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Entering into a contract by accident

As a commercial property lawyer I don’t often come across contracts that are entered into by accident.  This is because contracts for the purchase and sale of property, and most leases, have to be in writing and there are still fairly strict rules about how they have to be signed.  Many other  business transactions proceed on the basis of informal conversations and I wonder how often the people involved realise both how binding those conversations are and how difficult they can be to prove.
A decision of the Supreme Court last week showed how a loan contract to fund a purchase and subsequent development was entered into without anything being written down. Click here to view the judgment. The borrower eventually proved that the bank had agreed to fund not just the purchase, but also the construction. 
The facts are summarised below but the learning points from this case are:-

A verbal agreement can form a contract involving a lot of money.

There is no need for anything in writing or for money to be paid. 

It is often difficult to prove the agreement.  People do remember the same conversation differently, and don’t always say what they mean.

If there is an agreement the law tries to find a way to make it work, even if there are details missing.

It is possible for someone to bind their organisation in a conversation even if they don’t have all the necessary internal approvals.

It can take a lot of time and money to prove the terms of a disputed conversation, so it is better to put it into writing.

From February 2007 Mr Carlyle was negotiating a deal to buy land near Gleneagles, for residential development.  The seller insisted that the houses had to be substantially completed by March 2011. Mr Carlyle knew that he needed funding not just for the purchase but also the construction. He specifically and clearly stated that if the bank was to provide funds for the deposits “then the balance [of the purchase price] … and the Build Development Costs must be provided as they needed to be built”.  He wanted a “full commitment on the proposal or nothing”. This was repeated in a number of conversations.  On 14 June 2007 Mr Carlyle received a call saying, by his recollection “You will be pleased to know it is all approved. Edinburgh are going for it for both houses”, and on the strength of that conversation he concluded to contract.  However the bank manager thought she had only spoken of approval of funding for the purchase of the plots.  In her credit submission she had commented that the bank would be approached for future development funding but she had not submitted a request for funding before the purchase of the plots.
The case came to the Outer House of the Court of Session in 2009 and the judge accepted Mr Carlyle’s evidence rather than the bank’s.  In particular, he held that the bank’s statement of 14 June 2007 would have made it clear to Mr Carlyle that, set in the context of the previous discussions, the bank was committing itself to funding the purchase price, and the construction, even if it was not intended to convey that impression.
The Inner House of the Court of Session on appeal interpreted the evidence differently.  However the Supreme Court made it very clear that it was the judge, who had heard the evidence, who was entitled to decide that the contract had been concluded.  The fact that parties envisage their agreement being set out in a formal contract later doesn’t by itself prevent the agreement from having a legal effect until then.  A loan contract impliesan obligation repay and didn’t require express terms as to the rate of interest or the date of re-payment.  It would have been possible to frame a degree of specific implement to require the bank to make the facility available. 
Judgement was given by the Supreme Court on 11 March 2015 following a hearing in November 2014.  Both Mr Carlyle and the bank will have spent a lot of money on legal fees in connection with the dispute, and it has taken more than seven years to decide what was in a telephone conversation.  There are public records saying one person has been believed rather than another.  A brief email saying the bank had approved funding for the purchase but still needed credit approval for the construction costs would have been better.  If Mr Carlyle had emailed immediately confirming his understanding that would have helped his case, and might even have avoided the litigation.
 If you would like to discuss this further, or arrange any training for people in your organisation please contact Hugh Angus.
Disclaimer: The views and opinions expressed in this article site are soley those of the original authors and other contributors and do not purport to give specific legal advice.