Let’s not make the same mistakes twice!

Author: Joanne Cooney and Brian Hammond

July 26, 2018

On 15 May 2018, the Court of Appeal held that a Letter of Offer did not reflect the full terms of the agreement between a bank and a borrower. Accordingly, the bank was not entitled to judgment by relying strictly on the terms of the written contract between the parties.

Background

In 2005 the Borrowers sought a €4.6m, ten year interest-only term loan (the “Facility”) from Allied Irish Banks (“AIB”). They had already secured an offer from Bank of Ireland at a slightly better interest rate but which would require additional mortgages. AIB could not offer a ten year interest-only facility and instead offered a ten year loan with a five year interest-only facility, the terms of which would be reviewed after five years which was their ‘normal’ practice.

The Borrowers accepted AIB’s offer dated 5 March 2005 (the “Loan Offer”) which did not specifically include the review clause. It was their contention that the Loan Offer was accepted strictly on the basis of written and oral assurances that at the expiry of the five years, the term loan would be extended for another five years.

During the five year interest only period, the economy crashed, the Borrowers’ security devalued and AIB advised that it was not willing to extend the Facility for another five years. The debt was called in and judgment proceedings together with possession proceedings were issued.

High Court

Upon considering the evidence before it, the High Court held that there was undisputed evidence of a promise of a review after five years which was a key factor in inducing the Borrowers into accepting the terms of the Loan Offer.

The High Court also held that there was sufficient evidence that the Loan Offer, “did not contain the entire of the agreement between the parties” [1].

Nonetheless, in marking judgment in the sum of €3,972,893 together with an order for possession of 22 properties, the High Court rejected the defence that there was an obligation on AIB to conduct a paper review at the end of the five years and to extend the interest only period in any event.

The Court strictly interpreted the parol evidence rule and given the Borrowers’ experience together with the fact that they had legal advice when signing the Letter of Offer, he had agreed to the five year interest only term.

Evidence was given by AIB that the file had been looked at by a lending manager who determined interest only element of the Facility could not be extended. In light of the material change in both AIB’s and the Borrowers’ circumstances, following that review AIB were entitled to refuse to extend the interest only period.

Accordingly, a judgment was awarded against the Borrowers.

Court of Appeal

The Borrowers appealed the decision to the Court of Appeal and it was found that the trial judge had erred in assessing the factual evidence.

The Court of Appeal accepted that the written and oral representations by AIB (which had been found by the High Court to be fact) had to be complied with. While accepting that the original loan remained outstanding, in the absence of compliance with the assurances on which the Borrowers relied at the outset, the Court of Appeal concluded it was not open to AIB to demand on the Facility on the basis that the Borrowers had defaulted on the payment of capital.

It was held that “the Bank cannot be allowed to take benefit from its own failure to honour the terms of the collateral contract”[2] and the appeal was allowed.

Analysis

The Court of Appeal noted that this situation may well be case specific but it is a useful reminder to all who believe the ‘good times are back’. Five years may seem like a short time but a lot can happen in that time.

Bankers should not induce borrowers into arrangements to boost their portfolio. Borrowers should not be comforted by supposed friendships or business relationships with their bankers which might override the mantra of a financial institution – to make a return of advanced monies.

While the Borrowers here have won the battle, the war is still to be decided. As lending and borrowing increases, we should all be vigilant to record the full terms of our contract in a letter of offer so that the full rigour of the law can be relied upon by all parties.

It will be cheaper in the long run!

Click here to read the judgment of the Court of Appeal.

Footnotes
[1] [2016] IEHC 280, Para 47
[2] [2018] IECA 152, Para 17

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