In the recent case of Little & Another v Olympian Homes Ltd, guarantors successfully applied to set aside statutory demands in relation to non-payment under their guarantees by relying on an argument of a waiver by estoppel following an email sent by the lender. The test that applied here was whether there was a genuine issue which would need to be resolved in a full trial. This did not mean that the argument would necessarily be successful at trial, but raising it was sufficient to mean that the statutory demands (as a precursor to bankruptcy) were overturned.
Whilst appreciating the pressures lenders’ administrative teams will often be under, there are lessons here as to the risks of emails or other less formal means of communication being found by the courts to prevent (or delay) recovery of amounts that might otherwise have been due to the lender (in this case contractual interest).
Background
The lender had entered into a facility agreement with a borrower, a company connected to one of the guarantors. The guarantors were two individuals who had personally guaranteed obligations under the facility agreement.
The principal sum under the loan was fully repaid at around which time the lender circulated an incomplete draft deed of release by email which contained wording that purported to release the borrower and guarantors from the terms of the facility agreement in their entirety. What was not addressed was the contractual interest until almost a year later when demand was made for this to be paid. This was then followed by statutory demands being served which, if unmet and not set aside, could have formed the basis of a bankruptcy petition against each guarantor.
Relying on having received the email with the proposed deed of release and the terms of the facility agreement, the guarantors argued that the lender had (1) agreed to waive its right to any unpaid interest under the facility agreement and (2) even if there had been no waiver, that the lender was estopped from now seeking to recover the interest.
The judge found that the argument of a contractual waiver being orally agreed to, or inferred by the conduct of the lender, to be of little merit. However greater consideration was given to the issue of estoppel.
Waiver by estoppel?
A waiver by estoppel is generally considered a type of promissory estoppel. To establish this the guarantors were required to show:
- a legal relationship giving rise to rights and duties between the parties;
- a promise or representation by one party that they would not enforce the legal rights arising out of that relationship against the other party;
- objectively an intention by the party making the promise or representation that the other would rely on it; and
- actual reliance on that statement or conduct by the other party.
As noted above, these were applications to set aside statutory demands, so the judge did not need to consider whether the full criteria for promissory estoppel were established, but rather whether there were substantial or sufficient grounds for a dispute.
The judge commented that the covering email contained a clear and unequivocal statement of the guarantors’ release from their guarantees and the terms of the facility agreement. It was also noted that the email qualified as “in writing”, falling within the terms of the facility agreement. Additionally, the draft release was considered to be complete in every material element save for one date. The draft document also referenced the release of the guarantors in line with the covering email and there was evidence that the guarantors relied on this to their detriment (by making other arrangements on the assumption that they owed nothing more).
The judge concluded that there were substantial grounds for disputing the debt referenced in the statutory demands and as such they should be set aside.
Lessons for lenders
In light of the above, lenders must carefully consider the formalities of providing a waiver under financial documents and be aware that email correspondence may be considered a waiver by estoppel irrespective of the intention of the sender or existence of consideration. In this case it was put in evidence that the individual at the lender who sent out the email attaching the proposed release considered in hindsight he was mistaken and said he did not intend to release the claims in full – only to accept the proposed repayment in return for certain security being released. Whilst the factual issues remain to be resolved at trial, the importance of being clear on what is intended is obvious.
Loan agreements will often contain boilerplate clauses designed to limit the effect of waivers. In this case the judge did give effect to the importance of the provision that required waivers to be in writing, but that was complied with here. The problem was the scope of the promise to release, which may have been wider than was intended, but that would not matter if it was found to have been relied on given its actual terms.
To avoid this, lenders will know that it is always advisable only to grant waivers or partial releases in separate specified documentation, to be signed and dated by all parties. Lenders may wish to:
- For new loans (or variations) – amend the boilerplate to their finance documents to provide that, when it comes to a waiver of rights under them, “in writing” means by way of a document signed and dated by the lender, and excludes pre-contract correspondence.
- For existing loans – where waivers of rights or releases are being negotiated or agreed, “subject to contract, all rights reserved” wording should be included in correspondence prior to execution of the release or waiver document to make it clear what is (and importantly what is not) being agreed or proposed and that the lender’s full legal rights in relation to all other matters are fully reserved.