Supreme Court Emphasises Fundamental Obligations in Lender/ Borrower Relationship

13-05-2014

Author: Keith Smith and Eimear McNamara



Fundamental Obligations in Lender/ Borrower Relationship: Judgment of the Supreme Court dated 9 April 2014 (Delivered by Mr. Justice Clarke with Ms. Justice Laffoy and Ms. Justice Dunne Concurring).

This judgment is a useful reminder that, while the threshold for defendants to raise an arguable defence in respect of summary judgment is low, where there are clear questions of law that can be decided on summary hearing and where there is no risk of injustice to the parties, the court is entitled to grant judgment on a summary basis. 

The judgment emphasises that, in a lender/borrower relationship, the basis of the contractual relationship is the facility letter agreed to by the parties and that once the monies are either advanced or continued by the lender, there is an obligation on the part of the borrower to repay the monies advanced in accordance with the terms of the facility letter.

The judgment also provides useful confirmation that the mere fact of the transfer of the benefit of debts to NAMA, with the resultant opening and closing of accounts, does not in itself provide an arguable defence for summary judgment in respect of those debts.

Background

This Supreme Court judgment related to an appeal by the Defendant of a judgment of the High Court delivered by Mr. Justice McGovern on 19 December 2013 granting summary judgment to the Plaintiff in the sums of €49,856,925.50 and STG£10,567,723 on foot of a facility letter issued by Anglo Irish Bank Corporation Limited (“Anglo Irish Bank”) dated 20 July 2010 on the basis that the Defendant had failed to establish any arguable defence in respect of the claim for judgment of the principal sum. These loan facilities had subsequently been transferred to NAMA.

An application for a stay on the execution of the Order of Mr. Justice McGovern was heard by the Supreme Court on 10 March 2014.  During the hearing of the stay application, it became clear that one of the major issues to be determined was whether the Defendant had sufficient grounds to meet the criteria for a stay.  In his judgment, Mr. Justice Clarke found that it became clear that it “would be an unnecessary use of scarce court resources to hear detailed submissions on the merits of the appeal solely for the purposes of deciding whether or not to grant a stay when, in reality, it would not take much longer to analyse those same grounds for the purposes of determining the substantive appeal.” Accordingly, the appeal was heard by the Supreme Court shortly thereafter, on 27 March 2014 and judgment was delivered less than two weeks later.

The issue the Supreme Court had to decide upon was whether the Defendant had a sufficiently arguable defence to meet the threshold in respect of the granting of summary judgment.

Defence raised

In essence, the defence relied on by the Defendant was that Anglo Irish Bank, and subsequently NAMA, in amalgamating and transferring the Defendant’s loan accounts, through the opening of new accounts and closing of pre-existing bank accounts without express authorisation, had carried out unauthorised transactions on those accounts, which the Defendant alleged constituted the entire discharge of his indebtedness, and that this therefore offered a defence to the claim for summary judgment. The Defendant claimed that NAMA could not have a claim arising out of its contractual relationship with the Defendant as the old accounts had been cleared and closed and that he could not be liable on the new accounts as they were not authorised.

Threshold for summary judgment

Mr. Justice Clarke re-affirmed the test to be applied in considering whether a claim is capable of being determined by way of summary judgment in Aer Rianta c.p.t v Ryanair [2001] U.R. 607, which was subsequently relied upon in in Danske Bank v Durkan New Homes [2010] IESC 22 (which cited McGrath v O’Driscoll [2007] 1 I.L.R.M. 203).  This test addresses the question as to whether it was appropriate to determine issues of law or construction in the context of a summary judgment application. Mr. Justice Clarke referred to the threshold as being undoubtedly low but found that:

“..the Court retains the entitlement, in considering whether there is a sufficient defence to meet that admittedly low threshold, to finally determine straightforward questions whether of law or construction of documents where there is no real risk that, in so doing within the confines of a summary judgment application, any injustice can follow.”

Mr. Justice Clarke referred to the judgment of Mr. Justice McGovern and found that the issues arising on the appeal were property characterised as straightforward questions of law and construction of documents.

Decision

Mr. Justice Clarke referred to the terms of the relevant facility letter, which the Defendant agreed to in July 2010, and made a number of points in respect of the defences raised: (i) that most of the reorganisation methods of Anglo Irish Bank pre dated the facility letter; (ii) that the facility letter itself contemplated some degree of further reorganisation of the accounts; (iii) that the facility letter contemplated that a certain account would be used to pay interest on others; and (iv) that the facility letter was accepted in the ordinary way by the Defendant.Mr. Justice Clarke found that it was beyond argument that, by accepting the facilities in the terms of the facility letter, the Defendant must be taken to have accepted any reorganisation of his accounts that had occurred prior to the date of the facility letter and those that were contemplated by the facility letter.In respect of the claim made by the Defendant that NAMA had no authority to carry out the transactions which post-dated the facility letter, Mr. Justice Clarke found that, while there was no express authority given to NAMA to do so in the terms and conditions of the facility letter or the terms of the facility letter itself, the underlying contractual terms provided that, once the loans are either continued or advanced, there is an obligation on the part of the Defendant to repay and for the imposition of interest in accordance with the terms of the facility letter.  The transaction is to lend money on specified terms and conditions and there was nothing which requires that those monies should stand as a debit obligation in any particular account or accounts.Mr. Justice Clarke found that the situation may have been otherwise if it were possible to point to a specific term in the facility letter or its terms and conditions which precluded the transactions, or if it could be shown that the effect of the transaction was to alter, in any way, the legal obligations of either party other than the transfer of the benefit of the debt from Anglo Irish Bank to NAMA.Accordingly, Mr. Justice Clarke found that the transactions were proper and did not provide any basis for an arguable defence.  He therefore dismissed the appeal and affirmed the Order of Mr. Justice McGovern.

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