Firm loses all its assets in misunderstanding over contract

A firm that entered into a contract before the final details were agreed has ended up losing all its assets.

The case involved a firm that wanted to buy a property but could not raise the purchase price. It entered into an agreement with a company that would lend it both the deposit and purchase price in full.

The documentation for the deposit loan was drawn up, contracts were exchanged and a completion date set for three weeks later. As security for the deposit loan, the lender took charges over the firm’s assets and a debenture covering its intellectual property rights in a patent.

The firm believed that the documentation securing the deposit loan was intended to be temporary, and would be replaced by a long-term agreement to be negotiated between exchange and completion.

In the event, the two sides were unable to agree terms for a longer-term loan. The lender demanded repayment of the deposit, which the firm could not provide because it had no funds. The lender called in its security and the firm lost everything.

It took legal action claiming that it had been snared into making the deposit loan agreement when the lender had never intended to proceed with a long-term funding arrangement.

The High Court ruled in favour of the lender. The judge said the firm’s case was weak from the outset and got weaker during the trial.

On the evidence, there had been no fraudulent misrepresentation. The lenders had put the maximum pressure on the firm, but there was no allegation of undue influence or duress.

They had simply exploited their strong position and the borrower’s weakness. That was not, in itself, actionable, and happened every day in the commercial world. The real reason for the breakdown between the parties was a clash of personalities.

Please contact Simon Porter if you would like more information about the issues raised in this article or any aspect of contract law.