Borrowers Given Scope To Rely On Pre-Contractual Assurances By Bank

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Created: Thursday, July 05 2018 18:04

In a recent decision, the Court of Appeal overturned a High Court judgment against a debtor because of failure by the lender to adhere to pre-contractual assurances given to the borrower.

Background

In AIB Mortgage Bank v Hayes[2018] IECA 152, the defendants/ borrowers had sought a 10 year loan facility from the bank on the basis of an interest-only tracker mortgage. At that time, the bank could not offer this type of facility for a period in excess of five years. The defendants/ borrowers had a similar offer from another financial institution. The bank had given them verbal and written assurances that if the defendants agreed to take the 5-year interest-only loan, it would be favourably reviewed on expiry of its terms for a 5-year interest-only extension.

The defendants/ borrowers invoked these representations in opposing Judgment against them for the debt.

In the High Court, Baker J made a number of the findings of fact, including:

• The expression used by the bank that “all things being equal there wouldn’t be any issue in extending at that stage for a further five years”, must have been, was intended to, and did in fact have contractual import.  The bank did intend to give a degree of comfort or assurance to the defendants in the negotiation, that should they accept the loan offer, the interest only facility would be favourably reviewed after the five years, and that it was anticipated that the interest only period would be continued for another five years;

• There was sufficient written evidence of a collateral agreement between the parties and the formal offer of mortgage loan did not contain the entirety of their agreement; and

As there were discussions to extend the loan for a further 12-month period, the High Court was satisfied that the bank had complied with the assurances given by the bank.

However, on appeal Gilligan J held that the High Court had not complied with the assurances given. The appeal was centred on whether or not the bank had complied with this obligation to consider the extension of the interest-only tracker mortgage.

Pre-contractual Representation was a Collateral Contract

The case of Tennants Building Products Ltd v O’Connell [2013] IEHC 197 was considered. MacSweeney & Company acted in that case. In that case, Hogan J. in the High Court stated as follows:

“[W]hile the courts will permit a party to set up a collateral contract to vary the terms of a written contract, this can only be done by means of cogent evidence, often itself involving…written pre-contractual documents which, it can be shown, were intended to induce the other party into entering the contract.”

The requirement for “cogent evidence” as set out in Tennants Building Products was satisfied in this case as the representation was very specific and clearly designed to induce the defendants/ borrowers into entering into the loan facility.

In 2010, when the facility came up for review, the economic and business background was very different from that in 2005 and the bank could not consider a 5 year interest-only extension as it had promised it would.  The Court of Appeal found that the loan was never actually reviewed for the purpose of a 5 year interest-only extension, much less reviewed “favourably” as promised before the entry into by the defendants/ borrowers of the facility agreement. 

The bank did not comply with its written and oral representations made to the defendants prior to them taking up the loan offer and could not be allowed to take the benefit from its own failure to honour the terms of the collateral contract. 

In the absence of compliance with the assurances that were given to them and upon which they relied, it was not open to the bank to have issued a letter of demand in respect of the loan on the basis that the defendant had defaulted on the payment of capital. Gilligan J. in the Court of Appeal stated as follows:

“the [bank] did not comply with their written and oral representations and assurances made to the [defendants/ borrowers] prior to them taking up the loan offer. In these circumstances, the Bank cannot be allowed to take the benefit from its own failure to honour the terms of the collateral contract.”

The requirement for “cogent evidence” as set out in Tennants Building Products was satisfied in this case as the representation was very specific and clearly designed to induce the defendants/ borrowers into entering into the loan facility.

In 2010, when the facility came up for review, the economic and business background was very different from that in 2005 and the bank could not consider a 5 year interest-only extension as it had promised it would.  The Court of Appeal found that the loan was never actually reviewed for the purpose of a 5 year interest-only extension, much less reviewed “favourably” as promised before the entry into by the defendants/ borrowers of the facility agreement. 

The bank did not comply with its written and oral representations made to the defendants prior to them taking up the loan offer and could not be allowed to take the benefit from its own failure to honour the terms of the collateral contract. 

In the absence of compliance with the assurances that were given to them and upon which they relied, it was not open to the bank to have issued a letter of demand in respect of the loan on the basis that the defendant had defaulted on the payment of capital. Gilligan J. in the Court of Appeal stated as follows:

“the [bank] did not comply with their written and oral representations and assurances made to the [defendants/ borrowers] prior to them taking up the loan offer. In these circumstances, the Bank cannot be allowed to take the benefit from its own failure to honour the terms of the collateral contract.”

In the circumstances, the High Court judgment against the defendants/ borrowers was set aside and the defendants/ borrowers could proceed with their counterclaim for damages for breach of contract, misrepresentation, negligence and breach of duty. The consequences for the bank could be very significant.

Significant Scope for Defendants/ Borrowers

This case represents rare victory for defendants/ borrowers in bank debt cases.

It shows that defendants/ borrowers can argue that banks can be bound by representations made by bank officials. A high standard is required, and the representations must constitute “cogent evidence, often itself involving….written pre-contractual documents which, it can be shown, were intended to induce the other party into entering the contract” in order to succeed.

This case is undoubtedly of concern to banks as it will give borrowers/ defendants some scope to argue that representations made before loans were advanced could in some circumstances be part of the legal contract between the bank and the borrower.