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.
In AIB Mortgage Bank v Hayes1 the defendants had sought a 10-year loan facility from the bank on the basis of an interest-only tracker mortgage. They already had an alternative offer for this facility from another lender at a better interest rate. At that time the bank could not offer this type of facility for a period in excess of five years. The defendants argued that 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 in 2010 for a 5-year interest-only extension.
In the High Court Baker J had 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;
- The defendants’ primary focus was to achieve a substantial interest only period at a satisfactory interest rate. Subject to sufficient comfort on that point, their preference was to remain with the bank due to their existing relationship;
- 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
- The contract between the parties did provide for a review of the facility after five years. This was a term of the contract, or operated as a preliminary contract.
In 2010, there were discussions to extend the loan for a further 12-month period. In the High Court Baker J held that this was sufficient to comply with the assurances given by the bank. However, on appeal Gilligan J held that the High Court had fallen into error here.
When Pre-contractual Comfort is a Collateral Contract
Gilligan J referred to the case of Tennants Building Products Ltd v O’Connell 2 which states:“[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 here. It was clear from the undisputed evidence that the promise of a review after five years was a key factor in inducing the defendants to enter into the contract. It also had to be borne in mind that the defendants had an alternative favourable offer from another lender.
The Bank’s Application of the Collateral Contract
In 2010, when the facility came up for review, the economic and business background was very different from that in 2005 and lending by the principal banks in the Irish market was very constrained. The borrowers’ file had been transferred to the Financial Solutions Group and its management taken over by a senior lending manager in that group. In considering how the bank dealt with the proposed renewal, the court noted the following:
- There was no evidence that the bank considered the prospect of a 5-year extension at any time. In fact, the testimony of the senior lending manager was that such a prospect could not have been considered as the bank was no longer providing such a product and she did not have the authority to, and could not have, extended the loan; and
- Details of the verbal and written assurances given to the defendants (constituting the collateral contract) never came before any review body.
The court found that, accordingly, the loan was never actually reviewed for the purpose of a 5-year interest-only extension (much less reviewed favourably as promised). Nor was it reviewed on an “all things being equal basis” as made out in the written and oral assurances given to the defendants in 2005 to induce them to enter into the loan 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. The matter must be approached as if the five year interest only contract had been extended for a further five years to 2015. After that point the interest only agreement concluded and the loans became repayable on a capital and interest basis.
Between 2010 and 2015, the defendants continued to pay the accruing interest on their loan. 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 in 2012 on the basis that the defendant had defaulted on the payment of capital. In the circumstances, the High Court judgment must be set aside and the defendants could proceed with their counterclaim for damages for breach of contract, misrepresentation, negligence and breach of duty.
This case may make for uncomfortable reading for existing lenders, and purchasers of debt, who are often reviewing transactions on the basis of the available documentation without the benefit of input from the persons involved in making the deals. While the bar is high for defendants arguing that the signed finance documents do not represent the complete contract, this case does demonstrate how this position can be successfully argued even in circumstances where there is no indication of any bad faith or sharp practice. The case is also an important reminder for persons who are actively lending about the need to ensure that the motivation to close a deal does not lead to speculative or untenable promises being made. The degree to which the defendants are ultimately successful in their counterclaim for damages against the bank will also be of significant interest when the case comes back before the High Court.