27/08/2014

The Supreme Court was recently asked to work out whether three loans were all part of the same contract or were separate contracts. The answers meant either securing or losing almost a million dollars.

The contested arrangement involved a number of loans made from a Mr and Mrs I to a Mr H, who was experiencing financial difficulty and needed to come up with funds quickly. In order to help him out, Mr and Mrs I entered into an initial loan agreement with Mr H for $200,000. The money was lent on the basis that Mr H would repay the loan with shares in Mr H's company  (or cash if shares were not available) to a value of twice the loan advanced. This meant that on the first loan of $200,000, Mr H was liable to pay $400,000 of shares in return.

Soon after, Mr H entered into two further loans with Mr and Mrs I and arranged to borrow $455,000 under the three loan agreements. Mr and Mrs I lent all the money required under the first and second loan but refused to supply the full amount on the final loan when it became clear that Mr H would not provide any security on the debt.

Mr and Mrs I sought to then recover all repayments from Mr H under the terms of the three agreements, totaling $910,000. Mr H counter claimed that the contracts had been breached and he was no longer liable to repay any of them.

In order to resolve the conflict, the court first had to determine if the third loan agreement was valid in the face of Mr and Mrs I failing to advance all the requested money to Mr H. If it was found to be invalid, Mr and Mrs I would not be able to recover the money advanced under this agreement, totaling $75,000.

The court found on the facts that none of the parties appeared to try and complete the contract when the full loan moneys were not advanced and, as a consequence, had abandoned the contract entirely. As such Mr and Mrs I failed to recover the $75,000.

Mr H also argued that all the agreements formed one contract, and that as the third agreement had been abandoned, the earlier agreements should also be seen as abandoned. This would mean that although Mr H had received $710,000 under these agreements, he would not be liable to repay the debt.  Luckily for Mr and Mrs I, the court found that this argument was not the case and as such Mr H still owed them $710,000.

When preparing any contract it is important to understand what effect it may have on current commercial arrangements. Incorrect preparation or failure to fulfill one's obligations under contract could result in significant losses for all involved, just like it almost did for Mr and Mrs I, who even then did not come out unscathed.

If you have any questions regarding any information contained in this article, please contact Townsends Business and Corporate Lawyers on (02) 8296 6222.