In a phone call, the Bank said “You’ll be please to know it’s all approved, Edinburgh are going for it for both houses….” On the back of that Mr Carlyle went ahead and committed to buy land at Gleneagles and put houses on it. He drew down the deposit and purchase monies but a year later the Bank refused the development funding.
The Bank argued that:
- the phone call was just giving information about an internal decision rather than being a promise to provide all the funding
- that they were not under any legal obligation (based on previous dealings) until they had entered into a written contract
- in any case, they were not bound because all the essential terms had not been agreed (such as maximum drawdown amount, term, margin, repayment provisions).
The Court disagreed and found that:
- the bank had made a legally binding promise to fund both the purchase and development
- the transaction was not the same as previous dealings and even though the parties envisaged that they would enter into a detailed formal contract at a later date, that did not prevent their agreement from having legal effect before that
- even though the obligation to provide the funding was “relatively ill-defined” once intention to be bound had been established, the court will look for ways to uphold the contract despite any omissions or ambiguities.
In Scots law a unilateral undertaking is binding without the need for consideration. Under English law the position is slightly different and the court, arguably, would have needed to find a collateral contract to enforce the promise the Bank made. Nonetheless, it is a reminder that contracts can be made orally even when £1.5 million is involved.
This decision has implications for commercial contracts and for lenders. For more information, please contact Mark Paterson in our Commercial team or Richard Leeming in our Banking and Finance team.