Contractual Issues

Loan Contracts

A letter of loan offer by a lender will be framed in such a way as to become a binding contract on acceptance by the borrower. The lender will usually sign and issue two duplicate copies to the borrower. Acceptance will take place when the borrower signs one copy of the duplicate letter of loan offer and returns it to the lender. In some cases, the lender’s legal advisors may draft the loan offer. The lender’s solicitor may draft the loan agreement in the style of a “commercial” contract.

The general principles of contract law apply in relation to the formation of the contract as well as issues arising in the course of the relationship and its termination. When signed and accepted, the lender becomes obliged to lend, subject to the satisfaction of the various preconditions within the period stated or implied. If there is an event of default, the lender’s commitment to lend will generally terminate, and it will be able to demand repayment and enforce any security which it holds.

Almost invariably, the terms of lending will be governed by an express or implied contract between the lender and borrower. Even where there is no formal loan document (e.g. an informal overdraft arrangement), the lender’s general terms are likely to apply to the terms of lending.

General Terms and Conflicts

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 ideally, but not necessarily, accompany the loan offer.

The booklet may deal with a wide variety of facilities from short-term overdrafts to longer-term loans.   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.

Questions of interpretation may arise, where there are conflicts and contradictions within the loan documents. The general principle of contract law is that special conditions predominate over general conditions. For example, the special conditions may express or imply a limitation of recourse, but the general conditions may provide for full personal liability.

The loan agreement and the security documents, such as a mortgage deed will together 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. There may be inconsistencies between the mortgage deed and loan agreement. The loan agreement will generally take precedence.

Questions may arise as to whether the very broad terms of mortgage documentation which, for example, provide that a 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.

Contra Proferentem

Even in non-consumer cases, the courts will almost invariably 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, the loan agreement it will be interpreted in favour of the customer’s interests and against the interests of the lender.

The loan offer document will almost invariably be proposed by the lender 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 lender’s document for the purpose of the contra proferentem principle.

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 dictate certain aspects of the format and contents of the loan agreement. There are mandatory warnings and information.

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 of a consumer under some of the legislation mentioned in the last paragraph.

Implied Contract

If for some reason, no written contract has been concluded, then the loan monies will be almost invariably repayable as a debt due under an implied contract or on restitutionary principles.  Generally, the borrower will not be allowed to keep monies advanced to it, even if for some reason, a contract governing the advance is not concluded or is subject to some invalidating factor.

A recent instance 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 contract 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 general 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.

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 this he has therefore disposed of or been deprived of the benefit received such that it would be unjust to make him refund it.

Restittuion II

Where both parties knowingly participate in illegality, restitution is likely to be disallowed. The illegality must be central to the transaction. For example, 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 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 cased 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.”

Personal Liability for Mortgage Debt

An individual borrower is personally liable for the loan unless the lender specifically agrees that recourse is limited in some way. Generally, a loan is a personal debt which may be sued for, in debt collection proceedings. There are summary Court procedures for recovery of a liquidated (fixed or ascertainable) sum debt. Where a court order for the debt is granted or obtained, it can be enforced against the borrower and all of his assets in a number of ways.

Generally, there will be little defence to a claim on a debt against a borrower. A court order can usually be obtained declaring liability for the debt, without the need for a Court hearing, if the borrower does not defend the proceedings. This will be the case, unless there is some real dispute, with a legally valid basis, concerning liability or the extent of liability for the debt.

Identity of Parties

The borrower and lender should be identified. This will usually be clear from the terms of the loan agreement. Lenders have had statutory obligations to take extensive steps to identify customers under Anti-Money Laundering and Terrorist Financing legislation for almost two decades.

Exceptionally, there may be ambiguity regarding unincorporated bodies of persons and companies. The general principles of partnership law will determine the liability of partners for firm borrowings. The partnership may be described by the firm name, or particular partners may be named. Partners who are not named may be liable for the obligations and debts undertaken on behalf of their fellow partners, within the scope of the partnership.

Co-ownership arrangements may be formalised by agreement, where a number of co-owners agree to regulate the terms of their ownership. They may be similar to partnerships at a superficial level, but there is no mutual authority for co-owners to bind each other. Clubs and other unincorporated bodies have no legal identity separate to their constituent members.

There may be an error regarding the identity of the borrower. Some such errors may be capable of rectification, such as where there is a slight misdescription of the corporate name. In other cases, the error may have taken place at an earlier stage, such as where “wrong” group company, (which might have a different credit profile to the intended borrower) is named. In this case, rectification is unlikely to be available.

Joint and Several Liability I

Where there are multiple parties to the borrowing, it is presumed that they are jointly and severally liable for the loan obligations.  This position will usually be specified in the agreement. If the borrower is responsible for a fixed fraction only of the debt, this should be expressed. If the obligation of one borrower is to be entirely separate from his fellow borrowers, then clear and specific words of severance are required.

In some cases, an inference of fractional liability may follow by necessary implication from express terms. This may arise, where there is a loan to a partnership, with fixed percentage “guarantees” by each member. The so-called guarantees may imply that the partners’ prima facie personal liability is intended to be limited.

With joint liability, two or more persons jointly promise to do the same thing. There is one obligation. If parties have joint liability, then they are each fully liable for the performance of the relevant obligation.  They must be sued collectively. There is one legal claim only. If one obligor dies, his estate is discharged.

Several liability arises when two or more persons make separate promises to another. With several liability, each party may be liable for the whole or a proportion of the specified obligations. If a party is unable to satisfy his obligation, the responsibility does not pass to other parties. If it is intended that each borrower is to be liable for a fraction of the debt, then this should be clearly stated.

Joint and several liability means that two or more persons jointly promise to do the same thing and also severally make separate promises to do the same thing. In the case of joint and several liability, the lender may enforce the relevant contractual obligation, in full, against each of the parties. As between the jointly liable borrowers themselves, the liabilities are several. This means that if the lender pursues one party, and receives payment in full, that party can then pursue the other for a contribution under the Civil Liability Act or under general legal principles.  He may be subrogated to the lender’s security provided he discharges the liability in full.

Joint and Several Liability II

f A and B jointly agree to pay X £1,000, then X is entitled to £1000 and may claim the whole amount from either A or B. There is only one obligation. Payment of £1000 by A will discharge the liability of both A and B. If A and B severally agree to pay X £1,000, there are in effect two separate obligations. Each obligation may be cumulative, where the contract expressly or impliedly so provides.

If A and B jointly and severally agree to pay X £1,000 then X is entitled to £1,000 and may claim the whole of it from either A or B. The nature of a joint and several obligations is that (1) A and B jointly promise to pay X £1,000;(2) A promises that X will be paid £1,000 by either A or B; and (3) B promises that X will be paid £1,000 by either A or B. There are joint and separate obligations. The obligations are not cumulative, and X is entitled to £1,000 in total, not £2,000. Payment of £1,000 by A will discharge the liability of both A and B.

In the House of Lords case, the defendants who were business partners mortgaged commercial property to the claimant lender. The mortgage provided that if the expression “the mortgagor” included more than one person it was to be construed as referring to all and/or any one of those persons and that the obligations of such persons were joint and several. The mortgage named both defendants as “mortgagor” and also provided that the mortgagor covenanted to repay all sums advanced and all other indebtedness and/or liabilities of the mortgagor “whether alone or jointly”.

The House of Lords held that this resulted in the defendants being jointly and severally liable not only for monies advanced to them both jointly but also for monies advanced to one of them for purposes that had no connection with the other. The facts of the case are a reminder to take care about contracting on the basis of joint and several liability. The use of the term joint and several liability might defeat the obvious intention of the parties

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