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Matheson Banking Update - It wasn’t me!!
Non est factum (it was not my deed) was argued successfully before the Irish High Court recently when Charleton J dismissed a claim by Friends First Finance Limited (FF) for €1.75 million against Peter Lavelle (PL) and Charlotte Lavelle (CL).
FF claimed that CL borrowed €1.75 million pursuant to certain loan documentation entered into in December 2007. Payments under such documentation were guaranteed by her husband PL pursuant to a guarantee entered into at the same time. Early in 2012, FF claimed that CL defaulted on the payments due so they demanded repayment of the loan and sought recourse to the guarantee.
- CL, raising the defence of non est factum, argued that she never borrowed the money allegedly loaned to her. She explained that while she signed the loan agreement and supporting documentation, she had been given such documentation by PL who presented them to her for the purposes of settling monies into a family trust.
- PL argued that if the principal contract which facilitated the loan to CL was void, then the guarantee must also be void as it would be without consideration.
Whilst considering the defence of non est factum raised by CL, Charleton J noted that the manner in which FF dealt with the loan was “extraordinary” for a number of reasons:
- the task of ensuring execution of the loan agreement was delegated completely to a firm of financial advisors.
- FF treated CL and PL as forming a partnership for the purposes of tax planning despite the absence of any partnership deed for the purposes of investment.
- the loan was granted to CL for tax purposes only whilst in reality, the loan was for PL.
Whilst looking at the defence raised by PL, the court did not dispute that “if the loan on which the contract of guarantee is based was not entered into by CL, then it is clear that the guarantee is empty of the essential characteristic of consideration”.
Charleton J acknowledged that the defence of non est factum rarely succeeds but “on the very particular circumstances of this case, however, a situation arises which has rarely, if ever, been seen before and that is that a financial institution in seeking to make someone bound by a loan agreement should not see fit to meet with the borrower face to face, explore what requirements they have and ensure that they sign the documents establishing the mutuality of obligations of borrower and lender”. There was a complete “abrogation of responsibility” by FF in arranging a loan for someone in circumstances where the contract was entrusted through other parties (namely PL and the firm of financial advisors). The court completely accepted CL's evidence and noted that PL was at all times completely in control and that CL fully trusted him. This fact, in addition to the failure of duty by the lender in their approach which “undermined the reality of banking commerce” influenced the Court in finding CL's defence of non est factum to be successful.
Whilst the defence of “non est factum” is and will remain a rare and difficult defence to establish and it is acknowledged that the fact pattern of the people involved in this case and the manner in which the transaction was managed may not be typical, it is key that all banks and financial institutions should take heed of the High Court’s comments about the obligations of a lender in its treatment of a borrower in advancing a loan.