by Michael Hanley , Cian Clinch April-15-2015 in Banking & Financial Services

When agreeing to provide loan facilities to prospective borrowers, lenders insert conditions precedent in facility documentation to be satisfied by the borrower before funds are drawn down. On 11 March 2015, the UK Supreme Court held that oral confirmation by a representative of the lender that conditions had been satisfied and funds would be provided, can impose an obligation on the lender to advance funds, regardless of whether or not the borrower had in fact satisfied the conditions precedent set out in facility documentation. 

UK Developments in Construction Finance

In Carlyle v Royal Bank of Scotland, Mr Carlyle sought funding for the purchase and development of a property. Loan agreements were entered into in relation to the funds required to purchase the property but, despite being aware that the property was only being purchased to develop and sell accommodation, the bank later refused to advance the development funds. The bank initiated proceedings for the repayment of the loans and Mr Carlyle counter-claimed for losses arising from the bank’s failure to advance the development funds.

It was held at first instance that oral assurances that funds for both the purchase and development of the property would be provided amounted to a legally binding unilateral obligation by the bank to advance funds. These assurances included a phone call between the borrower and the bank during which the borrower was assured by a bank employee that “it’s all approved”. This conclusion was reached despite Mr Carlyle agreeing in writing to indicative terms which required the satisfaction of conditions precedent and signing a loan agreement which stated among other things that the borrower was not bound by the loan until they signed the agreements. This decision was upheld on appeal to the UK Supreme Court.

Application of Carlyle Decision in Ireland

The potential application of the Carlyle judgment in this jurisdiction comes with two caveats. Firstly, the law of contract in Scotland differs greatly from the position in Ireland in that no consideration is required in Scotland for a contract to become binding. The Irish Courts will be more reluctant to bind parties based solely on a unilateral undertaking in the absence of consideration.

The second caveat is that the Supreme Court in Carlyle was only considering whether a trial judge was entitled to find that a unilateral undertaking could be binding on the parties and not whether the trial judge had made the correct decision. While finding that a trial judge was so entitled, Lord Hodge stated that had he been hearing the evidence he might have concluded that no legally binding obligation had been created. In considering how the Irish courts will interpret compliance with conditions precedent the seminal 2012 Irish High Court decision in IBRC v Cambourne Investments Inc & Ors must be factored in. In the Cambourne case it was decided that lenders can unilaterally waive conditions precedent, without notice to the borrower, if the conditions sought to be waived are for the exclusive benefit of the lender and are severable from the remainder of the contract.

Best Practice for Lenders

While it is unclear whether Irish Courts will follow the UK Supreme Court decision in Carlyle, prudent lenders should alert their representatives to refrain from confirming in oral communications that conditions have been satisfied, until receiving legal and credit sign off that all conditions precedent in facility documentation have been complied with and or are being waived in line with the Cambourne decision.

For further information on the above, contact Michael Hanley, Head of Banking and Financial Services at Hayes solicitors, on mhanley@hayes-solicitors.ie

Back to Full News