a lease agreement of commercial aircraft had included a clause whereby the defendant:
“agree[d] and acknowledge[d] that save as expressly stated in this Agreement and the other Transaction Documents to which [the claimant] is a party [the claimant] has not and shall not be deemed to have made any warranties or representations, express or implied, about the aircraft.” 
247.	Aikens J held that parties who agree such a clause are agreeing that no representations were made by the claimant or if any representations were made, then it was “deemed” that they were not.  He referred to Colchester BC v Smith and Peekay and the commercial convenience for parties to a contract to agree that a certain state of affairs (e.g. that no pre-contractual representations were made) is the case, so as to provide a clear basis for the contract itself.  In Trident, as he held, the parties had agreed to base their contractual relations on the footing that there had been no representations “even if it was not in fact the case that there had been no representations” (para 36).  Subject to the potential application of section 3 of the Misrepresentation Act, Trident could rely on the clause to defeat the misrepresentation.  
248.	In Titan Steel Wheels Limited v Royal Bank of Scotland Plc [2010] EWHC 211 (Comm) there were allegations of mis-selling of forward currency contracts.  The relevant contractual provisions were again similar to those in issue in the present case (see paras 30-32 of the judgment).  On a preliminary issue Steel J applied the Peekay analysis and found that no duty of care arose:
“… I conclude that the terms outlined, taken as a whole, are only consistent with the conclusion that Titan and the Bank were agreeing to conduct their dealings on the basis that the Bank was not acting as an advisor nor undertaking any duty of care regardless of what recommendations, suggestions or advice were tendered …” (para 85)   
249.	Referring to Peekay, Springwell and Trident, Steel J concluded “I detect no basis upon which a different analysis would be justified in the present case” (para 89).  He noted that it was no answer to say that the bank was not protected if it did in fact give advice (para 91) because the terms in question went much further than to relieve the Bank from any obligation to give advice: they provided that any statements were not to be treated as advice nor could they be relied on by the claimant and the parties had agreed that if the Bank did give advice it was not to be treated as accepting any responsibility.  He adopted Gloster J’s exhaustive analysis in Springwell (para 97).  
Discussion
250.	The authorities to which I have referred, other than Lowe v Lombank, show that parties can agree that their dealings shall be conducted on a particular basis of fact (including as to what has or has not occurred) even if the true facts are different and that, if they do, a contractual estoppel will arise.  It is not easy to reconcile that position with the apparently absolute statement in Lowe v Lombank that a statement as to past facts known to be untrue cannot be converted into a contractual obligation and is not a contractual promise.  If Lowe v Lombank means that an agreement that something has not happened is incapable of being a contractual obligation or promise, and is no more than a representation, which is ineffective unless the three Lowe v Lombank conditions have been fulfilled, then it cannot found a contractual estoppel.  
251.	The distinction between past and present facts is not without difficulty.  If a party agrees that he is entering into a contract in reliance on three identified representations which are the only representations that have been made to him, his agreement may be said to relate partly to the present (his reliance at the moment of contract) and partly to the past (what he has been told).  It would be somewhat curious if such an agreement operated as a contractual estoppel only in respect of the claimant’s agreement as to what he relied on at the moment of contracting but not in respect of his agreement as to the limits of what he had been told.     
252.	Gloster J observed that in Lowe v Lombank all that the Court of Appeal had to decide was that the false statement in the agreement as to non-notification of purpose fell foul of section 8 (3) of the HP A 1938 and suggested that in reality Diplock, J was regarding the so-called agreement as no more than a sham provision as was “shortly” to be recognised by the Court of Appeal including himself, now Diplock LJ, in Snook v London and West Riding Investment Ltd [1967] 2 QB 786.   The Court of Appeal in Lowe v Lombank did not, however, decide the case on the basis of section 8 (3), nor did it decide that the agreement was a sham.  It is by no means clear that it was.  The finance company had every intention that the contract should take effect in accordance with its terms.
253.	Nevertheless I do not regard myself as bound by Lowe v Lombank to conclude that an agreement that no representations have been made or relied on (or as to any other past fact) can never amount to a contractual estoppel.   There is no intrinsic reason why that should be so.  There is good reason for allowing businessmen to agree with each other the basis of fact (including past fact) upon which they are to do business.   In Lowe itself Counsel had “expressly disclaim[ed] reliance upon [the clause] as an estoppel”.  The argument which Diplock J addressed was that Mrs Lowe could not be regarded as having made known to the finance company that she wanted the car in order to use it safely on the road because it was impossible to imply into a contract a term inconsistent with an express term, so that the implication, otherwise apparent from the terms of the contract, that the car was wanted for use on the road, did not arise.  
254.	But, as the Court held:
“Whether or not the plaintiff made known to the defendants by implication the particular purpose for which she required the car is a pure question of fact as to the state of knowledge of the defendants to be inferred in the light of all the circumstances, including the terms of the contract itself.  On this issue, the rule of construction relied on by Mr.  Roche that you cannot imply in a contract a promise, which is inconsistent with an express promise, is irrelevant, for the inference to be drawn from the terms of the contract that the defendants knew the particular purpose for which the plaintiff required the car is not an implied promise, nor is the representation in clause 9 (ii) of the contract an express promise.”
255.	In circumstances where no reliance had been placed on estoppel in argument I decline to take the last phrase of that citation as a decision that a contractual estoppel (which may not be the same as a contractual promise or obligation) in relation to past facts can never arise.  If, contrary to my view, Lowe v Lombank so holds, then I regard the decision as (a) wrong and (b) reached per incuriam in the light of Colchester Borough Council, itself affirmed on appeal, and following Burroughs Adding Machine Ltd v Aspinall, a decision of the Court of Appeal which accepted the effectiveness of a provision whereby statements of account given to a salesman were deemed to be accepted as correct and were to be binding on him in the absence of objection within 30 days of receipt.  The statements given omitted certain sales to banks which the salesmen contended were commissionable.  I believe that I should follow the later decision of the Court of Appeal in Peekay, which has itself been followed in several subsequent first instance decisions – Bottin International Investments Ltd v Vonson [2006] EWHC 3112; Donegal International v Republic of Zambia [2007] EWHC 197; [2007] 1 Lloyd's Rep 397; Springwell; Trident; Titan Steel Wheels; Food Co UK LLP v Henry Boot Developments Ltd [2010] EWHC 358.  
256.	In any event, whilst some of the Relevant Provisions relate to the past, the Confidentiality Agreement itself relates to the future by providing that the Arranger will be making no representations, so that the question of the effect of an agreement as to past facts does not arise.  
Construction
257.	RZB contends that the Relevant Provisions should be restrictively construed so as not to apply to statements as to matters within RBS’ own knowledge such as RBS’ equity in RBSFT and any support therefor.  The market, it submits, would expect these provisions to cover statements about topics in respect of which the Arranger would be dependent on information provided by others, but not matters within its own knowledge.  
258.	I do not regard it as legitimate to construe the provisions in this way for a number of reasons. 
259.	Firstly, both the IM and the Confidentiality Agreement specify that no representation is made or that RBS does not make any.  These provisions are unambiguous.  
260.	Secondly, there is nothing in the wording of the Relevant Provisions that indicates that they are intended to be restricted in their application in the manner suggested.  The definition of Confidential Information extends to all information relating to the Transaction received by RZB from RBS, regardless of its source.  There are sound commercial reasons for the Arranger not assuming responsibility in respect of any information.  Its role is to bring parties together.  It is neither borrowing funds nor assuming any responsibility to repay them.  It wishes to avoid being embroiled in disputes (possibly, as here, years after the event) about the quality of the information provided, whether through it or by it, or about the extent of its knowledge, or about what was not said expressly but implied.  
261.	Thirdly, the circumstances of the present case – that the erroneous information related to matters within the Arranger’s own knowledge – are unusual.  Neither expert had come across a transaction, in which the Arranger acquires a separate equity participation in the Borrower, before.  Arrangers habitually stipulate to other banks that they do not assume responsibility for information supplied to them.  But the evidence does not indicate any general market understanding that the Relevant Provisions would not apply in respect of information known to the Arranger, much less a market meaning to those words.  Mr Rhodes’ opinion as to the scope of the provisions was the expression of a personal view.   
262.	Fourthly, reliance was placed on the words in the IM “The contents of this Memorandum have not been independently verified”.  These words, it is submitted, showed that the disavowal of any representation arose because some of the information had been derived from others and was, therefore, to be limited to information so derived and not to what was within RBS’ own knowledge, such as the arrangements relating to its equity in RBSFT.
263.	I do not regard those words as implying that the Relevant Provisions are inapplicable to present circumstances.  I note that in IFE v Goldman Sachs there was a reference in the relevant memorandum to the contents not being independently verified and that “Accordingly no representation is made….”  It was argued that this provision did not preclude an implied representation that Goldman Sachs itself was unaware of any facts showing that the information was or might be materially incorrect.  Had that argument succeeded Goldman Sachs would have been responsible if facts known to it invalidated the information provided.  
264.	Toulson J, whose judgment was approved by the Court of Appeal, rejected that submission holding that “an implied representation that Goldman Sachs did not know of any facts showing that the statements in the [Syndicate Information Memorandum] were or might be incorrect in any material way …. would open up wide and uncertain territory”.  The existence of such an implied representation would potentially involve the Arranger having to conduct what might be a laborious examination as to what it could be taken to know and whether that showed the information provided to be untrue.  There was, however, an implied representation that, in supplying the information memorandum, Goldman Sachs was acting in good faith i.e. was not knowingly putting forward information likely to mislead.  
265.	Fifthly, all the Relevant Provisions convey the same message namely that no representations are being made at all.
266.	Sixthly, the information contained in the IM (and even more so the Transaction Maturity, Early Termination and Transaction Summary documents) relates for the most part to the structure, which would be within RBS’ knowledge, so that, if the construction argued for is correct, the Relevant Provisions could only apply to a very small part of the information.  
267.	In those circumstances I hold that the Relevant Provisions apply to matters which are said to be within RBS’ knowledge and are not subject to the limitation argued for.  They operate as a contractual estoppel to the effect that no representations are being made as to, or responsibility taken for, the accuracy or completeness of any of the Confidential Information.
268.	A number of other construction points were taken.  Firstly, as to the Confidentiality Agreement, it was suggested that its application must be limited to information relating to the Company, as defined, i.e. EEL, because RZB undertook to use the Confidential Information solely for the purpose of evaluating the Company.  As to that it seems to me that, in the light of the definition of Confidential Information, which includes all information relating to the Company and the Transaction, and the fact that the information is to be used for the purpose of evaluating the Company “with a view to participating in the Transaction” that the Agreement must extend to all information relating to the Transaction.   
269.	Secondly, it was submitted that, when clause 22.4 (a) (iv) of the Facility Agreement provided that an Existing Lender made no representation or warranty and accepted no responsibility to a New Lender for the accuracy of any statements made in or in connection with any Finance Documents (which included the Facility Agreement, the Loan Notes, the Security Documents, the TRS, the Put Option and Enron’s Put Option Guarantee) or any other documents, that did not extend to any statements made by it as Existing Lender as opposed to statements made by others.  I see no reason to write in that limitation.  One would expect the clause to protect an Existing Lender, transferring all or part of its interest in the Loan, in respect of statements made by it about, say, the TRS.
270.	Thirdly, it was submitted that the provisions in the Facility Agreement to which RBS became a party by novation by virtue of the Syndication Agreement of 23rd February 2001 are inapplicable to representations made after the date of the Facility Agreement (1st November 2000).  Again I see no reason for that limitation, which seems to me inconsistent with the intention of the provisions.  These are designed to apply (in favour of Existing Lenders) to New Lenders who, after the date of the Facility Agreement, become party to it by novation.  They are intrinsically likely to apply to statements made between the date of the Facility Agreement and the date when the New Lender becomes a party to it.  Clause 24.15 (d) provides in terms for a New Lender to agree that it has been and continues to be responsible for making its own independent appraisal and investigation of all risks arising under or in connection with any Finance Document or Operative Document, including the adequacy, accuracy and completeness of any information provided by the Agent, any party or by any other person under or in connection with the Finance Documents or any other agreement, arrangement or document entered into in connection with any Finance Document or Operative Document.  Operative Document was defined so as to include the Finance Documents and, in effect, every document in the Transaction Bible.   
The Misrepresentation Act 1967
271.	Section 3 of the Misrepresentation Act 1967, as amended, provides as follows:
“Avoidance of provision excluding liability for misrepresentation.
If a contract contains a term which would exclude or restrict — 
( a ) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or 
( b ) any remedy available to another party to the contract by reason of such a misrepresentation, 
that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11 ( 1 ) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.”  
272.	The relevant questions are, therefore, (a) whether the Relevant Provisions exclude or restrict any liability to which RBS is subject by reason of any misrepresentation made by it or any remedy available to RZB by reason of such misrepresentation; and (b) if and to the extent that they do, whether or not RBS has established that they satisfy the requirement of reasonableness.  
273.	Section 3  does not affect the logically prior question as to whether, having regard to the terms of the Confidentiality Agreement and the IM, a banker in RZB’s position would have understood RBS to be making representations in the IM, and what representations, if any, were impliedly made.  
The authorities on section 3
274.	In Cremdean Properties Ltd v Nash [1977] 241 EG 837 certain tender documents were alleged to contain representations in reliance on which the plaintiffs had submitted an offer as required by the tender.  The first defendant relied upon a notice on the final page of the special conditions of sale which provided that the particulars given were believed to be correct but their accuracy was not guaranteed and any error should not annul the sale or be a grounds for compensation and that:
“(b) any intending purchaser must satisfy himself by inspection or otherwise as to the correctness of each of the statements contained in those particulars.”
275.	Fox J, as he then was, held that if there was a misrepresentation, a provision which sought to exclude or restrict liabilities or remedies arising from that misrepresentation was within the mischief of the section 3 and it did not make any difference what the form of that provision was.  If there was a representation and the defendant had to rely on the notice to relieve him from the consequences of that misrepresentation, section 3 would prohibit that reliance.  He also decided that, upon the assumption that there had been misrepresentations as alleged, the notice was no answer to the first defendant’s liability, although he accepted, as a purely factual matter, that the notice might be material in determining whether there was a misrepresentation and whether the plaintiff had relied on it.  He rejected an argument that paragraph (b) meant that the first defendant could be under no liability because the plaintiffs were by the notice put on inquiry and told to check the facts for themselves.    
276.	In the Court of Appeal [1977] 2 EGLR 80, 244 EG 547 Bridge LJ held that paragraph (b) did not amount even to a purported annulment of the existence of any representation embodied in the earlier parts of the document.  Having done so he said that he would:
“… go further and say that if the ingenuity of the draftsman could devise language which would have that effect, I am extremely doubtful whether the court would allow it to operate so as to defeat section 3.  Supposing the vendor included a clause which the purchaser was required, and did, agree to in some terms as “notwithstanding any statement of fact included in these particulars the vendor shall be conclusively determined to have made no representation within the meaning of the Misrepresentation Act 1967”, I should have thought that that was only a form of words the intended and actual effect of which was to exclude or restrict liability, and I should not have thought that the courts would have been ready to allow such ingenuity in the form of language to defeat the plain purpose at which section 3 is aimed.”  
277.	Scarman LJ agreed:
“... in particular with the observations that my Lord made about the submissions put to the court by Mr Maurice ….  Nevertheless, the case for the appellant does have an audacity and a simple logic which I confess I find attractive.  It runs thus: a statement is not a representation unless it is also a statement that what is stated is true.  If in context a statement contains no assertion express or implied that its content is accurate there is no representation.  Ergo, there can be no misrepresentation; ergo, the Misrepresentation Act 1967 cannot apply to it.  Humpty Dumpty would have fallen for this argument.  If we were to fall for it, the Misrepresentation Act would be dashed to pieces, which not all the King’s lawyers could put together again.”
and held that the notice, fairly construed was:
“a warning to the would-be purchaser to check the facts; that is to say, not to rely on [the representation].  It is because the statement contains the representation that the warning is given.  Since the statement was false, there was a false representation; the Act therefore applies.”
278.	In Thomas Witter v T.B.P Industries Ltd [1992] 2 All ER 573 Jacob J had to construe a clause by which a party acknowledged that he had not been induced to enter the agreement by any representation except those contained or referred to in a schedule.  He held that the representation relied on was within the schedule and that, even if the clause had exclusionary effect, it was neither fair nor reasonable.  He appears to have taken it for granted that such a clause came within section 3.
279.	In E A Grimstead & Son Ltd v McGarrigan [1999] EWCA Civ 3029 Chadwick LJ held that an acknowledgment of non-reliance was capable of operating as an evidential estoppel, subject to the Lowe v Lombank constraints.  He held that, in the absence of evidence from Mr McGarrigan that he entered into the agreement on the basis that the purchaser from him was not relying on whatever representations he had made, he could not rely on the estoppel.  
280.	Chadwick LJ assumed, without deciding, that such a clause fell within section 3 and said:
“There are, as it seems to me, at least two good reasons why the courts should give effect to an acknowledgment of non-reliance in a commercial contract between experienced parties of equal bargaining power – a fortiori, where those parties have the benefit of professional advice.  First, it is reasonable to assume that the parties desire commercial certainty.  They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed.  They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings.  Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party – or, more usually, the purchaser – is willing to accept.  The risk is determined, in part at least, by the warranties which the vendor is prepared to give.  The tighter the warranties, the less the risk and (in principle, at least) the greater the price the vendor will require and which the purchaser will be prepared to pay.  It is legitimate, and commercially desirable that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.”
281.	In Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 WLR 2333 a clause in a contract for the sale of a jet aircraft provided as follows (the letters being those inserted by the judge for ease of exposition):
“[A] The parties have negotiated this contract on the basis that the terms and conditions set out herein represent the entire agreement between them relating in any way whatsoever to the aircraft and the initial and continuing spares which for the subject matter of this contract and [B] accordingly they agree that all liabilities for and remedies in respect of any representations made are excluded save in so far as provided in this contract.  [C] The parties further agree that neither party has placed any reliance whatsoever on any representations agreements statements or understandings whether oral or in writing made prior to the date of this contract other than those expressly incorporated or recited in this contract”.
282.	Judge Raymond Jack QC, as he then was, held that Part C of the clause came within section 3, whether looked at as a warranty or an estoppel.  He held Part C was:
“a term [of the contract] which would exclude or restrict – (a) any liability to which a party to [the] contract may be subject by reason of any misrepresentation made by him before the contract was made”
“A term which negates a reliance which in fact existed is a term which excludes a liability which the represent or would otherwise be subject to by reason of the misrepresentation.  If that were wrong, it would mean that section 3 could always be defeated by including an appropriate non-reliance clause in the contract, however unreasonable that might be.”
283.	In Watford Electronics a contract for the supply of certain equipment contained the following term:
“14	Entire Agreement
The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract”.
284.	The issue before the Court of Appeal was whether two other provisions, one excluding liability for consequential losses and the other limiting liability to the price, were unreasonable.  For that purpose it was necessary to decide what types of claim the two provisions related to.  The judge had held that they covered both contractual and misrepresentation claims.  Clause 14 of the contract was relevant to the issue because it bore on the question whether the provisions were limited (as the Court decided that they were) to contractual claims.  Chadwick LJ held that the second half of the clause could operate as an evidential estoppel, subject to proof of the three requirements in Lowe v Lombank; and that it was not “in substance an exclusion clause to which section 3 of the Misrepresentation Act is applicable”, as the judge had wrongly held.   
285.	Chadwick LJ went on to say:
“… there is no reason why the parties should have intended, by the words which they have used in the first sentence of the limit of liability clause to exclude liability for negligent pre-contract misrepresentation.  Liability in damages under the Misrepresentation Act 1967 can arise only where the party who has suffered the damage has relied upon the representation.  Where both parties to the contact have acknowledged in the document itself that they have not relied upon any pre-contract representation, it would be bizarre (unless compelled to do so by the words which they have used) to attribute to them an intention to exclude a liability which they must have thought could never arise.”
286.	I cannot perceive any relevant distinction between clause 14 in Watford Electronics and clause [C] in Government of Zanzibar.  It seems to me that, if there had in fact been reliance on the representations pleaded in Watford Electronics, the effect of clause 14 would have been to exclude liability as it did in Government of Zanzibar.  If, therefore, the clause had been relied upon as a contractual, as opposed to an evidential estoppel, it would have fallen within section 3.
287.	There is an important distinction between a provision which makes clear that no (or only a qualified) representation is being made and one which purports to exclude a representation that has been made.  Toulson J, as he then was, considered this distinction in IFE v Goldman Sachs.  
288.	In that case Goldman Sachs had sent a Syndicate Information Memorandum (“SIM”) to the claimant and others inviting them to participate in the syndication of a mezzanine facility.   The SIM stated that the information in it had been derived from many sources and was not to form the basis of any contract; that Goldman Sachs had not independently verified the information and gave no representation, warranty or undertaking, express or implied and did not accept responsibility for its accuracy; and that the information was not to be assumed to have been updated and did not constitute a representation by any person that the information would be updated.  The SIM gave a rosy view of the company in question.
289.	The claimant contended that these statements were properly to be characterised as attempts to exclude liability for misrepresentation to which section 3 of the Misrepresentation Act 1967 applied.  It also sought to invoke section 2 of the Unfair Contract Terms Act 1977 (“UCTA”).   
290.	Toulson J observed that the question was whether the challenged clauses were properly to be understood, not as excluding a liability for misrepresentation, but rather as going to the question whether the alleged representation was made at all.  If the latter, neither the Misrepresentation Act 1967, section 3, nor UCTA section 2, had any relevance to them: William Sindall plc v Cambridgeshire County Council [1994] 1 WLR 1016 at 1034 per Hoffmann LJ.  
291.	He rejected the claimant’s challenge to the clauses holding that the question was one of substance and not form (para 68) so that a party cannot by a carefully chosen form of wording circumvent the statutory controls on exclusion of liability for a representation which on a proper analysis has been made.  
292.	He gave the example of the seller of a car who says to a buyer “I have serviced the car since it was new, it has had only one owner and the clock reading is accurate”.  Such statements would be representations and would remain so even if the seller had added the words “but those statements are not statements on which you can rely”.   
293.	By contrast, if the seller of the car said “The clock reading is 20,000 miles, but I have no knowledge whether the reading is true or false”  the position would be different because the qualifying words could not fairly be regarded as an attempt to exclude liability for a false representation arising from the first half of the sentence.  
294.	On the facts of that case he held that (paras 70-71):
“The statements in the SIM … went to the scope of the representations being made and cannot properly be characterised for the purposes of either Act as attempts to exclude liability for misrepresentation … The relevant paragraphs of the SIM are not in my view to be characterised in substance as a notice excluding or restricting a liability for negligence, but more fundamentally as going to the issue whether there was a relationship between the parties (amounting to or equivalent to that of professional adviser and advisee)...”
295.	On appeal the Court of Appeal took exactly the same approach in characterising the clauses as determining the basis of the parties’ relationship: [2007] EWCA Civ 811 at para 28 (per Waller LJ).  
296.	In Springwell, which involved clauses similar to those in the present case, Gloster J found that (with the exception of a small number of genuine exclusion clauses, which were immaterial) most of the relevant provisions did not engage the Misrepresentation Act or UCTA.  She found (paras 669-671) that the effect of the particular clauses was to preclude any representation, whether of fact or opinion, being made at all because Springwell and JP Morgan Chase had contracted on the express basis that Springwell was taking its own decision to enter into the transactions, independently and without reliance on the bank, and because the latter was not assuming any responsibility for statements of fact or opinion that were made.   
297.	Having pointed out the distinction between clauses which exclude liability and clauses which define the terms upon which the parties are conducting their business, in other words clauses which prevent an obligation from arising in the first place, she referred to Tudor Grange Holdings v Citibank, in which Sir Nicholas Browne-Wilkinson, V-C, stated that:
“The Act of 1977 [UCTA] is normally regarded as being aimed at exemption clauses in the strict sense, that is to say, clauses in a contract which aim to cut down prospective liability arising in the course of the performance of the contract in which the exemption clause is contained.”
298.	She accepted that:
“terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of UCTA.  Otherwise, every contract which contains contractual terms defining the extent of each party's obligations would have to satisfy the requirement of reasonableness.”
299.	She went on to hold that the contractual documents showed that the bank was only prepared to allow Springwell’s representative access to the bank’s representative on the basis that, in accordance with the contractual documentation, Springwell was contractually precluded from bringing a claim in misrepresentation and that the bank was not assuming any responsibility for any statements that were made (para 675).  The effect of this, in Gloster J’s view was that (para 675):
“Having contracted to trade with Chase on those terms, it is not, in my judgment, now open to Springwell to seek to elevate those trading discussions into pre-contractual representations or statements in relation to which it is contended that Chase assumed a duty of care.”       
300.	In Peart Stevenson Associates Ltd v Brian Holland [2008] EWHC 1868 HHJ Richard Seymour QC discerned a difference in approach between Cremdean and Watford Electronics, the former holding that a form of words which however expressed had the effect of preventing a party to the contract from pursuing a claim for damages of misrepresentation came within section 3, and the latter providing that section 3 would not be applicable if a Lowe v Lombank estoppel operated.  But he did not consider it necessary to decide between the two because on either basis the claim, which involved fraudulent misrepresentations, failed.  
301.	In Trident Aikens J had to consider whether section 3 applied.  In the first part of the relevant clause - clause 19.1 - FFCL had agreed and acknowledged that, save as expressly stated in the lease agreement, Trident should not have any liability in relation to the description, satisfactory quality, fitness for any use or purpose, condition or design of the Aircraft.  The second part of the clause provided that:  
“The Lessee [i.e. FFCL] also agrees and acknowledges that save as expressly stated in this Agreement and the other Transaction Documents to which the Lessor is a party, the Lessor has not and shall not be deemed to have made any warranties or representations, express or implied, about the aircraft, including but not limited to matters referred to above.”  
Clause 19.2 provided:
“The Lessee [FFCL] gives up any rights against the Lessor [Trident] regarding any warranty or representation, except in respect of any warranty or representation expressly made in this Agreement or the other Transaction Documents to which the Lessor is a party.   The Lessee cannot make any claim against the Lessor at any time after Delivery relating to the condition of the Aircraft.”
302.	He acknowledged the force of the logic in Chadwick LJ’s statements in Watford Electronics but held:
“However, the effect of a clause must always depend on its exact wording.  In this case the first half of cl 19.1 undoubtedly contemplates that FFCL might assert that Trident was liable in relation to the description, merchantability, satisfactory quality or fitness for any use or purpose of the aircraft.  Clause 19.2 expressly contemplates that FFCL, as lessee, would but for the clause, have rights in respect of representations.  Therefore, I have concluded that both cl 19.1 and 19.2 do fall within the scope of s 3 of the 1967 Act because they both purport to exclude or restrict liability for misrepresentation.”
303.	He then went on to find that because the relevant contracts were “international supply contracts” for the purpose of section 26 of the 1967 Act, they were outside its ambit.  
Discussion
304.	As Aikens J said, the effect of any clause must depend on its wording, which usually takes one or other of the following forms:
(a)	X agrees with Y that Y is  not giving, or has not given, or is deemed not to have given, any representations of any kind  (or is only giving certain specified representations); or that he does not intend anything he has said to be relied on;

(b)	X agrees with Y that he is not entering into the contract as a result of any representations by Y; or that he has not relied and does not rely upon any representations and/or that he has exercised an independent judgment and/or has sought independent advice; 

(c)	X agrees with Y that Y is not acting as an adviser or assuming any responsibility.   

In the drafting the word “representations” is often followed by one or more of “warranties, assurances, statements, undertakings etc”.  In some cases X may acknowledge rather than agree.  
305.	Although contractual estoppel clauses are increasingly common, particularly in the case of complex financial instruments or investments, their use is not restricted to that field.  They may also be used in everyday contracts made with consumers or between businesses great and small.  Any interpretation of section 3 must accommodate the car dealer as well as the bond dealer.  
306.	Suppose, to take a version of Toulson J’s example, a car is sold.   The dealer says “I have serviced the car since it was new, it has had only one owner and the clock reading is accurate”.   He is not fraudulent but mistaken, carelessly confusing one car for another, in relation to which the statement is true.  Relying on his statement the buyer purchases the car.  Without it he would not have done so.  The car has had several owners, no known service history, and the clock reading is substantially inaccurate.   The contract of sale provides (in one of many paragraphs on the back of the form which the buyer does not read and to which his attention is not directed) that the buyer is entering into the contract on the basis that no representations have been made to, or relied on by, the purchaser.
307.	In that example there has been a clear statement of fact, on a matter said to be within the representor’s personal knowledge, which was in fact intended to induce the contract, upon which the purchaser in fact relied, which is false.  If section 3 has no application in respect of a contractual estoppel there is no further control mechanism on its operation, which does not require detrimental reliance.  The seller (and any other similar seller) may, subject to any applicable consumer protection laws, make non-fraudulent misrepresentations of that type with impunity.
308.	In such a situation section 3 is, as it seems to me, applicable because, on those facts, there has been what the person to whom the statement was made would reasonably understand to be a representation, which was intended to be and was in fact relied on.  The clause seeks to avoid liability for what, absent the clause, would be a clear liability in misrepresentation.   The situation might be different in the unlikely scenario that before he contracts the buyer sees the clause and, eyes wide open, agrees that he is not relying on what he may have been told.  
309.	Such a conclusion is consistent with that reached in Cremdean by Fox J (if there is a misrepresentation, any clause, whatever its form, which excludes liability is within the mischief of section 3) and, tentatively, by the Court of Appeal (a purported annulment of the existence of any representation cannot by artful draftsmanship operate to exclude the operation of the Act).   
310.	As has already been said, the essential question is whether the clause in question goes to whether the alleged representation was made (or, I would add, was intended to be understood and acted on as a representation), or whether it excludes or restricts liability in respect of representations made, intended to be acted on and in fact acted on; and that question is one of substance not form.
311.	Everything must depend on the facts.  In some cases the effect of the clause will be to show that what might otherwise have been a representation of fact to be relied on is no more than a statement of belief, or of opinion, or a statement of what the maker has been told, or a statement of a very limited character (“the clock says 20,000 but I do not know whether that is true”).  Thus in IFE Fund Goldman Sachs supplied information from others in an information memorandum.  The representations alleged were said to be implicit in what was said in that memorandum.  Goldman Sachs’ non acceptance of responsibility was apt to make it plain that it was not itself making any representations about the accuracy of the information.   
312.	Similarly the clause in question may show that no representation is in fact being made, or rebut any suggestion of an implicit statement of fact contained within an express statement, particularly one of opinion (where the existence of an implied statement of fact and the nature of that statement is debatable: see BG Plc v Nelson Groups Services (Maintenance) Ltd [2002] EWCA Civ 547).  Thus in William Sindall the argument that a vendor who sold as “beneficial owner” implicitly represented that he had a good right to convey free from encumbrances failed because the court held that the provision that the purchaser should be deemed to purchase with full notice of and subject to all easements qualified the obligation to convey as beneficial owner and any representation which could be implied from that expression.  
Basis clauses
313.	In Springwell Gloster J took the view that terms which simply defined the basis upon which the parties were transacting business did not fall within section 2 of UCTA; otherwise, as she said, all contractual terms that did so would have to satisfy the test of reasonableness.  It is obviously advantageous that commercial parties of equal bargaining power should be able to agree what responsibility they are taking (or not taking) towards each other without having to satisfy some reasonableness test.  At the same time there is a danger that the “ingenuity of the draftsman” will insert into a myriad of contracts a clause to the effect that the basis upon which the parties are contracting is that no representations have been made, are intended to be relied on or have been relied on, as a means of evading liability which is intended to be impregnable.   
314.	In this respect the key question, as it seems to me, is whether the clause attempts to rewrite history or parts company with reality.  If sophisticated commercial parties agree, in terms of which they are both aware, to regulate their future relationship by prescribing the basis on which they will be dealing with each other and what representations they are or are not making, a suitably drafted clause may properly be regarded as establishing that no representations (or none other than honest belief) are being made or are intended to be relied on.  Such parties are capable of distinguishing between statements which are to be treated as representations on which the recipient is entitled to rely, and statements which do not have that character, and should be allowed to agree among themselves into which category any given statement may fall.     
315.	Per contra, to tell the man in the street that the car you are selling him is perfect and then agree that the basis of your contract is that no representations have been made or relied on, may be nothing more than an attempt retrospectively to alter the character and effect of what has gone before, and in substance an attempt to exclude or restrict liability.  
Do the Relevant Provisions purport to exclude liability so as to fall within section 3?
316.	I do not regard either the Confidentiality Agreement or the IM as in substance an attempt to exclude or restrict any liability to which RBS might be subject by reason of a misrepresentation made by it before the Syndication Agreement was made.  On the contrary they contain, as it seems to me, the agreement of the parties as to the basis upon which the Confidential Information was to be given, namely that it was not to be regarded as a representation of fact on which RBS intended that RZB should rely or upon which it was entitled to rely; and that any statements made in, for instance, the IM were not to be regarded as complete.  The provisions in the IM and the Confidentiality Agreement were there at the start of, and defined, the relationship between the parties and the character of what was to be said.  
317.	If parties such as these agree in unequivocal terms as to the ambit of what is being represented to them and the extent to which one party is entitled to rely on what it is being told by the other, I do not see why the Court should not give effect to their agreement (as representing the true nature of their relationship) in deciding whether any actionable representation has been made.   In contracting in terms such as those in the Confidentiality Agreement the parties are in effect saying that the contents of the IM are believed to be true but that no warranty or representation is being given as to the accuracy or completeness of the contents (or the reasonableness of that belief).  In the result the Arranger will be potentially liable if the author does not in fact believe the contents to be true; but not otherwise.  
318.	If there had been no IM and no Confidentiality Agreement, and representations (or what looked like them) had been made by RBS to RZB, it may be that the provisions in the Facility Agreement (to which RZB became a party by novation) that no representations had been made and no responsibility was accepted for any information that had been provided, should be regarded as attempts at exclusion of liability.  In view of the conclusions I have reached it is not necessary to consider this further.  The provisions in question re-affirmed a position already in place.  
Reasonableness
319.	If, however, I am wrong on that and have fallen, Humpty Dumpty like, for Mr Zacaroli’s arguments, it is necessary to consider whether or not RBS has shown that the Relevant Provisions satisfy the requirement of reasonableness as stated in section 11 (1) of the Unfair Contract Terms Act 1977 namely that:
“the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.”
320.	In my judgment it has done so.
321.	The Courts have on several occasions expressed the undesirability, generally speaking, of striking down terms freely agreed between large commercial parties who are usually to be regarded as the best judges of their own interests: see Lord Wilberforce in Photo Productions Ltd v Securicor [1980] AC 827, 484D-E.  Tuckey LJ, in Granville Oil & Chemicals v Davis Turner [2003] 2 Lloyd’s Rep 356 at [31]; Toulson J in IFE at [54].  Chadwick LJ expressed this particularly strongly in two cases:
(a) Grimstead v McGarrigan [1999] EWCA Civ 3029 at para 29
“There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power - a fortiori, where those parties have the benefit of professional advice.  First, it is reasonable to assume that the parties desire commercial certainty.  They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed.  They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings.  Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party - or, more usually, the purchaser - is willing to accept.  The risk is determined, in part at least, by the warranties which the vendor is prepared to give.  The tighter the warranties, the less the risk and (in principle, at least) the greater the price which the vendor will require and which the purchaser will be prepared to pay.  It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.” 
(b) Watford Electronics v Sanderson CFL Ltd [2001] 1 All ER (Comm) 696 at para 55:
“Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them.  They should, in my view, be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement.  They should be taken to be the best judge on the question whether the terms of the agreement are reasonable.  The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms.  Unless satisfied that one party has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered - the court should not interfere.” 
It is, however, material to note that in Watford Electronics the Court was concerned with a contract in which the relevant risks, and the party best placed to assess them, were or ought to have been well known to the parties before they contracted; and where the terms in question were the result of a serious negotiation.  
322.	The undesirability of refusing to give effect to the Relevant Provisions seems to me particularly applicable here.  Both parties are large commercial concerns.  The transaction into which RZB entered was an arm’s length transaction entered into after mature deliberation.  RZB was and is a very large Austrian bank; an experienced participant in the syndicated lending market (in which Mr Stuart-Prince had worked extensively) with experience in structured finance transactions.  It had previously participated in syndicated loan facilities for Enron.  The Relevant Provisions were in no way unusual.  On the contrary, they were in a form habitually used in the market.  The IM and the Confidentiality Agreement were presented, and in the case of the latter signed and agreed, at the outset.  
323.	The Relevant Provisions are a means of allocating risk and of avoiding disputes as to, inter alia, the debatable ambit of implied representations.   That risk may involve the lender not being informed of something of which it (but not the Arranger) thinks it ought to have been told.  RBS was entitled to expect that the provisions would take effect in accordance with their terms.  The likelihood is that, if RZB wanted to participate in the Facility it would have to sign up to the Relevant Provisions.  But it was in no sense obliged to engage in this particular form of structured finance, or to enter into the Syndication Agreement, or to deal with Enron or RBS.  It was legitimate for RBS to agree terms which sought (unsuccessfully as it happened) to avoid the prospect of a detailed review, years after the transaction, of the history of its negotiation.   
324.	I do not regard the strength of these considerations as materially weakened because this type of transaction, set up for accounting purposes and involving the Arranger taking equity in an SPV to which the credit is extended, was unusual and the misrepresentations relied on related to matters in RBS’ sphere of knowledge.   
325.	The clauses would not apply if RBS was guilty of fraud.  They are not therefore unreasonable as purporting to exclude liability for fraudulent misrepresentation, because they do not: Government of Zanzibar v British Aerospace [2000] 1 WLR 2333, 2346; Six Continents Hotels Inc v Event Hotels GmbH [2006] EWHC 2317 at [53].  They would not avail RBS if it included something in the IM in which it did not honestly believe.
326.	I was referred to my decision in Balmoral Group Ltd v Borealis (UK) Ltd [2006] 2 Lloyd’s Rep 629 in which I regarded certain exclusion clauses as unreasonable, on the grounds (i) that they excluded liability for any breach of core Sale of Goods Act obligations (to provide goods of satisfactory quality and fit for purpose) under contracts for the sale by a manufacturer of a raw material (borecene) used for moulding plastic oil tanks, which, in consequence of its latent defects had failed spectacularly; and (ii) that the allocation of risk purportedly made by the exclusion clause (which would have restricted liability to the price) was inappropriate  particularly in circumstances where, if Balmoral wanted to do business using borecene as a raw material, it could only do so on Borealis’ terms.    
327.	I do not regard that case as comparable.  In the present case RBS acted as an arranger not a supplier.  RZB was not without remedy, even though the claim against Enron was in part unsatisfied.  The allocation of risk effected by the standard terms was well established and well understood by bankers operating in a sophisticated market.  RZB did not have to lend to Enron (in effect) in this way (or at all).  The clauses made for certainty; were designed to avoid arguments such as the present and, in effect, relieved from liability (insofar as they did) save in the event of bad faith.  In the present context that was not unreasonable.  
The defence under section 2 (1) to the first two representations
328.	RBS will have a defence to the claim under section 2 (1) if it proves that it “had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true”.  
329.	RBS contends that if it is to be regarded as having implicitly stated that its equity was at risk or that there was no support for the equity, then it reasonably believed that that was true.  It was reasonable for it to believe that a non binding assurance given as part of a banker-customer relationship did leave the equity “at risk” and did not constitute “support” in any relevant sense.  The lack of any right to sue on the assurance or prove in any Enron bankruptcy meant that the equity was at risk; or, at the lowest, that RBS reasonably believed that that was so.   
330.	In Greenwood v Leather Shod Wheel [1900] 1 Ch 421 the Court of Appeal rejected the proposition that a statement in a prospectus was not untrue within the meaning of section 3 of the Directors Liability Act 1890 (which is in similar terms to section 3) unless it was untrue in the sense in which it was used by those who issued the prospectus, as opposed to the sense given to it by the Court.  In order for the defence under section 2 (1) to apply the representor’s belief must relate to the truth of the facts that the Court decides were being represented, not to what the representor thought he was saying.  That principle may on occasion give rise to difficulties of application given that some statements of fact (“the music was very loud”), may reasonably be believed to be true or false by different persons presented with the same circumstances (“that is not what I would call very loud”).
331.	I have already concluded that the first representation, in the form in which it was pleaded, was substantially true in that RBS' equity was at risk.  The fact that there was “support” in the form of non binding assurances did not render it untrue.  RBS does not, therefore need to rely on section 2 (1).  If it does need to do so, it can rely on the section to believe it had reasonable grounds for believing and did believe that its equity was at risk.  
332.	If, however, the representation is that there was no support of any kind, then RBS, which was the recipient of the assurances, cannot rely on the section to say that it believed or had reasonable grounds to believe that there was none.  
333.	I have also concluded that the second representation was substantially true.  So, again, RBS does not need to rely on section 2 (1).  If it does it can rely on the section to say that it had reasonable grounds for believing and did believe that the manner in which the ETOL transaction would be unwound at its inclusion, including the price for the underlying shares would be as stated in the material provided to RZB.  
The third and fourth representations – falsity?

The third representation 
334.	If, contrary to my view, the third representation was made, RZB has not shown it to be false.  I am not satisfied that the equity was not at risk for the purposes of US GAAP, or that the transaction did not satisfy the accounting principles necessary to permit the method of accounting which Enron sought (and put into effect).  Whether or not it did was a matter of auditing judgment.  It would have been open to a competent auditor to have adopted the accounting treatment which Enron in fact adopted.  I set out in Appendix 3 the relevant provisions of US GAAP and the reasoning by which I have come to that conclusion.   
The fourth representation
335.	If, contrary to my view, the fourth representation was made, RZB has not shown it to be false since it has not established that the ETOL transaction or the way in which it was to be treated and accounted for by Enron was improper or unlawful.
336.	In circumstances where I have held that neither the third nor the fourth representations were (a) made; (b) understood to have been made; or (c) false, I do not propose to address the applicability of a section 2 (1) defence.  
Fraud
337.	Mr Jeffrey Gruder QC for RZB opened this case on the basis that it was about “banking ethics”.  In his closing submissions he submitted that RZB did not need to show that RBS acted dishonestly save to the extent that it might be necessary to avoid what would otherwise be the effect of the Relevant Provisions.
The Law
338.	In order to establish a claim in deceit it is necessary for a claimant to prove that the relevant representations were dishonestly made in that the defendant (a) knew that he was making the statement that the Court finds him to have made; and (b) had conscious knowledge of the facts alleged to render the statement false.  
339.	As to (a) it is necessary for the claimant to identify the representation made and to show that the representor knew that that was what he was saying.  It is not sufficient that the representation was false in a sense which the representor did not understand or intend it to bear: Derry v Peek (1889) 14 App Cas 337; Akerhielm v de Mare [1959] AC 789.  As to (b) the claimant must show that the defendant knew that he was not telling the truth.
340.	The relevant principles were re-stated by the Court of Appeal in AIC Ltd v ITS Trading Services (UK) Ltd [2007] 1 All ER (Comm) 667, in which Rix LJ said this:
“256.  As for the element of dishonesty, the leading cases are replete with statements of its vital importance and of warnings against watering down this ingredient into something akin to negligence, however gross.  The standard direction is still that of Lord Herschell in Derry v Peek (1889) 14 App Cas 337 at 374: 
"First, in order to sustain an action in deceit, there must be proof of fraud and nothing short of that will suffice.  Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false."
257.  In effect, recklessness is a species of dishonest knowledge, for in both cases there is an absence of belief in truth.  It is for that reason that there is "proof of fraud" in the cases of both knowledge and recklessness.  This was stressed by Bowen LJ in Angus v.  Clifford [1891] 2 Ch 449 where he said (at 471): 
"Not caring, in that context, did not mean not taking care, it meant indifference to the truth, the moral obliquity of which consists in a willful disregard of the importance of truth, and unless you keep it clear that that is the true meaning of the term, you are constantly in danger of confusing the evidence from which the inference of dishonesty in the mind is to be drawn – evidence which consists in a great many cases of gross want of caution – with the inference of fraud, or of dishonesty itself, which has to be drawn after you have weighed all the evidence."
258.  And in Armstrong v.  Strain [1951] 1 TLR 856 at 871 Devlin J, after a full citation of passages in earlier authorities which stress the need for dishonesty (also called actual fraud, mens rea, or moral delinquency), said this about the necessary knowledge: 
“A man may be said to know a fact when once he has been told it and pigeon-holed it somewhere in his brain where it is more or less accessible in case of need.  In another sense of the word a man knows a fact only when he is fully conscious of it.  For an action of deceit there must be knowledge in the narrower sense; and conscious knowledge of falsity must always amount to wickedness and dishonesty.  When Judges say, therefore, that wickedness and dishonesty must be present, they are not requiring a new ingredient for the tort of deceit so much as describing the sort of knowledge which is necessary.”
The latter passage is echoed in the words of Buxton LJ (at [399(iii)] in AIC):
“Where knowledge of a fact held by the speaker is relied on to make his statement deceitful, he must be "fully conscious" of that fact and have conscious knowledge of the falsity of his statement: Armstrong v Strain [1951] TLR 856 at p 871, per Devlin J.”
341.	In addition, a claimant who alleges deceit bears a heightened burden of proof since, although the test is whether the case is established on the balance of probabilities, “the more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established”: AIC, [259] (per Rix LJ).
342.	RZB’s case is that RBS knew that Enron engaged in improper and dishonest techniques to conceal its true financial position.  RBS, it is said, knew that the assurances given by Enron in respect of the equity would (or would likely) invalidate Enron’s proposed accounting treatment with the result that Enron would be accounting for the ETOL transaction in an improper and unlawful manner.  The acceptance by RBS of an Enron assurance would flout the requirements of US GAAP that RBS’ equity be “at risk”.  In those circumstances RBS deliberately kept the assurances secret and omitted to refer to them, or to the fact that the transaction was driven by US accounting requirements, in the IM so that they would not come to the attention of third parties, including Enron’s auditors, the relevant US authorities, and other banks since, had they done so,  one or more of the following would occur: (a) the banks would enquire more closely whether the accounting  requirements were satisfied; (b) Enron would decide not to proceed with the transaction since to do so might reveal its abuse of the FAS 125 provisions; (c) the improper nature of the proposed accounting would be revealed to the authorities.
343.	In order to defend itself against the charge of dishonesty RBS has adduced the evidence of 15 witnesses, 14 of whom have given evidence orally.  Ms Milton, who is unwell, gave evidence in written form.  The witnesses who gave oral evidence and their positions were as follows:
RBS

(a)	Nicola George (nee Goss)	Associate Director, Power Team

(b)	Thomas Hardy				Global Head of Project and Export Finance

(c)	Iain Houston				Head of Structured Finance

(d)	Iain Robertson				Chief Executive, Corporate Banking and 
Financial Markets

(e)	Derek Sach				Head of Specialised Lending Services

(f)	John Taylor				Senior Tax Consultant

(g)	Donald Workman			Head of Integration

(h)	Chris Parsons				Senior Director, Loan Syndications

(i)	Steve Gee					Senior Director, Loan Syndications

(j)	Andrew Jameson			Head of Power Team, Project and Export 
Finance

(k)	Adam Pettifer				Manager, Power Team

(l)	Christopher Clarke			Senior Credit Manager, Structured Credit

(m)	Peter Commons			Head of Structured and Specialised Credit

Linklaters

(n)	Anne Hoe					Senior Associate, Capital Markets
344.	The fraud allegation was pleaded against Ms Milton, Ms Goss and Mr Gee.   It is no longer maintained against Mr Gee.  RZB points out that the fraud allegation was only relevant against those who were party to the compilation of the IM.  It is, however, material to note that allegations of dishonesty are not made against others involved in the transaction.   
345.	Having heard the witnesses and seen them cross examined over several days, and having considered the contemporaneous documents, I am not satisfied that any of them have behaved dishonestly or have made, or been party to the making of, fraudulent representations to RZB.  My conclusion is not based on the incidence of the burden of proof. I am satisfied on the evidence that none of them have acted dishonestly.  
346.	In particular I do not accept that RBS knew or suspected that the oral assurances confounded Enron’s proposed accounting treatment, that on that account they had to be kept secret from third parties, or that Ms Milton and Ms Goss knew that the IM contained implied representations which they knew to be false.  Nor do I accept that RBS did not care whether the IM was true or false and that its only real concern was that the arrangements relating to the equity were kept secret because they could not be revealed.  
347.	In reaching that conclusion I have taken several different considerations into account.
The Background
348.	The public perception of Enron in the latter half of 2000 was markedly different to what it was in the autumn of the following year.  At the time it was a major international company, blue chip and investment grade.  It appeared to be extremely solid financially, growing in size and reach, having an impressive management, which operated at the cutting edge of financial engineering.  Its accountants were Arthur Andersen, then one of the biggest and most prestigious firms in the world, over a hundred of whose personnel were working in its offices.  Its English solicitors in respect of the ETOL transaction were Slaughter and May.   Banks were falling over themselves to lend to it.  None of that was a guarantee of integrity (as subsequent events showed); but the nature and extent of Enron’s business was not such as to excite suspicion of impropriety.  On the contrary RBS was entitled to assume that it was dealing with an honest business – the working assumption on which banks deal with their customers.  It did so assume.  The RBS witnesses made clear that they had a positive view of Enron at the time.
349.	As will be apparent hereafter US GAAP permits the accounting treatment which Enron intended even though the finance provided to RBSFT was only 3.5% equity capital, provided that certain conditions were met.  Two of these were that the capital was “at risk” and that the sale to RBSFT was a “true sale”.  Whether that is a satisfactory situation is open to serious question.  But that is not the point.  The accounting treatment which Enron intended was potentially available to it.  Whether or not it was in fact available if a non-contractual assurance was given depends on the true construction of the relevant GAAP provisions, which are far from clear and provide no definitive guidance as to the meaning of “at risk”, in respect of which two differing views have been given by the experts in the present case.  
350.	The relevant personnel at RBS were not experts on US GAAP.  It was legitimate for RBS to regard it as a matter for Enron and Arthur Andersen to ensure that the proposed transaction would comply with US accounting requirements.  
The personnel involved.

RBS
351.	Over a dozen RBS personnel were involved in the ETOL transaction.  Allegations of deceit or dishonesty are pursued only against two of them.  It is, of course, possible for a fraud to be practised by a select few of those involved in a transaction – typically those at its core and most in the know.  A feature of the present case is that there are several individuals (e.g. Mr Hardy, Mr Houston, Mr Jameson, Mr Parsons and Mr Taylor) who appear to have had a degree of knowledge similar to those charged with dishonesty, who are not said to have been dishonest.  It is difficult to see why the two charged should have been dishonest but the others not.
352.	Further, if Ms Milton and Ms Goss intended to conceal the assurances from third parties because of their effect on the legitimacy of Enron’s proposed accounting treatment it is difficult to see how such concealment could be achieved unless several others – such as those who were responsible for attempting to syndicate the loan including Mr Parsons and Mr Gee - were apprised of the need for secrecy and were prepared to go along with it.  That was not the case.
Solicitors
353.	Both Linklaters for RBS and Slaughter and May for Enron were involved in the transaction and made aware of the assurances and that they were not to be documented.  If the idea was to keep the assurances secret this was risky.   
Arthur Andersen
354.	None of the documents evidences a meeting with Arthur Andersen.  It is, however, apparent that they were involved in structuring this type of transaction for Enron and the ETOL transaction in particular.  I have little doubt but that they made plain to Enron that there could be no legally binding undertakings.  Arthur Andersen’s position before the Examiner was that it was not aware of the assurances.  I have no way of telling whether that is true.  I am, however, satisfied that RBS did not know that Arthur Andersen was unaware of the assurances and believed that they were.   
The documents
355.	The assurances are referred to in several documents.   None of them evidences or suggests an agreement to conceal the existence of the assurances, whether from Arthur Anderson, the US Authorities, RZB or anyone else.  Nor do the documents suggest that RBS suspected that there was or might be something improper about the ETOL transaction.  
Motive
356.	It is not necessary for RZB to establish any motive; but an absence of apparent motive points away from dishonesty.  I have no doubt that RBS was keen to maintain its relationship with Enron and to preserve the “Tier 1” status, which NatWest had had.  I do not, however, accept that that explains why Ms Milton and Ms Goss would be prepared to be dishonest, a course involving considerable personal risk.  There is no evidence that they were motivated by the prospect of some particular personal benefit.  
357.	On a different level, it is difficult to see why RBS should be prepared to have any involvement, let alone as a lender of £138 million, in addition to its very substantial other lending, with what it realised or suspected was a dishonest borrower engaged in the business of false accounting - a circumstance itself likely to affect the credit risk.  I accept the evidence of Mr Houston, then RBS’ Head of Structured Finance, given in answer to the suggestion that certain people within RBS were very keen to preserve and build on NatWest’s Tier 1 relationship with Enron (RBS having before the merger been lower in the pecking order), that, whilst it was in RBS’ interests to see its business with Enron grow, provided that it was appropriate, “there was no hunger in the sense of anybody driven by inappropriate behaviour to seek more business.  It was not the nature of the way the bank worked.” 
RZB’s contentions
358.	RZB contends that there are a number of matters that establish that RBS behaved dishonestly, which I consider below.
Non documentation of the assurance
359.	RZB contends that the assurances were given orally because it was essential that third parties did not learn about them; and that RBS knew or suspected that that was so.  I do not accept this.
360.	The fact that the assurances were given, or to be given, orally, that they could not or would not be documented, and that that was for accounting reasons, is referred to in several of the documents.  I do not regard these references as suspicious.  Nor did any of the RBS witnesses.  In this market, “documented” was synonymous with “contractual” and “not documented” with “non-contractual”.  The assurance/“promise” could not be documented because it could not be contractual and it could not be contractual for accounting reasons.  The relevant evidence is cited in Schedule B to RBS’ final submissions and includes evidence from witnesses such as Messrs Workman, Taylor and Pettifer whom RZB accepts gave honest and open evidence. 
361.	The fact that such references were repeated, including in papers circulated to the Credit Committees and Linklaters (who were familiar with this type of transaction) is not readily reconcilable with a plan of dishonest concealment on the part of Ms Milton or Ms Goss.  Any contention that these two individuals realised that the giving of the assurances was intrinsically suspicious is difficult to square with the fact that it did not seem so to several other witnesses (such as Mr Workman, who was fully aware of Mr Hardy’s conversation with Mr Chivers) who learnt of them and are not said to have been dishonest.  
362.	Nor do I find it suspicious that the assurances were not contained in the transaction bible.    They were relationship assurances dehors the transaction.  RZB points out that it would have been open to RBS/Enron to record the assurance in a comfort letter expressed not to be legally binding.  I do not however regard the fact that that route was not taken as indicative of dishonesty on RBS’ part.
The Sutton Bridge Transaction
363.	In the list of issues RZB identified the Sutton Bridge transaction as relevant to the dishonest state of mind of the three then impugned individuals.  In the event it was not suggested to any of them that they were dishonest in relation to that transaction.  The fact that a very similar transaction had previously been completed, which is no longer suggested to have involved any dishonesty, is evidence that the deal team could and did begin to put together the ETOL transaction on the basis that it was as legitimate as its predecessor.
Failure to investigate
364.	RBS did not take advice on the propriety or lawfulness of Enron’s proposed accounting treatment of the transaction; nor as to why FAS 125 allowed such treatment (if it did) provided that the assurance was non-contractual; nor as to whether the assurances were legally binding.
365.	I do not regard either of these as indicia of dishonesty.  RBS was being invited to act as Arranger in a transaction which was for present purposes identical to the previous Sutton Bridge transaction, in which RBS had been invited to participate in June 1999.  The transaction was presented to it on the basis that its structure would enable Enron to achieve its desired accounting treatment.  The negotiations with Enron and its advisers proceeded on the basis and understanding that the transaction would actually, and not colourably, comply with the requirements of FAS 125 so as to permit the intended treatment.  The structure was designed to achieve a true “true sale”.  
366.	I do not find it particularly surprising, or suspicious, that RBS did not themselves ask Arthur Anderson, or their own accountants, for an opinion on the legitimacy of the accounting treatment proposed.  I accept the evidence of Mr Rhodes, RZB’s expert, that to obtain an accountant’s report would be unusual.  A customer like Enron, with accountants like Arthur Andersen, could be relied on to satisfy itself as to what should go into Enron’s accounts.   RBS was entitled to assume that Enron’s accounting entries would be correct (as Mr Rhodes accepted).
367.	Nor do I regard the fact that advice was not taken on the legal status of the assurance as significant.  The relevant personnel regarded the assurance as non-contractual.  In my judgment they were right to do so.  
Secrecy
368.	RZB alleges that RBS, in the persons of Ms Milton and Ms Goss, did not care whether or not the IM was accurate in relation to the treatment of the equity, so long as the arrangement relating to the equity was kept secret.  This was the imperative which drove the drafting of the IM and led to the elimination of any reference to “true sale” or “FAS 125” or the “US accounting requirements” in the IM.  
369.	RZB contends that RBS deliberately concealed the assurances because, if anything had been said which had revealed them, potential syndicate members would be likely to have been troubled, and would have enquired more closely as to whether the accounting requirements were satisfied.   If this had occurred: (i) the syndication would not have been as successful as  was necessary to ensure that RBS would continue to have capacity for further Enron transactions; and (ii) Enron might not have proceeded with the transaction “since there was a danger of their abuse of FAS 125 being revealed to their auditors and, ultimately, to the SEC”. 
370.	I do not accept that the IM was deliberately drafted, so far as RBS was concerned, without reference to the assurances because it was imperative to keep the assurance secret in order to avoid the consequence referred to in the previous paragraph.  The assurances were not mentioned because the IM was primarily dealing with the loan in which the banks were being invited to participate.  RBS did not believe or suspect that Enron was abusing FAS 125.  Its understanding was that Arthur Andersen was closely involved in fashioning the structure and ensuring its compliance with GAAP.   
371.	Linklaters were told of the assurances and knew that they were not to be documented.  They were provided (on 4th and 5th October 2000) with the ETOL Credit application and the minutes of the Credit Committee meetings and assisted in the preparation of the IM.  They were closely involved in advising RBS on the transaction from the outset.  I cannot discern any significant difference for present purpose between the information available to RBS and that available to Linklaters.  There is no evidence that Linklaters, who had been involved in all of Enron’s European FAS 125 deals, considered that the assurances would invalidate the proposed accounting treatment, although whether they did so or not would not be something on which Linklaters would be expected to advise.
372.	It is to be noted that Linklaters were not told not to communicate with Arthur Andersen.  On the contrary by an e-mail of 22nd September 2000 sent by Mr Schardin to Slaughter and May and Linklaters they were asked to send (as Ms Hoe did) draft documents to Arthur Andersen.  
Ms Hoe
373.	RZB in its final submissions suggested that Ms Hoe was aware of the desire of RBS and Enron to suppress references which might have been embarrassing as far as FAS 125 was concerned and that she was not averse to assisting this.  If this was a suggestion of dishonesty it was not pleaded, put, or proved, and I reject it.  Ms Hoe understood that, for accounting reasons, there could be no legally binding assurance and that the documents should not contain anything which created one or suggested that one existed.  I deal with certain e-mails that were relied on in this respect in appendix 2.  I cannot now tell (nor could she remember) what exactly were the sensitivities that she had in mind in her e-mail of 9th November 2000.  
Arthur Andersen
374.	No representative of Arthur Andersen attended any of the relevant meetings.  RBS was given to understand that Arthur Andersen was closely involved with the transaction in all its aspects and assumed that Arthur Andersen were satisfied that the accounting requirements would be met.  The involvement of Arthur Andersen was underlined to Messrs Commons and Carraro when they visited Houston in September 2000.  The note of that meeting records, in relation to Enron’s off-balance sheet transactions:
“Enron reviews each such development with Arthur Andersen ahead of creation to ensure that off-balance sheet status can be achieved, as well as discussing these with the external rating agencies to ensure that they fully understand the nature and scope of such engagements.”
Misleading Credit Lyonnais
375.	At 17:40 on Thursday 23rd November 2000 Mr Steven Tubb of Credit Lyonnais e-mailed Ms Milton/Mr Gee asking whether there was “any agreement (call/put/swap/ derivative/other) between Enron and RBS relating to RBS’ equity holding” and other questions.  Somehow Mr Parsons learnt of that e-mail, probably as a result of a conversation with either Ms Milton or Mr Gee.  At 13:32 on Tuesday 28th November he replied to Mr Tubb in the following terms:
“The only agreement between RBSFT and Enron relating to RBSFT's equity holding if the Put Option.”
376.	RZB submits that that was not an honest answer, and that its dishonest character was symptomatic of the deception which RBS was effecting.  If that is so, the answer must have taken the form which it did as a result of some communication with Ms Milton or Mr Gee.  
377.	Mr Parsons had no recollection of Mr Tubb’s e-mail or his response to it.  I do not find that particularly surprising.  His evidence was that he had had no discussion with Mr Gee or Ms Milton about suppressing information, and, if any such suppression had been suggested, he would not just have accepted it but would have discussed it with his boss and others.  He proffered two reasons as to why he might have responded in the way that he did.
378.	The first was that he had a working knowledge of Credit Lyonnais and Steven Tubb and understood the sort of information that they required; so that he may have understood that what he was being asked was whether there were any documented (i.e. contractual) arrangements that might have an effect on the senior debt.  The second was that, since the assurances were not relevant to the syndication of the facility, he had forgotten about them. Later in his evidence he said, in response to a question from me, that if he had had the assurance in mind he would have responded by saying that there was no documented legally binding agreement in place but that there was an oral comfort.  There is an inconsistency between his evidence as to what he would have said if he had not forgotten (there is only an oral comfort) and his first suggestion (which assumes that he had not forgotten) as to why he answered as he did (because Mr Tubb was only interested in contractual agreements).   
379.	I accept Mr Parsons' evidence that he was not asked by anyone to suppress information and I do not believe that he decided to do so on his own initiative.  I cannot tell why he responded in the way that he did (although I regard either of his suggested reasons as possible).  I do not think his evidence (or his response to Mr Tubb) was dishonest.  
380.	The fact that Mr Tubb asked the question that he did indicates that he, at any rate, did not treat the IM as indicating that there was no agreement of any kind in relation to the equity.  
Misleading the Revenue
381.	RZB alleges that RBS misrepresented the position in relation to the assurances to the Inland Revenue so as to “keep the lid on the oral commitment.”  It relies on the details of the transaction sent to the Revenue on 13th September 2000 (“the clearance letter”) by Mr Taylor, in which RBS stated that it “anticipates it would receive a return on this investment equal to 3% of the dividends received on the preference shares.”  This was allegedly a misrepresentation because:
“At the time the Revenue clearance was sought, the return which RBS anticipated receiving was more than 3% of the dividends on the preference shares.   The return on the preference shares was not anticipated to match its required rate of return of 13.5% p.a.  on its investment in RBSFT and so it was anticipated that Enron would make up the shortfall under the oral commitment.”
382.	At the time of the clearance letter the actual anticipated return on the preference shares was not known to Mr Taylor.  The level of return which RBS was to receive on the preference shares was not in fact of relevance so far as the issue for the Inland Revenue was concerned, namely whether RBSFT was a trading or an investment company.  
383.	On 7th September 2000 Ms Goss had sent Mr Taylor a briefing paper of 6th September 2000.  This referred to the fact there was to be an understanding between Enron and RBS “although for FAS 125 purposes this will not be documented”.  No one told Mr Taylor, who was, as RZB accepts, an honest witness, not to mention that.  He met with the Inland Revenue the next day.  Thereafter the clearance letter was drafted with input from Linklaters, Enron and RBS.  Mr Taylor was “confident that the Clearance Letter contained a full and detailed description of all relevant aspects of this transaction from RBS’ tax point of view.   The understanding was not referred to in the Clearance Letter because … it would not make a difference to RBS’ tax treatment”.
Proving in Enron’s bankruptcy
384.	RBS made a claim in Enron’s bankruptcy.  It did not include any reference to the assurances.  Under the heading “Other Claims” it asserted claims against Enron “for obligations owing to, and damages suffered by the Claimant in connection with the Claimant’s participation in various credit facilities and financial transactions with Enron”.  One of the 15 transactions included RBS’ equity investment in RBSFT.  The Claim included all rights to assert 17 causes of action of which number 12 was a general claim of failure to fulfil contractual or fiduciary obligations.  RZB submits that RBS was submitting a claim on the basis that the assurances were contractually binding; but was being careful not to put its claim purely on a contractual basis because the actions of the banks which had dealt with Enron and their roles in creating the accounting structures were coming under scrutiny.  I do not accept this.  It does not seem to me that RBS was claiming in respect of the assurances at all.  
US Accounting requirements
385.	In the light of my conclusions about the third and fourth representations there is nothing in the way in which Enron, to RBS’ knowledge, proposed to account for the ETOL transaction that supports the claim in deceit.
Damages
386.	If I am wrong on all of the above, then, as the law now stands RZB is entitled to recover the loss which it has suffered as a result of entering into the contract.  That is the measure of recovery in an action for deceit: Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254.  In Royscot Trust Ltd v Rogerson [1991] 2 QB 97 the Court of Appeal held that the measure of damages in an action under section 2 (1) of the Misrepresentation Act is the same as in an action for deceit.  The measure is not, as it would be in a case of negligence, the loss which flows from the inaccuracy of the information: South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, 213-4; Avon Insurance v Swire Fraser [2000] 1 All ER (Comm) 573, [7].  By the latter measure RZB has suffered no loss.  
387.	Royscot has been subject to strong academic criticism.  Equally, it has been said that the Court of Appeal was bound to reach the conclusion that it did having regard to the decision of the House of Lords in Clark v Urquhart [1930] 1 AC 28 in relation to section 3 of the Directors’ Liability Act 1890 and paragraph 22 of the report of the Law Reform Committee which gave rise to the 1967 Act.  RBS, whilst submitting that it was wrongly decided, recognises that I am bound by it.
388.	Accordingly, had I been in favour of RZB I would have decided that it was entitled to recover the amount which it has lost by reason of participating in the syndicated loan.  I do not understand there to be any dispute but that, following Enron’s collapse, only £4,750,736 has been repaid.  RZB’s recoverable loss would, therefore, have been £5,249,263 together with interest.  
Finale
389.	I am greatly indebted to Counsel and solicitors on both sides for the skill with which they have conducted this case and the quality of their submissions, and for the admirable way in which they have prepared the statements and assembled the very substantial relevant material.  
APPENDIX 1

In his evidence, Mr Stuart-Prince confirmed that he would have understood at the time that the Relevant Provisions precluded the alleged representations being made by RBS [Day 2/p.27:23-29:14]:
	                                               
“23	Q.	Reading those clauses, you would have understood at the
24		 time, would you not, that RBS was expressly telling you
25		 that it was not making any statements on which you could
1			rely in relation to the information supplied?
2		A.   Yes.
3   	Q.   Again, at the time, you would have understood RBS to be
4       		saying to you, would you not, "We will have no legal
5       		responsibility to you in relation to your acquisition of
6       		part of the senior loan, if it turns out that there is
7       		something inaccurate, inadequate, unreliable or
8       		incomplete in the information you have been given"?
9   	A.   	Yes.
10  	Q.	So at the time, you cannot have thought, can you, that
11      		RBS was in fact making the opposite representation to
12      		you; namely it was representing to you that the
13       	information being supplied was complete, reliable,
14       	adequate or accurate?
15   	A.	Well, you are -- the information that was provided, you
16       	would have expected to have been all of those things,
17       	and you wouldn't have expected it not to have been.
18	Q.	Exactly.
19	A.   	And so, you know, this is a -- you know, I understand
20		that that's the case, yeah.
21   	Q.	So you expected it to be accurate --
22	A.	Yeah.
23	Q.	 -- because one generally expects information you are
24		given, especially in a market like this, to be accurate?
25	A.	Correct.
 1		Q.	But you don't hear RBS to be telling you: take it from
 2			us, it is accurate?
 3		A.	Yes.
 4		Q.	Because they have said the opposite, effectively.
 5		A.	Yes.
 6		Q.	And you had no problem with this --
 7		A.	No.
 8		Q.	-- because it's standard.   And you will have seen that
 9			Miss Warren had signed this, not just saying, "I see
10       	that's the case", but agreeing that that was the case.
11	A.	Yes.
12	Q.	And you would expect a bank in this market to honour its
13		agreement in these circumstances?
14	A.	Yes.  
	See also Day 2/45:17 - 46:10:
17	Q.	We know that RBS did not say in terms to you: take it
18		from us, this is accurate, complete, reliable,
19		et cetera.   Yes?
20	A.	Yes.
21	Q.	But we do know that RBS said something on that topic,
22       	because it said something in the confidentiality
23      		agreement, and indeed the information memorandum itself,
24       	and what it said was to the entirely opposite effect,
25      		wasn't it?  "We are not making any statement to you,
1      		whether express or implied, that what you are getting is
2      		accurate, complete, reliable or adequate"?
3		A.	Yes.
4		Q.	So, again, drawing this distinction which you understood
5			at the beginning between what the document itself says
6			and what the arranger is telling you, at the time, you
7			cannot have thought, because it was illogical to do so,
8			that RBS was implicitly saying to you: this information
9			is accurate and complete?
10	A.	Yes”.

APPENDIX 2

TAX TREATMENT OF THE TRANSACTION FROM RBS’ PERSPECTIVE

Discussions about tax treatment

1	From Wednesday 6th September onwards there were discussions between representatives of Enron, RBS, Linklaters and Slaughter and May (S&M) about, inter alia, the structure and tax treatment of the transaction.  Initially the discussions centred on whether an offshore or an onshore SPV should be used.  The potential problem was whether the Inland Revenue would accept that RBSFT, in buying the preference shares and entering into the TRS, was acting as a trading company in which case it would only be liable for the tax on the profit made on the overall transaction, or whether the SPV was to be regarded as an investment vehicle.  

If RBSFT was to be treated as a trading company the preference dividends paid to RBSFT would be taxable profits under Schedule D Case 1; and the c.  97% thereof paid by RBSFT to Enron under the TRS would be deductible in calculating those profits (the dividends and payments cancelling each other out).  The payments that RBSFT would receive from the TRS would be taxable profits and the interest paid to the Banks would be deductible from those profits.  Any profit made by RBSFT on the disposal of the preference shares would be part of its trading profits.  Any profit made by RBS on any sale of RBSFT would be part of its trading profits.  The remaining 3% of the dividends would be extracted from RBSFT by way of a management fee.  The result would be to leave RBSFT with no profit and no loss.  

If RBSFT was an investment company the dividends received would be non taxable and any gain on the sale of the preference shares would be subject to capital gains, not corporation, tax, although the rates for those taxes were at the time the same.  Whether payments under the TRS would have been deductible would have been uncertain.    

2	On 6th September there was an initial meeting with Enron attended by Linklaters and RBS at which, because of the problem about the deducibility of payments made under the TRS, it was proposed that an offshore SPV be used.  Enron indicated that there was no “tax play” for them i.e. that it was not seeking any particular tax advantage.

3	On Thursday 7th September John Taylor, RBS' Senior Tax consultant, expressed the view in a conference call that the SPV could be a UK company.  He suggested that confirmation should be sought from one of RBS’ tax inspectors at the Inland Revenue that the SPV (i.e. RBSFT) would for tax purposes be treated as trading.  In the afternoon of Friday 8th September he went to see the relevant Inland Revenue Inspector and had initial discussions about treating RBSFT as a trader.  The Inspector wanted further details of the whole transaction and of all the companies involved in it.  At some stage during his discussions with the Inspector Mr Taylor indicated that the transaction involved no “tax play” by Enron.

4	Over the weekend discussions took place between Mr Taylor, Ms Milton/Ms Goss and Mr John Lindsay of Linklaters and a draft clearance note was prepared. Ms Goss produced the first draft.  Linklaters produced another.  In one paragraph of that draft it was said that:

“…in order to achieve the desired accounting treatment for Enron, no formal arrangement for the sale of the equity may be made.  Irrespective of this, it is intended that the TRS arrangement will cover any loss on disposal/redemption of the prefshares.”
In a later Enron draft that paragraph was removed and, at an earlier place in the draft, there   appeared the words:

“The transaction needs to be structured as described below in order to achieve the desired US Accounting treatment and, in particular there must be no arrangements to ensure the repayment of the return on the 3% of equity that RBS will be providing via a subscription for shares in an SPE (see 8 below) .
…
8.  The remaining 3% of the dividends will be attributable to the equity investors in the SPE (i.e. RBS).  It is not possible for the equity investors to be given a guaranteed return in respect of income or capital as this would prejudice the desired US accounting treatment.”
A further draft e-mailed by Ms Goss to Mr Taylor at 05.25 on 13th September had this version:
“The remaining 3% of the dividends will be attributable to the equity investors in the SPE (i.e. RBS).  RBS does not anticipate realising a loss on its equity investment and anticipates that it would receive a return on this investment equal to 3% of the dividends received on the preference shares”
5	In the transaction as then contemplated the TRS swap was going to involve Enron paying the interest and principal on the loan and receiving 97% of (i) the dividends on the preference shares and (ii) the sale proceeds of those shares, leaving RBS with 3% of the dividend on the shares and of the sale proceeds.  As would later appear, the 3% of dividends would not be enough to produce the intended 13.5% rate of return.  At this stage, however, the financial data was not available to those at RBS and Linklaters involved in drafting the letter nor were any details of the Put Option available.     

Clearance Letter sent to the Revenue

6	Enron commented on the draft.  A final version, which included the two paragraphs last cited above, was cleared by Enron on Wednesday 13th and sent to the Revenue on that date.  The letter made no reference to the assurance, which was of no relevance to RBS’ tax treatment.    

7	On Thursday 14th September draft Put Option terms were made available to RBS.

8	On 19th September Ms Goss e-mailed Mr Taylor to tell him that the expected available cashflows produced a return on the preference shares of 5.5% and of the informal arrangement with Enron to make up the difference.

9	At some time on 20th September there was what Mr Lindsay noted to be a “very aggressive telephone conversation from Enron on tax issues” from which he inferred that Enron has decided to go down the “repo route” in view of the tax savings that it would give them.  This would involve forcing RBS to rely on the Put Option in order to exit the transaction (as opposed to being made whole by Enron bidding in the auction of the preference shares), thereby causing the transaction as a whole to be treated from the tax point of view as a “repo”: section 730A and 730 B of ICTA 1988.  Under a “repo” (repurchase) the party who in economic terms is the borrower sells an asset, such as shares, to the party who in economic terms is the lender on terms that the asset will be resold by the “borrower” to the “lender”.  The excess of the lender’s receipts (re-purchase price and dividends) over his payments (the provision of the money) is treated like interest on a loan and taxable accordingly.   

10	It would appear that Enron had woken up to the fact that, as the transaction stood, one Enron company would be paying the dividends, without receiving a tax deduction for them, and another Enron company that received TRS payments would be taxable on those receipts.  A tax asymmetry would arise so that what was intended to be an essentially internal transaction would generate a taxable income.  If the matter was treated as a repo Enron would, in Mr Taylor’s estimation, obtain a tax benefit of some £ 7-8 million.

11	On the same day the telephone conversation between Mr Hardy and Mr Chivers took place (see para 41 above).  At 16.00 the CBFM Credit Committee met.  At 21.57 Mr Lindsay sent to RBS possible alternatives for different tax treatment.  These included the use by RBS of an offshore subsidiary in Jersey or of a Jersey company owned by a Jersey Charitable trust but with non-voting preference shares issued to RBS.  

The Revenue accepts that RBSFT is a trading company for tax purposes

12	On 21st September there was a conference call at 09.30 (Linklaters, RBS, Enron and S&M).  Shortly before 17.00 Mr Taylor spoke to the Revenue and was told that they accepted the complete transaction as being trading so that RBS would only be taxable on its margin.    Enron was advised by RBS that tax clearance had been obtained.  Later that evening Mr William Watson of S&M telephoned Mr Lindsay to point out that Enron would be claiming repo treatment.  Mr Lindsay discussed the matter with colleagues at Linklaters and then with John Taylor and Nicola Goss.  Mr Taylor felt uneasy about the clearance he had received in view of what he had said to the Revenue about Enron not looking for any tax advantages.  A decision was made to advise Enron via Mr Watson that if the deal was to go ahead by 30th September the repo benefit would have to be foregone.  

13	On Friday 22nd September there was another quadripartite conference call, the time of which is unclear.  According to Mr Lindsay's note Enron explained that the Put Option was a last resort and had been requested by RBS.  They only expected it to be exercised if it was in RBS’ favour i.e.  if RBS would be made whole thereby.   Mr Lindsay advised that the deal would need to be put to RBS’ Structured Products Committee (Mr Taylor thought that that was because it now appeared to involve Enron obtaining a tax advantage).  RBS and Linklaters agreed to discuss matters with Mr Taylor with a view to going back to the Inspector to ensure that he was aware that there was a possibility of repo treatment and to let him know the amount of tax benefit that might accrue to Enron.  Enron advised that the Inspector may want some assurances that RBS would not be coerced into exercising the put by Enron (the effect of which would be likely to mean that Enron was entitled to repo treatment).  Mr Lindsay noted  by way of conclusion that RBS would still be faced with the need to ensure that the Inspector knew the numbers involved and understood what would determine whether the option was exercised in order to ensure that the Bank could rely on the clearance.

14	By now RBS treated what Enron was saying about the Put Option being a last resort with some scepticism, or even mistrust, in the light of previous indications that Enron wanted the transaction to take effect as a repo, which, itself, appeared contrary to what had previously been said about the absence of a tax play.   There was a risk of the whole deal going off.

The Revenue’s written confirmation

16	On the same day the Inspector wrote to Mr Taylor to confirm that, if the SPV was a trading company the receipt and payments under the TRS would be Case 1 items.  If the SPV was an investment company he could say that, if the margin made by the SPE was offered to tax and the arrangements did not avoid UK tax, then the Revenue would not argue for a treatment which led to a mismatch in incomings and outgoings for SPE.  In effect he confirmed that, even if RBSFT were to be regarded as an investment company, the Revenue would allow it deductions for what it paid under the TRS.

17	The Group Credit Committee met at 12.00.  

18	A fax from Ms Milton to Mr Hardy of 21.07 on Saturday 23rd September recorded that Mr Taylor was to contact the Inspector on Monday to check with him that the Revenue had recognised that there could be repo treatment for Enron were the put to be exercised; and that, based on the formula within the Put Option (i.e. the fair market value) and judging by past financial criteria it was unlikely that RBS could be made whole if the put were to be exercised.  The idea was mooted of giving the Revenue an undertaking that the Put Option would only be exercised if RBS would be made whole by the exercise of the put, it being felt that that might make the Inspector more willing to reconfirm the tax treatment (on the footing that RBS would do what it could to avoid there being a repo from which Enron could take advantage).

19	On 22nd September Mr Hardy wrote his memorandum of that date relating to his conversation with Mr Chivers of 20th September (see para 41 above).  RZB suggests that he did so as a result of the problem which was developing in relation to Enron's desire for repo treatment.  Mr Hardy's evidence was that he recorded the conversation as a matter of routine; and I think that is likely to be correct.  I am not convinced that his doing so had any link with the tax discussions.  Mr Taylor was not told of the conversation with Mr Chivers at the time and only saw the memorandum in the course of these proceedings.  

Changes of plan

20	On Monday 25th September Mr Taylor spoke to the Revenue prior to 09.52 to tell them that RBS would be dropping the use of an SPV; that the transaction would be put through the bank; and that the Put Option was the more likely exit route so that the transaction would be a repo over the Enron shares.  This is likely to have been as a result of discussions with Enron.  The Inspector raised no concerns about this change.

21	In the late afternoon of the same day the position changed again.   Mr Taylor spoke to the Revenue to tell them that RBS was reverting to the original structure involving RBSFT and that Enron would be treating the transaction as a repo.  The Inspector said he would confirm that this did not affect the views expressed in his earlier letter.   Mr Taylor wrote to the IR confirming that the transaction would be treated by both Enron and RBS and its SPV as a repo of the preference shares as it was likely that the SPV would exit from the transaction by exercising its Put Option.  So far as RBS was concerned there was no tax advantage dependent on whether the exit route was the Put Option or the auction process.

Reconfirmation from the Revenue

22	On 26th September the Inspector confirmed that the revised treatment would not affect the comments of his letter of 22nd September.  

27	The indication to the Revenue on 25th September that the SPV would be likely to exit from the transaction by exercising the Put Option does not square with what the Credit Committee was told on 22nd September that the Put Option was a backstop in the event that Enron did not honour its promise to make the bank whole and the Goss/Milton memorandum of 26th September which expressed the belief that the option would only be exercised if Enron did not bid under the auction process or where the FMV calculation produced a value sufficient to make RBS whole.  Quite how this mish mash occurred is not clear.

28	In an e-mail of 3rd October Ms Hoe recorded that Mr Taylor was very keen to include in the RBSFT board minutes wording regarding the profit which RBSFT was anticipating would be made from the transaction; that she had explained to him what Enron's view was likely to be and that that she would craft a board minute at which a “commercial discussion” would be recorded.  There would then be a second board meeting approving the minutes of the first board meeting and formally approving the legal documents.  The likely view to which she was referring was that there should be no reference to a stated fixed profit because that would not fit with their proposed accounting treatment.  

29	In early October some draft minutes were produced by Linklaters of an intended meeting of RBSFT which contain just such a commercial discussion and included reference to the fact that RBSFT would:

“… also have the right to require an Enron Subsidiary (guaranteed by Enron Corp.) to purchase the shares at a price which would be at least equal to the fair market value of [the] share.  The meeting considered the potential profit for the Company of a sale of the shares.”
30	On 26th October Ms Goss e-mailed Mr Taylor and Ms Goss with two sets of board minutes saying that she had found it “extremely difficult to include wording which would quantify [the] profit in a way which would not raise FAS 125 issues”.  In evidence Ms Hoe agreed with my suggestion that the problem was that “if the equity is too assured, it might begin to look as if it was not equity at all”.  In this draft the minutes of the second meeting referred (in the passage cited) to a “price which would be at least equal to the fair market value of those shares”.  The likelihood is that that was simply a mistake: the Put Option provides for the lower of Book Value and FMV.  In reply Mr Taylor suggested adding the words “and concluded that it was in the company’s best interests to undertake this trading transaction”.  This was the form that the first Board Minute of 31st October then took.   

31	RZB contends that the likelihood of Enron forcing RBS to use the Put Option as the exit route (in order to achieve repo treatment) meant that it could not rely on the Auction Process to make it whole; and that RBS was, therefore, the more reliant on Enron's promise than before - so that the assurance, given on 20th September and carefully recorded on 22nd September, was and was understood to be contractual.  RZB suggests that the content of the minutes referred to in the previous paragraph reflects the true agreement namely that RBS would have the right to require an Enron subsidiary to purchaser the shares at a price at least equal to the fair market value.  It further suggests that the dilemma to which Ms Hoe referred together with the decision to have two minutes, one of which would formally approve the transaction and be included in the transaction “bible” and the other of which would refer to profit in rather vague terms and would not be included, shows that in truth there was a promise being made which could not be revealed.

32	I do not accept that the legal status of the Enron assurance (or RBS’ perception of its status) changed over or around the period 20th - 24th September.  It remained, to the knowledge of all concerned, as important as before that the assurance should not be legally binding.  Nothing in the evidence suggests that anyone at RBS understood that, in the light of an increase in the likelihood of the Put Option being exercised RBS was to have a legal right to anything more than what the Put Option (as recorded) gave it.  In Mr Taylor’s view, if the assurance had been contractual the ETOL transaction would have been a repo and there would have been no need for the clearance.

33	I do not accept that the giving of the assurance on 20th and the recording of it on 22nd September was a response to the question that had arisen in respect of the tax treatment.  The draft board minute (and its final version) do not accurately reflect the terms of the Put Option.  There was no agreement that the Put Option should have the effect of the draft minute.  I accept that Linklaters understood that Enron probably did not want anything to be recorded that would make it appear that there was a binding obligation.  That sensitivity did not, however, mean that there was, in fact, some contractual obligation.

APPENDIX 3

US GAAP

1	The expression “Generally Accepted Accounting Principles” (“GAAP”) refers to a series of conventions rules and procedures which define accepted accounting practices.  At the relevant time the sources of those principles were identified in Statement on Auditing Standards No 69 (“SAS 69”) – “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles” - and were as follows:

(i)	Category A: officially established accounting principles consisting of Financial Accounting Standards Board (“FASB”) Statements of Financial Accounting Standards and Interpretations, Accounting Principles Board (“APB”) Opinions, and AICPA Accounting Research Bulletins.  FAS 125 is an FASB statement.  

“SAS 69 states in footnote 3 that “rules and interpretative releases of the Securities and Exchange Commission (SEC) have an authority similar to category (a) pronouncements for SEC registrants.  In addition, the SEC staff issues Staff Accounting Bulletins that represent practices followed by staff in administering SEC disclosure requirements.  Also, the Introduction to the FASB’s EITF Abstracts states that the Securities and Exchange Commission’s Chief Accountant has said that the SEC staff would challenge any accounting that differs from a consensus of the FASB Emerging Issues Task Force, because the consensus position represents the best thinking on areas for which there are no specific standards”.
(ii)	Category B: 	FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and AICPA Statements of Practice.

(iii)	Category C:	AICPA Accounting Standards Executive Committee (“AcSEC”) Practice Bulletins that have been cleared by the FASB and consensus positions of the FASB Emerging Issues Task Force (“EITF”).

(iv)	Category D:	AICPA accounting interpretation and implementation guides (“Qs & As”) published by the FASB staff and practices widely recognised and prevalent either generally or in the industry.

(v)	Category E:	Other accounting literature such as FASB Statements of Financial Accounting Concepts (“CONs”).  CONS are the foundational principles underlying GAAP.  SAS 69 para 11 identifies their importance, explaining that “FASB Statements of Financial Accounting Concepts would normally be more influential than other sources in this category.”

These categories form a hierarchy; so that recourse should be had to any guidance they contain in sequential order.  But if a specific pronouncement within GAAP directly addresses a specific issue that guidance is to be applied even though there may be higher level (but not directly on point) GAAP that might lead to a different conclusion.

2	In order for the ETOL transaction to achieve Enron’s desired accounting treatment RBSFT had to satisfy the applicable GAAP for non-consolidation of a special purpose entity (“SPE”) which meant that the transfer of the preference shares had to satisfy the provisions of FAS 125.  In essence the accounting issue was whether the sale of the preference shares should be reported as a sale (a “true sale”) or as a collateralized borrowing.  

FAS 125 

3	FAS 125 provides in its summary:

“This Statement provides accounting and reporting standards for transfer and servicing of financial assets and extinguishments of liabilities.  These standards are based on consistent application of a financial components approach that focuses on control.  Under that approach, after a transfer of financial assets an entity recognises the financial and servicing assets it controls and the liabilities it has incurred, derecognises financial assets when control has been surrendered, and derecognises liabilities when extinguished.  This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.”
4	Paragraphs 9 and 30 provide:

“9.  A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange.  The transferor has surrendered control, over transferred assets if and only if all of the following conditions are met:
a.	The transferred assets have been isolated from the transferor – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or receivership (paragraphs 23 and 24).
b.	Either (1) each transferee obtains the right – free of conditions that constrain it from taking advantage of that right(paragraph 25)  – to pledge or exchange the transferred assets or (2)  …
c.	The transferor does not maintain effective control over the transferred assets through (1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity (paragraphs 27-29) or (2) an agreement that entitles the transferor to repurchase or redeem transferred assets that are not readily obtainable (paragraph 30).”
“30   A call option or forward contract that entitles the transferor to repurchase, prior to maturity, transferred assets not readily obtainable elsewhere maintains the transferor’s effective control because it would constrain the transferee from exchanging those assets…”
It is not suggested that the ETOL transaction failed to satisfy the transfer of 
Control requirements.   

5	Paragraph 129 of FAS 125 provided:

“129	The Board observes that a special-purpose entity that has distinct standing at law may still be an affiliate of the transferor, and therefore its assets  and liabilities may be required to be included with those of the transferor in consolidated financial statements.  Many respondents maintained that existing principles are not clear and asked the Board to develop within this Statement additional consolidation guidance for special-purpose entitles.  The Board concluded that this Statement is not intended to change existing generally accepted accounting principles for consolidation issues.  However, the Board acknowledges that consolidation of special-purpose entities is an issue that merits further consideration and is committed to deliberating that issue in its current project on consolidated financial statements.”
6	That lack of clarity makes it  necessary to turn to two EITF Topics, namely Topic D-14 and Topic 90-15 issued by the end of May 1990 and July 1991 respectively.  These deal with the question whether an SPE (such as RBSFT) needs to be consolidated into the financial statements of the transferor (Enron).   If it did, Enron would not be able to recognise its gain from the sale of ETOL.  

THE EITFs

EITF Topic D-14	Transactions Involving Special-Purpose Entities

7	EITF Topic D-14  provides

“Generally, the SEC staff believes that for nonconsolidation and sales recognition by the sponsor or transferor to be appropriate, the majority owner (or owners) of the SPE must be an independent third party who has made a substantive capital investment in the SPE, has control of the SPE, and has substantive risks and rewards of ownership of the assets of the SPE (including residuals). Conversely, the SEC staff believes that non-consolidation and sales recognition are not appropriate by the sponsor or transferor when the majority owner of the SPE makes only a nominal capital investment, the activities of the SPE are virtually all on the sponsor’s or transferor’s behalf, and the substantive risks and rewards of the assets or the debt of the SPE rest directly or indirectly on the sponsor or transferor.”
EITF Issue 90-15 Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions

8	EITF 90-15 addresses the question of what amounts to a substantive capital investment.  It addresses leasing transactions but, as is common ground, it, together with EITF Issue 96-21, is generally accepted as applicable to SPEs in other transactions such as the ETOL transaction.  It records a Task Force consensus that a lessee would be required to consolidate an SPE lessor when all of a number of conditions were met the third of which was that the owner of record of the SPE had not made “an initial substantive residual equity capital investment that is at risk during the entire term of the lease.”

9	The EITF contains a statement of the SEC staff position in relation to a number of questions.  Question 3 asked what amount qualified as a substantive residual equity capital investment.  The answer was: 

“The initial substantive residual equity investment should be comparable to that expected for a substantive business involved in similar leasing transactions with similar risks and rewards.  The SEC staff understands from discussions with Working Group members that those members believe that 3 percent is the minimum acceptable investment.”
10	The guidance available as to the meaning of the phrase “at risk” amounted to the following: 

(1)	The response to Q3 in EITF 90-15, which states:

“As the consensus states, the investment should be at risk with respect to the leased asset for the entire term of the lease.   The investment would not be considered to be at risk, for example, if the investor were provided a letter of credit or other form of guarantee on the initial investment or return thereon.   An investor note payable issued to the SPE would not qualify as an initial substantive residual equity investment at risk.”

(2) 	     The answer to Q7 in EITF 96-21 – Implementation Issues in Accounting for Leasing Transactions Involving Special Purpose Entities 

“Source of Initial Minimum Equity Investment
Question No.7
Would an equity investment that is financed with nonrecourse debt qualify as an initial substantive residual equity capital investment as that term is used in condition 3 of Issue 90-15?  Would an equity investment that is financed with recourse debt qualify?
Response
If the source of the funds used to make the initial minimum equity investment is financed with nonrecourse debt that is collateralized by a pledge of the investment, the investment would not meet the at-risk requirement discussed in condition 3 of Issue 90-15.

Similarly, the at-risk requirement would not be met if the owners purchased residual insurance or obtained a residual guarantee that would ensure recovery of their equity investment.   If the initial minimum equity investment is financed with recourse debt from a party not related to the lessee, the owners (borrowers) must have other assets at risk to support the borrowing in order to avoid condition 3 of Issue 90-15.”  

11	As at November 2000 no court or tribunal had either decided, or provided any ruling or guidance as to, the meaning of “at risk”.  Nor had the SEC or the EITF.   Individual auditors would thus have to decide for themselves, on the facts of any given case, whether the equity was at risk.  I have heard evidence on the question from Professor Bartczak on behalf of RBS and Mr Regan on behalf of RZB.   Professor Bartczak has had many years of academic experience teaching the principles of US GAAP at university, and to business corporations through the consulting firm which he has run since 1985.  Mr Regan is a practising accountant and the Chairman of Hemming Morse Inc.    

Professor Bartczak’s view

12	Professor Bartczak’s opinion is that the touchstone inquiry is whether there was a legally enforceable obligation of Enron protecting RBS’ equity investment in RBSF.  In a field where there is uncertainty such a criterion produces a desirable bright line rule.  Just such a rule developed with the 3% equity figure which started off as a minimum and is now recognised as the criterion.  If non-legally enforceable statements could change the accounting there would be no certainty as to the proper accounting treatment.  Further, it was in 2000 a common expectation in the securitisation field that transferors would do all they could to prevent SPE security lenders from losing their investment, a state of affairs known as “implicit recourse” or “voluntary support”.  The fact that transferors would stress the strength of their relationship with equity investors in order to give them comfort about their investments ought not to lead to any different accounting treatment.   

13	In support of his opinion he drew attention to the examples given as to what would not constitute at risk, cited in the response to Q3 in EITF 90-15, which involve circumstances in which the entity in the position of RBS has the benefit of a legally binding obligation.   He suggests that a company such as RBS, if it does not have a legally binding commitment, is properly to be regarded as at risk in relation to the equity because of the risk that the commitment, upon which it cannot sue, will not be honoured if the nature of the relationship changes over the relevant  period.  This may be for any number of reasons including departure of the relevant personnel, divergence of commercial interests making it no longer as important as it once was to honour the commitment, falling out and the like.  
 
14	Professor Bartczak draws attention to the guidance provided by the FASB in September 1999 in “A Guide to the Implementation of Statement 125 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: Questions and Answers”.  Q & As 49 and 50 read as follows:
“49 Q - Would a transferor’s contractual right to repurchase a loan participation that is not a readily obtainable asset preclude sale accounting?
A – Yes.   …
50 Q – In certain industries, a typical customer’s borrowing needs often exceed its bank’s legal lending limits.   In order to accommodate the customer, the bank may “participate” the loan to other banks (that is, transfer under a participation agreement a portion of the customer’s loan to one or more participating banks).   In those situations, a noncontractual understanding may exist among the participants.   Under that noncontractual understanding, the participating banks will return some portion of the loan at par to the lending bank if its legal lending limit increases.   The noncontractual understanding is not an enforceable right, although the participating banks generally comply.   These loans generally are not-readily-obtainable assets, and the participating banks are not constrained from selling their interest in the participation.   Does this noncontractual understanding constitute a call on not-readily-obtainable assets?
A – No.   A probable behavior is not equivalent to a contractual right.   Paragraph 9(2) (c) focuses on a transferor’s right (it is phrased entitles) to repurchase or redeem the transferred assets.   Therefore, while in most circumstances the transferee will likely return the assets if the transferor asks for them, it is not obligated to do so.   That is, the transferor has not retained control over the transferred assets if it does not have a legal right to call those assets.” 

15	This was not guidance given in relation to “at risk” but in the context of para 9 c of FAS 125, which relates to whether there has been a loss of control of the relevant asset.  RBS submits that the sharp distinction which this guidance draws between a contractual right and probable behaviour indicates that a similar approach is appropriate in relation to the analogous question whether equity is “at risk”.   Both are looking at a question of status.  

16	Professor Bartczak recognised that other accountants might reasonably disagree with his view.  He observed that before the collapse of Enron few accounting practitioners knew about SPEs or the consolidation rules applicable to them, and only a small group of practitioners at the very largest global accounting firms considered these issues in their daily practice.  Accounting judgments in this field were being exercised by a small cadre of accountants.

17	RZB also draws attention to the facts assumed in Q & A 50.  These include the fact that “the participating banks are not constrained from selling their interest in the participation”.  In that situation,  RZB submits, the understanding cannot constitute a call option of the kind referred to in paragraph 30 of FAS 125 because the transferee’s right to sell or exchange those assets is not constrained.  The transferee bank could sell their interest in the participation the same day they obtain it and before the transferor’s lending limit is increased (if it ever will be).  The Q&A is concerned with a different situation from the consolidation test under EITF D-14, 90-15 and 96-21, where the relevant test is concerned more with whether some obligation has been incurred which infringes the “at risk” requirement.

RZB and Mr Regan

18	RZB submits that legal enforceability cannot be the test.  If it was, equity would be at risk if there was a legally enforceable promise given by a $ 2 company but not at risk if there was the strongest possible non binding assurance from a reputable and solvent corporation, or a public body.  

19	Mr Regan’s view is that a non binding assurance of the type given in the present case would destroy the “at risk” nature of the equity.  In reaching that view he takes into account the guidance to be found in a number of different GAAP sources, which are concerned with the reporting of contingent liabilities.

FAS 5

20		FAS 5, which falls within Category A, deals with “Accounting for Contingencies”, discusses loss contingencies whose common characteristic is a guarantee, and states that:

“The Board concludes that disclosure of those loss contingencies, and others that in substance have the same characteristic, shall be continued.  Disclosure shall include the nature and amount of the guarantee.”

AAER 82

21	  	FAS 5 is referred to in AAER 82, released in 1985, which is of category A status.  Its title is ‘The Significance of Oral Guarantees to the Financial Reporting Process’.  It states that:
“the Commission [i.e. the SEC] is of the view that, depending upon the facts and circumstances, oral guarantees, even if legally unenforceable, may have the same financial reporting significance as written guarantees.  Statement of Financial Accounting Standards No.5, paragraph 12, states that material undertakings which in substance have the characteristics of a guarantee should be disclosed in financial statements.

Thus, whether oral or written, a material commitment which is in substance a guarantee should be reported.   One factor, among others, in determining whether statements made by an issuer constitute an oral guarantee which should be reported is whether the financial institution relied upon the statements in making the decision to extend credit.

Guarantees and guarantees-in-substance can affect the accounting treatment for transactions.  … Therefore, financial institutions and other entities should report those oral arrangements which constitute guarantees-in-substance in response to an audit confirmation request….”

22	 	These observations by the SEC were made in response to an argument that had been addressed to the SEC in a case where a company ("the issuer”) had materially overstated its income and net assets.  The issuer’s subsidiary had purported to sell a substantial amount of assets to an unrelated foreign company (“the buyer”) in order to raise cash.   There was in fact no true sale and the risks of ownership never passed to the buyer because the subsidiary agreed with the buyer to repurchase an amount of assets sufficient to enable the buyer to pay its debts incurred in purchasing the assets sold.  In order to obtain finance for the transaction the buyer had obtained standby letters of credit from several banks.  The issuer told the banks it would issue comfort letters stating that it knew of the obligations of its subsidiary arising from the agreement with the buyer.  A senior executive of the issuer told a representative of one large New York bank that the issuer viewed its comfort letter as a guarantee and would make sure that the bank was paid and did not lose money on the transaction.   In response to an audit confirmation request from the issuer’s auditor asking for information regarding guarantees, liabilities or other third party obligations, the bank did not report the existence of the guarantee.

23	      The argument was that “as a matter of contract law … oral guarantees were not legally binding under applicable state law and that only legally binding guarantees should be reported in response to an audit confirmation request”.  The SEC took the view that, depending on the facts and circumstances, oral guarantees, even if legally unenforceable, might have the same financial reporting significance as written guarantees.  

24	      RZB submits that there is a close parallel with the assurance given by Enron to RBS.  The SEC stressed the importance of substance over form, and made the following observations which, RZB submits, are of general application: 

“Based upon the applicable accounting literature, the Commission believes that oral statements, which are in substance guarantees, are contingent liabilities which may, under certain circumstances, require disclosure.   They may also have material significance in accounting for transactions.  The Commission emphasizes that the substance of oral guarantees should be considered by financial institutions and others in completing audit confirmations.  Agreements which in substance constitute guarantees should be reported in response to an audit confirmation request.”
      CON 6

25	  	CON 6 deals, in paras 35-40 and 203, with liabilities and their characteristics.  It states as the last of three characteristics of liabilities that:

“….  most liabilities are legally enforceable.  However, those features are not essential characteristics of liabilities.  Their absence, by itself, is not sufficient to preclude an item’s qualifying as a liability… although most liabilities rest generally on a foundation of legal rights and duties, the existence of a legally enforceable claim is not a prerequisite for an obligation to qualify as a liability if for other reasons the entity has the duty or responsibility to pay cash, to transfer other assets, or to provide services to another entity.
…
40	… although most liabilities stem from legally enforceable obligations, some liabilities rest on equitable or constructive obligations, including some that arise in exchange transactions.   Liabilities stemming from equitable or constructive obligations are commonly paid in the same way as legally binding contracts, but they lack the legal sanction that characterizes most liabilities and may be binding primarily because of social or moral sanctions or custom.   An equitable obligation stems from ethical or moral constraints rather than from rules of common or statute law, that is, from a duty to another entity to do that which an ordinary conscience and sense of justice would deem fair, just, and right – to do what one ought to do rather than what one is legally required to do.  … A constructive obligation is created, inferred, or construed from the facts in a particular situation rather than contracted by agreement with another entity or imposed by government.   For example, an entity may create a constructive obligation to employees for vacation pay or year-end bonuses by paying them every year even though it is not contractually bound to do so and has not announced a policy to do so.    The line between equitable or constructive obligations and obligations that are enforceable in courts of law is not always clear, and the line between equitable or constructive obligations and no obligations may often be even more troublesome because to determine whether an entity is actually bound by an obligation to a third party in the absence of legal enforceability is often extremely difficult.   Thus, the concepts of equitable and constructive obligations must be applied with great care.
…
203	An entity may incur equitable or constructive obligations by actions to bind itself or by finding itself bound by circumstances rather than by making contracts or participating in exchange transactions.   An entity is not obligated to sacrifice assets in the future if it can avoid the future sacrifice at its discretion without significant penalty.   The example of an entity that binds itself to pay employees vacation pay or year-end bonuses by paying them every year even though it is not contractually bound to do so and has not announced a policy to do so has already been noted (paragraph 40).   It could refuse to pay only by risking substantial employee-related problems.”
26	  	RZB submits that the assurances in this case, given at a high level, in circumstances where the effect of non-compliance could severely impair, if not rupture, the Enron-RBS relationship amounted, if they were not legally enforceable, to just the sort of constructive obligation contemplated by CON 6.  
 
27	  	CON 6 recognises that, if there is no legal obligation, it may be extremely difficult to draw the line between no obligation and some sort of non-legal obligation.   Para 203 of CON 6 suggests that it is relevant to consider the extent to which the “promisor” would suffer a significant penalty if the promise was not honoured.  Mr Regan agreed that, in the light of the provisions of CON 6, in order for an auditor to reach a judgment as to whether a particular non-binding assurance constituted a constructive obligation for CON 6 purposes he would need to have regard to all the relevant facts including the perception of the person giving the assurance as to the consequence of its not being performed. He accepted that, if the auditor had little or no guidance bearing on the question whether or not the assurances were an in substance guarantee he could not make an appropriate assessment as to whether it was.  On this basis, in the absence of knowing how Enron viewed the assurances internally, it is not possible to know whether the constructive obligation threshold, if applicable, has been reached.  

Representational faithfulness
 
28	  	The experts are agreed on the importance of the need for representational faithfulness.    ‘Representational faithfulness’ is explained in paragraph 63 of CON 2 (“Qualitative Characteristics of Accounting Information”) as being “correspondence or agreement between a measure or description and the phenomenon it purports to represent.   In accounting, the phenomena to be represented are economic resources and obligations and the transactions and events that change those resources and obligations”.

29	      Broadly speaking representational faithfulness in the accounting treatment of a transaction means that substance is not to be subordinated to form.   SAS 69 makes clear that:
“Generally accepted accounting principles recognize the importance of reporting transactions and events in accordance with their substance.   The auditor should consider whether the substance of transactions or events differs materially from their form.”
CON 2 adds that:

“Substance over form is an idea that also has its proponents, but it is not included because it would be redundant.   The quality of reliability and, in particular, of representational faithfulness leaves no room for accounting representations that subordinate substance to form.   Substance over form is, in any case, a rather vague idea that defies precise definition.”
30	       I agree.
 
Conclusion

31	  	Whether or not RBS’ equity was “at risk” was a matter of judgment for its auditors.  There was no definitive test, ruling or advice as to what those words meant for GAAP purposes; so there could be no text book answer to the question.   One of the judgments that the auditor would have to make was as to which of the GAAP principles was applicable.  Those principles, as Mr Regan put it, consist of “about 2000 pages scattered around various documents like EITFs and whatnot.  It results from there being entities like Enron that come up with ways to create new facts and circumstances that need to be dealt with with specificity”.  

32	 	I do not derive much assistance from what CON 6 says about liabilities in determining whether or not RBS’ equity was “at risk”.  If an auditor is considering what liabilities should be recognised in a company’s accounts he may no doubt have to consider whether the company owes non-legal obligations which, because of their economic effect, ought to be recognised; and whether there is an “in substance guarantee” which gives rise to some form of contingent liability.  If,  however, the issue is whether equity is “at risk”, the question is not whether the company might have to pay even if not legally bound to do so, if it was to avoid significant penalty, but whether the company could be so sure of recovery that for practical purposes it was not at risk of losing the equity.  If the position is that there is no legal right to sue, I find it difficult to accept that the company is not at risk unless the prospect of non-payment is fanciful or so remote that it can be said that there is no real risk at all or one so slight as to be immaterial.

33	      Such a conclusion marries with the examples given on EITF 90-15 and 96-21 as to the circumstances in which equity would not be at risk, all of which involved contractual rights and with the distinction between contractual right and probable behaviour which underpins Q&A 50.   

34	      For similar reasons I do not derive much assistance from the GAAP pronouncements about contingent liabilities.  I note that none of them cross refer to FAS 125, or EITF 90-15 or 96-21, which are directly on point, or addresses the concept of “at risk”.

35	 	There is apparent force in the point that there must be something wrong with a test under which a non-contractual “promise” from a most reliable “promisor” keeps the equity at risk when a contract from a company of no substance means that it is not at risk.  It is not, however, to be supposed that a contractual undertaking from a company of straw would mean that the equity was not at risk, not because the contract was legally unenforceable, but because it was worthless.  Nor does the fact that a (non contractual) assurance is received from a public body necessarily mean that there is no risk.  Such bodies have been known to change their mind.

36	      In my judgment it would have been open to a competent auditor to take Professor Bartczak’s view; to regard CON 6 as of no great assistance; and to conclude that RBS’ equity was at risk for US GAAP purposes.   My finding that, leaving aside any GAAP connotations, the equity was at risk; and the fact that RBS thought that that was so, provides some further support for that conclusion.

37	 	I have reached this conclusion largely by an analysis of the GAAP material presented to me, particularly that part of it (EITF Topic D-14, Issues 90-15 and 96-21) which appears to be directly relevant to the issue in hand, and the absence of any reference in the latter material to non contractual assurances or in substance guarantees, and by reference to the reason of the matter.  Insofar as there are differences between the two experts I prefer the evidence of Professor Bartczak because, in my view, it is more congruent with the underlying material and concepts.  I was also impressed by his distinguished academic record and long study of GAAP including its application to SPEs and the consolidation of financial statements.  Mr Regan first encountered the issue as to the effect of assurances such as the ones now in issue in the context of work on Enron (he has given evidence as an expert in Enron-related litigation in the United States since 2001).  That does not of itself mean that his analysis is wrong; only that the area was not one in respect of which he had prior experience, which may explain why his first report contained a fundamental error namely that for RBSFT not to be consolidated with Enron it had to be a qualifying special purpose entity (which it did not).