Contract Issues

Overview

A loan offer will generally be framed in such a way as to become a binding contract on acceptance by the borrower. Common law contract rules apply to the loan agreement.  When signed, the bank becomes obliged to lend subject to the satisfaction of the various preconditions (conditions precedent) within the period stated or implied.  If there is an event of the default, the bank’s commitment to lend will generally terminate.

The loan agreement and the mortgage deed will set out the legal rights and obligations of the lender and borrower. Convenience and practical considerations usually lead to a separate loan agreement and mortgage deed. Difficulties may arise by reason of inconsistencies between the mortgage deed and loan agreement.

The content and complexity of the loan agreement will depend on the circumstances. Most lenders use a relatively standard form of loan agreement. Particular conditions, specifically relevant to the circumstances, are usually inserted by way of special conditions.   In some cases, the loan agreement can be negotiated to an extent. In most retail transactions, the borrower is likely to be offered the lender’s form of loan agreement for the loan “product” concerned.


Consumer Cases

In consumer cases, the Consumer Credit Act, the Consumer Protection Code and the European Communities (Consumer Credit Agreement) Regulations may apply and may prescribe many aspects of the format and contents of the loan agreement. In this event, the mandatory warnings, format, and information required must be inserted.  See the separate section on Consumer Credit agreements. The focus here is on non-consumer cases (although the Consumer Credit legislation is of broad and at the margins, uncertain, scope).

Loan agreements with “consumers” are subject to the Unfair Contract Terms legislation, which derives from European Union law.  A “consumer” means an individual who is acting outside of his normal trade or business. This is different in scope to some of the definitions in the legislation mentioned in the last paragraph.

Where the regulations apply, an “unfair” clause is not enforceable against a consumer. The regulations may require that a clause is interpreted in such a way so as to limit its application to a fair and reasonable interpretation. The regulations also require that the agreement be in plain and intelligible language.

The regulations apply, broadly speaking, to standard form contracts. A clause in a contract is unfair if it has not been individually negotiated and if, contrary to good faith, it causes a significant imbalance in the parties’ respective rights and obligations to the detriment of the consumer. However, the principle of “unfairness” does not apply to pricing and other commercial conditions.


Contra Proferentem

Even in non-consumer cases, the courts will interpret documents against the interests of the (usually stronger) party who proposes the agreement. This is the “contra proferentem” principle. If there is an ambiguity, it will be read in favour of the customer’s interests and against the interests of the bank.

The loan offer document will almost invariably be proposed by the bank or its legal advisers in the first instance. Even if the borrower or its representatives have made comments or modified it, it is still likely to be regarded as the bank’s document for the purpose of the contra proferentem principle.


“Commercial” Loan Agreements

The form and content of commercial loan agreements will depend on the loan size, type of business and historical practice. Most loan agreements are prepared within the lender’s organisations, without specific legal assistance. Generally, the bank’s existing form of facility letter or loan offer for the relevant type of case is used. This will usually incorporate the bank’s general business terms and conditions.

The general terms and condition may be physically attached to the loan agreement, or there may be a reference to the latest Edition of the lender’s booklet of conditions, which should preferably accompany the loan offer. Sometimes, the customer will be asked to sign the general conditions. More frequently, they are incorporated into the loan agreement by being appended or by way of reference.

The general business terms and conditions may be set out in an omnibus booklet which deals with a wide variety of facilities from short-term overdrafts to longer term loans.  Lending covered may range from working capital to development property projects.


Special Conditions

The general principle of contract law is that special conditions predominate over general conditions. The special conditions of the loan facility will typically deal with the key lending terms such as:

  • the identity of the lender and borrower;
  • facility amount;
  • interest rate;
  • repayment terms;
  • security.

In less standard, higher value cases, or in cases where the bank has its own internal or external legal advisers to hand, it may ask them to draft the facility letter.  In this event, the loan agreement is more likely to be in a more formal “commercial contract” style document.

Disputes may arise as to the interpretation of loan agreements. The wording in the special conditions may imply a limitation of recourse.  Questions may arise as to whether there is a conflict between the special and general conditions and if so, whether the special conditions override the general conditions.

Questions may also arise as to whether very broad mortgage documentation which, for example, appears to provide that the security is to be security for all sums due on all loan accounts, is in fact limited by the terms of the loan agreement. Ultimately, questions of this nature are questions of contractual interpretation, and each case will turn on its own facts.


Failure of Contract

A borrower will not be allowed to keep monies advanced on credit, even if for some reason, a contract governing the advance is not concluded or is subject to some invalidating factor. An example of recovery on the basis of an implied contract is Irish Bank Resolution Corporation Limited -v- Cambourne Investments Inc & Ors [2012] IEHC 262.  Charleton J. found that in the circumstances, there had been a failure of a condition precedent to the loan (relating to loan to value).  The contact failed, and the relevant condition was found (unusually) to be designed to protect both the borrower and lender.

Nonetheless, Charleton J. concluded “The primary debt was money borrowed by Cambourne on facility letters that made a loan offer by Anglo. The failure of the conditions precedent as to valuation and as to loan to value ratio in the facility letters offering the loans to Cambourne prevent the operation of that written contract. The main debt is thus not recoverable under those facility letters. It is otherwise recoverable because Cambourne agreed to borrow the money and Anglo agreed to lend it. As a matter of law, Cambourne is obliged to repay the money borrowed”.

In Kavanagh v. McLaughlin [2013] IEHC 453  Birmingham J. took a similar approach In this case, the proceedings have been defended on technical grounds with great industry and ingenuity. However, in my view, none of the points that have been raised either in oral or written argument provides a defence. Money was lent and has not been repaid. The money is due and owing. It follows that the plaintiffs are entitled to the orders that they seek.


Restitution I

Under the law of restitution, monies advanced in the context of a failed contract, are generally recoverable as monies had and received to the use of the lender. Recovery will usually be allowed, so as to avoid unjust enrichment. In this context, unjust enrichment does not imply a discretionary power for the court to refuse an order on broad, after the fact, notions of fairness. However, there may be full or partial defences available to the recipient, based on estoppel, change of position or statutory illegality.

The law of restitution has developed in an ad hoc and disparate manner. There is controversy as to the extent to which there is a general principle of unjust enrichment. The reason for the failure of the underlying contract is relevant to the types of remedy which is available. Proprietary remedies may be available, even if there is no personal claim (e.g. against a minor).

The general position is that monies advanced in the context of a failed contract may be recovered on a restitutionary basis, provided that there has been “a total failure of consideration.” There will usually be a total failure of consideration where the loan contract does not come into being or is later rendered void because the lender gets no legal undertaking in return.


Restitution II

The House of Lords upheld the recovery of monies paid to a company under an Ultra Vires contract in Westdeutsche Landesbank Gorozentrale v Islington BC [1996] AC 669. This case disowned earlier older authority to the contrary. This change was foreshadowed in the earlier Irish case In the matter of P.M.P.A. Garage (Longmile) Limited, P.M.P.A. [1992] 1 IR 315. Murphy J. held that the society could recover the monies in an action for monies had and received on the basis that it would be unjust and inequitable to allow the companies to retain the monies. Murphy J. said in his judgment

“Judges in modern times generally prefer to look at the reality of the situation rather than engage in the pretence that the defendant has promised to pay the debt.  In the present case, while the second defendant (if it were necessary for it to do so) could recover the £20,000 in an action for money had and received, it would be an affront to truth and reality to say that the basis of that cause of action is an implied promise to repay the money. The real reason why the courts would uphold the claim is because it would be unjust and inequitable to allow the first defendant to keep the money. To refuse the claim would mean that the first defendant would be unjustly enriched.”

There is a defence to a claim in restitution based on the defendant, having changed his position. In order for the change of position defence to be available in a restitutionary claim, the recipient must have been entitled to assume that he could keep the benefit, that he had no reason to know the possibility of a restitutionary action and that he has disposed of or been deprived of the benefit received, such that it would be unjust to make him refund it.


Illegality

Where both parties knowingly participate in illegality, restitution may be disallowed. The illegality must be central to the transaction. The incidental breach of a minor regulatory compliance obligation is unlikely to be sufficient. Where both participate in the illegality and are in pari delicto (equally at fault), then the loss may lie where it falls.

The Supreme Court in Quinn -v- Irish Bank Resolution Corporation Limited (In Special Liquidation) & ors [2015] IESC 29 held that the fact that loan monies were advanced for a purpose that breached S. 60 Companies Act, 1963 and the Market Abuse Regulations did not preclude the lender from recovering the loan monies. Clarke J. for the Court wrote;

“The first question to be addressed is as to whether the relevant legislation expressly states that contracts of a particular class or type are to be treated as void or unenforceable. If the legislation so provides, then it is unnecessary to address any further questions other than to determine whether the contract in question in the relevant proceedings comes within the category of contract which is expressly deemed void or unenforceable by the legislation concerned.

Where, however, the relevant legislation is silent as to whether any particular type of contract is to be regarded as void or unenforceable, the court must consider whether the requirements of public policy (which suggest that a court refrain from enforcing a contract tainted by illegality) and the policy of the legislation concerned, gleaned from its terms, are such as require that, in addition to whatever express consequences are provided for in the relevant legislation, an additional sanction or consequence in the form of treating relevant contracts as being void or unenforceable must be imposed. For the avoidance of doubt, it must be recalled that all appropriate weight should, in carrying out such an assessment, be attributed to the general undesirability of courts becoming involved in the enforcement of contracts tainted by illegality (especially where that illegality stems from serious criminality) unless there are significant countervailing factors to be gleaned from the language or policy of the statute concerned.”


References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017

Timothy N Parsons  Lingard’s Bank Security Documents 6th Ed 2015