Protection of Facility Agents in the case of Erroneous Payments

In the recent US case of In Re Citibank August 11, 2020 Wire Transfers (Revlon), the New York federal court held that lenders in a syndicated loan were not obliged to return an erroneous payment made by the syndicated facility agent due to the ‘discharge for value’ principle, which operated as a successful defence to unjust enrichment (click here for the full decision). Although this decision is being appealed, market participants have started to include express contractual protection for facility agents if the agent makes an erroneous payment.

In the light of Revlon, the Loan Syndications and Trading Association (LSTA) in the US published optional model clauses protecting facility agents in such cases, accessible here (LSTA member login required).

Similarly, on 30 June 2021, the Loan Market Association (LMA) in the UK published an optional ‘Erroneous Payment Clause’ (Clause) to assist market participants in cases where the parties commercially agree to provide the facility agent with express contractual protection if it makes an erroneous payment. The Clause provides for:

(1) 

an obligation on the party receiving the erroneous payment to return the payment to the facility agent, together with, optionally, interest;

(2) 

an optional time limit on the facility agent’s ability to demand return of the erroneous payment; and

(3) 

a waiver of any available defence or set-off that the relevant party may have in relation to the erroneous payment.

The Asia Pacific Loan Market Association (APLMA) has also adopted the LMA approach to erroneous payments and recommends to members that they may wish to adopt the language contained in the LMA guidance note. 

The LMA has emphasised that whether to include the Clause in a facility agreement is a commercial decision for the parties. If included, the Clause would supplement the existing, extensive protection offered to facility agents in LMA facility agreements, such as the broad indemnities and clawback provisions. For lenders, the practical effect is likely to be to impose an additional administrative burden on them as they would be compelled to hold any erroneous payments in a suspense account until they are certain the facility agent will not request the return of the funds. Although the Clause will prevent facility agents from having to rely on a restitution claim to recover an erroneous payment, they should continue to ensure there are sufficient internal checks in place to prevent payment errors from occurring in the first place.

The LMA guidance note is accessible here: link (APLMA member login required).