3 IFE FUND SA V. GOLDMAN SACHS INTERNATIONAL

On 31 July 2007 the Court of Appeal upheld the High Court's ruling that, where there is an effective disclaimer in an information memorandum, the duty of care owed by an arranger to members of a syndicate is limited to a duty of good faith. The Court held that the duty of good faith will be breached if the arranger has actual knowledge that information it has provided is misleading, but not if the arranger is simply in receipt of information which gives rise to the possibility that information previously provided is misleading.

3.1 The facts

IFE purchased bonds and warrants from Goldman Sachs issued by a French company, Autodis, for €20 million. The transaction was part of syndicated credit facilities to Autodis to enable it to acquire an English company, Finelist. IFE contributed to the mezzanine facility, which was arranged and underwritten by Goldman Sachs.

In the period between the printing of the information memorandum and completion of the investment, the reporting accountants, Arthur Anderson, produced two draft reports on Finelist. The reports, copies of which were circulated to Goldman Sachs (but not IFE), said that access to relevant information was proving difficult.

Immediately post-acquisition it became clear that Finelist had deliberately overstated its financial position. Shortly thereafter Finelist was placed into receivership. In order to restructure the capital and debt of Autodis, its shareholders and creditors entered into a Bondholders' Agreement pursuant to which IFE agreed to invest a further £4.5 million. The Agreement provided that the parties to it would not bring proceedings against each other or Autodis.

3.2 The claim

IFE subsequently brought an action against Goldman Sachs, alleging that Goldman Sachs owed IFE a duty of care to disclose the draft reports; that Goldman Sachs had made an implied representation as to the financial health of Autodis and that Goldman Sachs was under a duty to correct that misrepresentation.

3.3 The decision

The court considered that for IFE to succeed in its action for misrepresentation it must establish a representation by Goldman Sachs that, so far as they were aware, the reports reproduced in the information memorandum reflected Arthur Anderson's view of Finelist after the date of printing and up to the point of completion. The court examined the "Important Notice" on the cover of the information memorandum and found that the terms of the disclaimer expressly excluded any representation that Goldman Sachs had checked the accuracy of the statements contained in the memorandum, or that Goldman Sachs would notify IFE of any information coming to its attention after the date of printing. This disclaimer was effective to prevent the existence of a representation as to the accuracy of the information in the document arising simply as a result of Goldman Sachs having sent the memorandum to IFE.

The court did, however, find that there was an implied representation of good faith. The court ruled that, if Goldman Sachs had actually known it had in its possession information which made the information in the memorandum misleading, it could have been liable for breach of the representation of good faith. The court upheld the judge at first instance's view that the implied representation of good faith was a continuing one; however, the court held that on the facts of the case, in order to succeed, IFE would have to demonstrate that Goldman Sachs had acted dishonestly. IFE had made no such allegation against Goldman Sachs.

The court also approved the judge at first instance's view that the terms of the Bondholders' Agreement were binding and that they barred the action being brought by IFE.

3.4 Commentary

The Court of Appeal judgement in this case gives rise to a couple of points which will be of particular interest to banks/ brokers. Firstly, it suggests if a bank/ broker specifically denies making any representation about the accuracy of information in an information memorandum it sends out, that denial will be effective to prevent the existence of a representation as to the accuracy of the information in the memorandum arising simply as a result of the bank/ broker having sent the document to the recipient.

Secondly, notwithstanding the above point, there will always be an implied representation of good faith when a bank/ broker sends information to a recipient in the context of selling shares. Such an implied representation will be breached if the bank/ broker has actual knowledge of the inaccuracy of the information or becomes aware of the inaccuracy of the information before the recipient of the document makes its investment. That implied representation will not be breached however, if the bank/broker merely becomes aware of the existence of information which might render inaccurate information already given to a recipient and makes no further investigation. The court based the distinction between these two circumstances on the fact that a claim for breach of an implied representation of good faith is tantamount to a claim of dishonesty.

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