Intended Limitations of Personal Recourse
Where a loan contract is entered, and monies are advanced, it is presumed that the borrower is personally liable to repay the loan. If the lender’s recourse is limited to the secured asset or limited to partial recovery, this should be clearly stated in the loan agreement. It is desirable that it is also specifically stated in the mortgage document.
If the security documents do not mention limited recourse, but the loan agreement provides for it, the loan contract should predominate and determine the position. Even if the security is assigned to a third party, that third party will take it with the “equities”, as between the lender and borrower, and be bound by the limitation.
A limitation of recourse may be in any terms that can be contractually agreed. It may provide that recourse is limited to the proceeds of the sale of a security only. It may provide that a borrower is liable only in respect of a particular portion of the debt or is so liable subject to certain pre-conditions or subsequent conditions applying.
It is commonly provided that limitations on recourse to security are conditional on the validity of the underlying security and the absence of fraud. This is designed to underpin the lender’s assumption that the security is in fact, valid.
Limitations of recourse were usually agreed in resting in contract arrangements. In this case, the seller of the property had no economic interest in the sold property nor the buyer’s security. In order to facilitate avoidance of stamp duty, he may agree to receive the full sale proceeds without executing a purchase deed. The buyer becomes the owner in equity by way of trust, and the bare legal owner holds it by way of resulting trust for the buyer. The mortgagee requires a legal mortgage so that it can sell the legal title to the security. The vendor gives a non-recourse mortgage and should also give a non-recourse guarantee. The arrangement is no longer effective to avoid stamp duty.
Limited Recourse Provisions
The equitable principle of redemption entitles the mortgagor to redeem a mortgage either in money or money’s worth. Therefore, in a non-recourse arrangement, the borrower should retain a technical legal liability to pay, as the foundation for the security obligations. It should be provided in the loan agreement that the lender’s recourse is limited to enforcement or execution against the recourse assets (or in the other limited manner). It may provide that the right or remedy against a borrower will not be enforced in any other manner. It will not simply provide, that the borrower is not liable for the debt.
The lender may be authorised to obtain any judgment or order, necessary to realise the security. It may provide that personal recourse will apply. Where the security is not effective, recourse may be limited to the amount equal to the realizable value of the security, but for the invalidity or unenforceability. The lender may be entitled to obtain a judgement in respect of the obligations and to claim in the insolvency of the borrower/obligor/guarantor, to the extent necessary to realise the security.
There may be covenants limiting the extent to which the borrower might undermine the value of the secured assets. The borrower will not be allowed to contest the priority or validity of the security and may agree to hold all sums received in respect of the recourse assets on trust for the secured assets. Where the borrower has made fraudulent representations, the limitation of recourse may be lifted. Where the lender incurs enforcement costs in respect of the unsecured asset, this will be added to the secured sums.
Intended limitations of recourse provisions may be spelt out in detail in the security documents. Alternatively, the borrower may rely on the terms of the loan agreement only, so that the security documents will not disclose the limitation of recourse. An advantage of this course is that the same security may later be used as a basis for a revised loan agreement which does not provide for the limitation of recourse.
Mortgage without covenant to pay
The question is sometimes raised as to whether a failure to include a non-recourse guarantee or other obligation in a resting in contract type mortgage, undermines the obligation of the mortgagor. In some cases, there may be no guarantee, but the standard form of mortgage provides a covenant to pay. This is likely to be a sufficient obligation. In other cases, there may be no covenant to pay but a clause to the effect that the mortgages or charges to property as security for the recited third-party liability.
The absence of an obligation by the mortgagor is problematical to the lender. However, where the mortgagor has sold the property under a resting in contract arrangement, it is difficult to see how a Court of Equity would permit the seller to exercise the equitable right of redemption, where it had been paid in full. The Court is likely to interpret an implied obligation in most cases.
Claims of Limited Recourse
It is sometimes claimed that where the personal liability of a borrower is not mentioned in the “security” section of a loan agreement, that this implies that recourse is limited to the security mentioned. There may be cases, where on the true interpretation of the loan agreement, this is the position. However, such cases would be exceptional as the personal liability of the borrower on the debt in the loan agreement is separate from the security for that obligation.
A common scenario in the current economic crises is that a borrower, alleges that the loan agreement was intended to be limited to recourse to the secured assets, notwithstanding that this is not stated in the loan agreement or security documents. A lending official may have stated to the borrower, that although the loan agreement or guarantee includes a personal obligation to pay, that the bank would not need to rely on it or would not rely on it. It may be claimed that the lending official made these statements to induce the borrower to enter the agreement. This may or may not be the case.
Legal Basis for Side Agreements
The question of whether or not a valid side agreement or another legally sufficient basis for limited recourse (or otherwise) may exist, is determined by ordinary legal principles. A possible basis for variation is a second or collateral contract (commonly referred to as a side agreement).
If a side agreement cannot be shown by reason of the absence of consideration, the borrower may be able to rely on the principle of estoppel. If the lender or an official with the requisite authority to bind the lender, makes a representation knowing and intending that the borrower will rely on it to its detriment and the borrower so reasonably relies on it, the lender may be estopped from asserting its strict legal rights. In this case, the variation takes effect to the extent just and equitable.
A further basis may be founded on the law of tort. Where a fraudulent representation is made which a person relies on and suffers financial loss as a consequence, a civil claim may be available. In very limited cases, where a person makes a negligent misstatement, a civil remedy may also exist provided that there is a duty of care.
It may also be alleged that dealings in the course of the loan agreement have varied or waived the lender’s rights. Generally, the lender will take great care to ensure that this does not incur.
The following parts discuss the parol evidence rule and exceptions to it by way of collateral agreement, estoppel and representations. The law in these areas will determine whether a claim of limited recourse or other variation is sustainable.
Parol Evidence Rule and Exceptions
Under the “Parol” (verbal) evidence rule, there is a strong presumption that where there is a written contract document (especially a signed one), that the entire contract terms are incorporated in that document (here the loan agreement). It is possible in principle to have side agreements, operative representations, variations and waivers of contracts, which are constituted verbally. However, there are considerable evidential difficulties in establishing these variations, where there is a signed loan agreement.
In a number of recent cases, arguments have been made that the loan agreement document, has been varied by a verbal or informal exchange, before or contemporaneous with the formation of the agreement. In some of these cases, it has been claimed that recourse is limited to the secured property and that the borrower is not personally liable to repay.
The parol evidence rule disallows evidence which tends to vary, contradict or change the terms of a written agreement. The purpose of the rule is to uphold the principle of certainty in relation to contracts. It also reflects the principle, that statements of intention and pre-contract negotiations are irrelevant to the terms of the final binding agreement.
There are established exceptions to the parol evidence rule. Verbal evidence may be allowed to show that there is no contract. Evidence may be allowed not to prove the agreement, but to prove the surrounding circumstances and context. This may be allowed, particularly where the agreement is ambiguous and needs contextualisation.
Where the written agreement does not record the actual agreement made, verbal evidence may be allowed to correct the mistake. The parol evidence rule applies where the written agreement is intended to comprise the entire contract. If this is not the case, then further evidence may be introduced of an inconsistent oral agreement.
The courts allow oral evidence to establish a so-called “collateral contract”. This is a second parallel contract, which may change or vary the main contract. The collateral contract must itself be a valid contract, with its own offer, acceptance and consideration. The courts have accepted in some cases, that the entry of the main contract may be sufficient consideration. In some cases, the concept of a collateral contract may come close to avoiding the parol evidence rule.
Apart from the above rule, there will be often, practical difficulties in establishing a collateral contract by verbal evidence alone. Even if the facts as alleged are sufficient to constitute a collateral contract, it may be difficult to convince a court to accept contested verbal evidence by one party, particularly where the party has the motive to escape liability under the principal contract.
If there is insufficient evidence to establish a collateral contract, it may be possible to show the principal contract was entered on foot of a representation, which has induced the borrower has enter the contract and on which he has relied to his detriment. In this case, the lender might be restricted from exercising his strict legal rights to the extent that it is fair and equitable. Neither of these circumstances is likely to fully excuse repayment, but they might vary the terms, for example to a non-recourse basis.
Where there is a promise or representation of fact or definite intention, given in circumstances where the promised person does not give consideration, the discretionary equitable relief of promissory estoppel may be available. If one party makes a statement of fact or statement of his intention to another, which he realises or should realise the other will act on, and on faith of which, the other acts to his detriment, then the courts may not allow the first person to enforce his strict legal rights, if it would be inequitable to do so in the circumstances.
There must be an unambiguous statement of fact or intention. The party, who acted to his detriment must have done so, by reason of the statement. There must be knowledge or intention that it will be relied on by the other to affect the existing relationship. The essence of estoppel is reasonable reliance on the representation. It must be inequitable for the person making the promise to withdraw from the promise because the other person has relied on it.
The extent of the principle is limited. It does not apply in every case where one-party acts to his detriment in reliance on another’s statement. There must be something in the circumstances, which makes it unjust for the person who made the statement to renege on it. The courts give relief, only to the extent necessary to alleviate injustice.
Estoppel may usually only be used as a defence, rather than as a claim in itself. One party is “estopped” from asserting his strict legal rights. It may be that the person may be able to resume his strict rights by giving reasonable notice that he intends to return to the strict position, as regards the future. In this case, it must be possible for the person promised to resume his former position and undo the detriment. If the latter promised cannot resume his original position, the other’s promise may be final and irrevocable.
Defensive Clauses in Loan Agreements
Some loan agreements provide that the written agreement comprises the entire agreement. They may contain an acknowledgement that borrower has not been advised by the lender and relies on his own skill exclusively. The purpose is to prevent pre-contract statements or representations forming part of the contract or varying it. Such a clause will weaken the possibility of claiming side agreements, estoppel and misrepresentations etc.
The above clauses are unlikely to be effective where a statement was made fraudulently. They may not hold, in the case of the civil wrong of negligent misrepresentation, unless the wording is very clear. Even in the case of innocent misrepresentation, the courts may be prepared to engineer mechanisms to circumvent the provision, where the application of the clause would be patently unjust.
Loan agreements often provide that the remedies and rights of the mortgagee are not waived by any failure or delay in their exercise. It may be expressed that the exercise of some rights is not to imply the exclusion or waiver of others. It may state that rights may be exercised in whole or in part, as often as is necessary. The purpose of the above provisions is to prevent arguments as to variation and waivers of the loan agreement being made, where the lender forebears on enforcement, but wishes to reserve its rights to do so later.
The general position on collateral agreements and other claims which might limited contractual liability where was modified in relation to loan agreements and securities transferred to the National Asset Management Agency (“NAMA”). The Agency as assignee is only bound by side agreements etc. if they are disclosed by the lender to NAMA or they are proved in writing in the records of the lender. Where there is not the case, the Agency is not bound, but the borrower with the relevant right may have a claim in damages against the lender.
S. 101 of the National Asset Management Agency Act, 2009 provides
101.— (1) If in relation to a bank asset that NAMA or a NAMA group entity has acquired—
(a) it is alleged that a representation was made to, a consent was given to, an undertaking was given to, or any other obligation was undertaken (by agreement or otherwise) in favour of, the debtor or another person by the participating institution from which the bank asset was acquired or by some person acting or claiming to act on its behalf,
(b) no such representation, consent, undertaking or obligation was disclosed to NAMA in writing, before the service on the participating institution of the relevant acquisition schedule,
(c) the records of the participating institution do not contain a note or memorandum in writing of the terms of any such representation, consent, undertaking or obligation or do not contain a record of any consideration paid in relation to any such representation, undertaking or obligation, and
(d) the representation, consent, undertaking or obligation, if made, given or undertaken, would affect the creditor’s rights in relation to the bank asset, then that representation, consent, undertaking or obligation—
(i) is not enforceable, and cannot be relied on, by the debtor or any other person against NAMA or the NAMA group entity,
(ii) is enforceable, and can be relied on, by the debtor or any other person, if at all, only against a person other than
NAMA or a NAMA group entity, and
(iii) is not enforceable, and cannot be relied on, by NAMA or the NAMA group entity against the debtor.
(2) A claim based on a representation, consent, undertaking or obligation referred to in subsection (1) gives rise only to a remedy in damages or other relief that does not in any way affect the bank asset, its acquisition, or the interest of NAMA or the NAMA group entity or (for the avoidance of doubt) any property the subject of any security that is part of such a bank asset.
(3) The Court shall not make an order under section 182 in relation to a claim to enforce a representation, undertaking or obligation referred to in subsection (1).
Illustrative Case Law I
In Ulster Bank Ireland Ltd & Anor -v- Dean & Anor 2012 [IEHC] 248. McGovern J. contrasted the facts with those in the earlier case of AIB v Galvin. The cases illustrate the boundary between a successful and unsuccessful claim based on a collateral agreement.
“The defendants argue that the loans were not repayable on demand but were long-term loans to be paid for out of the sale of various properties. At para. 5 of his replying affidavit, Mr. [D] says that “throughout our commercial relationship with Ulster Bank, we were told that Ulster Bank would lend to us and what was expressed to be a ‘long-term’ basis”. The affidavit refers to instances of what they were told by representatives of the Bank. At para. 9 of his affidavit of 2nd May 2012, Mr. [D] says, “I was told that the various loan agreements, such as those exhibited in the affidavits of [AT], were merely ‘paperwork ‘ for some purpose of the bank”. He claims to have been told by representatives of the Bank that the loans offered were long-term loans and that he was told this prior to signing the two contracts described as the First Facility and the Second Facility. The defendants have not produced any written documentation to support this claim. It appears, therefore, that they are seeking to alter the terms of the facility letters which are clear on their face by means of parol evidence. This is not permissible. For reasons of public policy, the courts have not permitted oral evidence to be admissible if it is introduced in an attempt to contradict the terms of a written agreement between the parties. This is known as the ‘parol evidence’ rule. See Macklin v. Graecen & Co.  I.R. 61, and O’Neill v. Ryan  1 I.R. 166. In short, a party is not permitted to adduce evidence which, in effect, contradicts the reasonable construction of words used in a written agreement.
A further argument is made by the defendants that they are entitled to rely on a collateral agreement or side agreement. ……………… In the plaintiffs application, Ms. [TC] the relationship manager in charge of the defendants’ loan accounts, swore an affidavit stating there was no collateral or side agreement which overrode the facility letters. Mr. [NG] of the plaintiff Bank also swore an affidavit in which he specifically denied any collateral agreement. The defendants have offered no evidence other than verbal discussions which they say altered the terms of the facility letters, but such evidence is inadmissible, being in breach of the parol evidence rule and is a long way short of what was held to constitute a collateral agreement in the City and Westminster Properties  Ltd. case.
Illustrative Case Law II
In AIB v. Galvin Developments, [  IEHC 314 ] the facts were also very different to this case. A collateral agreement was to be found in written Heads of Agreement drawn up by the Bank according to which the Bank agreed to limit its right of recourse to 50% of the drawn debt. But in the case before me, the defendants have been unable to point to any written document which purports to vary the terms of the facility letters or on foot of which they agreed to sign the facility letters. At para. 97 of her judgment, Finlay Geoghegan J. stated:
“In my judgment, GDK and the Galvin Brothers are entitled to succeed in their contention that there existed a collateral contract according to which AIB agreed to limit its right of recourse to 50% of the drawn debt. I am using ‘collateral contract’ in the sense explained by Cooke J , in the Supreme Court of New Zealand in Industrial Steel Plant Ltd. v. Smith  1 N.Z.L.R. 545, at p. 555, quoting with approval from Cheshire and Fifoot on Contracts (51h N.Z. Ed. 1979, 53-54):
‘The name is not, perhaps, altogether fortunate. The word ‘collateral ‘ suggests something that stands side by side with the main contract, springing out of it and fortifying it. But, as will be seen from the examples that follow, the purpose of the device usually is to enforce a promise given prior to the main contract and but for which this main contract would not have been made. It is rather a preliminary than a collateral contract. But it would be pedantic to quarrel with the name if the invention itself is salutary and successful’.”
In the AIB v. Galvin Developments case, Finlay Geoghegan J. held that the Heads of Terms were a representation by the bank that subject to conditions, it would make facilities available on the terms and conditions indicated. The two conditions were formal approval by the bank and the issuance of a formal letter of sanction. The representations were intended to induce the potential borrowers to continue in negotiations with the bank to obtain the facilities referred to therein. The bank knew that the terms set out in the Heads of Terms were fundamental as far as the defendants were concerned.
The facts of that case bear no resemblance to the case which I have to decide, and the defendants have simply not been able to point to any written document or any facts which go any way near to establishing a collateral agreement.”.
Illustrative Case Law III
In Irish Bank Resolution Corporation Ltd -v- McCaughey 2014 IEHC 230 Kelly J. wrote
Collateral contracts are dealt with by Chitty at para. 12.103 as follows:-
“Even though the parties intended to express the whole of the agreement in a particular document, extrinsic evidence will nevertheless be admitted to prove a contract or warranty, collateral to that agreement. The reason is that ‘the parol agreement neither alters nor adds to the written one, but is an independent agreement’.
Such evidence is certainly admissible in respect of a matter on which the written contract is silent. In a number of older cases it was stated that evidence of such a contract or warranty must not contradict the express terms of the written contract. However, more recently the courts have admitted evidence to prove an overriding oral warranty or to prove an oral promise that the written contract will not be enforced in accordance with its terms……… The collateral contract or warranty may be formal or informal even though the main contract is one which is required by law to be in or evidenced by writing.”
In Tennants Building Products Limited v. O’Connell  IEHC 197, Hogan J. summarised the modern case law on this topic as follows:-
“The effect of this case-law may be said to be that while 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 (as in Mudd and in Galvin) written pre-contractual documents which, it can be shown, were intended to induce the other party into entering the contract. By contrast, generalised assertions regarding verbal assurances given in the course of the contractual negotiations will often fall foul of the parol evidence rule for all the reasons offered by McGovern J. in Deane.”
Illustrative Case Law IV
Not every statement or promise made in the course of negotiations for a contract may give rise to a finding that a collateral contract exists. To be so treated, a statement must be intended to have contractual effect.
In the case of Danske Bank v. Mulvaney  IEHC 45, Birmingham J. said
“The language of the loan facility letter means that formidable obstacles face Mr. Kelly. The letter states specifically and without equivocation that the facility is repayable on demand and without prejudice to that, and that it is to be repaid on or before the 31st March, 2010. One cannot help thinking, if the defendant believed that this was a non-recourse loan which was available to him then one would certainly expect the fortunate borrower would be very careful to see that the documentation accurately reflected that and that there was no ambiguity in that regard.
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