NEW BAFT MPA’S ABSENT FRAUD CLAUSE: “WE’RE SURE YOU DON’T NEED IT” by Shannon Manders, ITFA Consultant



The removal of the fraud clause from BAFT’s revised and updated English law Master Participation Agreement (MPA) is proving a sticking point for some industry practitioners, who feel that it is important for the document to state that the seller takes full risk.

The new MPA, released last year, has no separate provision dealing with fraud risk, which links with the fact that optionality has been removed from the document in an attempt to discourage institutions to modify it.

“We took the view that the provision in relation to fraud can be adequately dealt with elsewhere in the document,” says Geoff Wynne, partner at Sullivan & Worcester, who drafted the modernised form and its usage guidelines. “We removed the fraud clause, which had two options. We’re sure that you don’t need it. There are other clauses in the new MPA that deal with the effect of fraud. There is one which stipulates that the seller has an obligation to examine the documentation presented to it – if it gets that wrong then it would be liable. There is another which says that it must administer the transaction with proper care and attention.”

In simple terms, if a seller breaches either of these obligations, the participant has recourse to the seller. And if the seller is in compliance with its obligations, then the risk is shared.

Nevertheless, some bankers still prefer to retain a fraud clause as they see it as an extra reassurance.

“Those who have used the older version – where there is that cover of fraud – will continue to use that document,” asserted a member of the audience at a meeting of ITFA’s Northern European Regional Committee (NERC) at the end of February. “For us, having that safety, even if it could be argued in court, that a grantor would take on the risk of fraud, is a comfort that we’re keen to have.”

In response, Wynne – speaking on a panel at the event – explained that the fraud clause in the original document was in fact an “unnecessary diversion” that gave participants the false belief that they were fraud protected.

He explained: “If you look at the old BAFT, how that risk of fraud was dealt with was not clear: one option said that it would be shared, the other option indicated in very narrow terms that it was a risk of what was then the grantor.”

“We think that if, as a participant, you buy a transaction and look at the responsibilities that are still given to the seller, particularly in relation to document checking, we would hope you may well conclude that you don’t need anything more,” Wynne added.

At the event, fellow panellist Ron van Staten, managing director, legal counsel at ING, made the point that in the vast majority of cases fraud is not something that the selling bank is able to assess in the first place.

“Some banks think fraud is an issue that can be assessed by the bank selling a transaction to a participant. The argument is that if the selling bank makes a mistake in the assessment, it should bear that risk itself. Having been on both sides – buying and selling – I don’t share that view. The parties to the underlying trade finance transaction you’re dealing with are parties you usually know. If fraud happens, it’s probably also a surprise to that party itself because it’s an isolated problem of a few people.”

Fraud is rarely structural, explained van Staten, and if it is, one could argue that the selling bank’s KYC processes have not been properly complied with or that it has not exercised adequate care and attention.

“It’s a risk that should be shared – but with one caveat: that if with adequate care and attention the seller could have detected fraud but failed to do so, then the document as it is allows the participant to have a conversation with the seller about that mistake.”

Providing her feedback on the new document, Silja Calac, ITFA board member, spoke of her initial reluctance to accept that the fraud clause had been removed, but that she had, in time, converted her opinion. “I am only ever a buyer of assets, never a seller, and I have never used the fraud clause in all the many years I’ve been using the MRPA,” she said. “It’s always a long debate for nothing – it’s much better to pay attention to the documentation and really look into the risks during the underwriting rather than relying on a clause that might not be enforced.”

She advocated putting anything specific to the parties into the offer and acceptance instead. “You don’t want to think you have some kind of cover which in the end you may not have – because it would be very difficult to implement if there was a problem.”

Market take-up

It’s been six months since the new BAFT MPA was released to the market, but yet only a handful of banks in the room at ITFA’s NERC event indicated that they were “ready to go” with the new document.

“We like the document – compared to the previous one, it is an improvement on many aspects,” said van Staten. “The only thing is that we have many MPAs already in place with a lot of our banks. To go back and start that whole process again with a new one is going to take some time – it’s a practical issue. Eventually it will be absorbed by the market. Less than a year is too short a period to judge.”

It was noted that smaller banks, being more flexible and less constrained by the workings of internal counsel, will be able to adopt the new document more swiftly. “As a small bank, it’s a great document. If your counterparty is exactly the same, it takes five minutes: two signatures on a piece of paper and you’re done,” said one audience member.

Van Staten suggested that to speed up adoption, banks use an upcoming deal as a trigger to start applying the new document. “Without a deal on the table, there may not be enough pressure,” he said.

ITFA urges its members to send in any comments and concerns they may have about the new MPA so that they can be addressed by the association. Contact Paul Coles, Chair of the ITFA Market Practice Committee (paul.coles@itfa.org) for more information.