The law recognises many situations where a representation made by one party to another will become legally binding. In the context of lending, it is important for mortgagees to understand that statements they make to a borrower can result in binding obligations, including when those statements do not form part of the formal loan agreement.
Certain statements can give rise to an estoppel, which compel or prevent performance by a party. Such statements can include communication by a mortgagee to a borrower regarding the terms and conditions of a loan. If it is the case that the actual terms of the loan do not reflect the representations made by the mortgagee, it is likely the borrower will claim the mortgagee is estopped from taking an alternate course of action.
In the recent case of Fels v Rural Bank  WASCA 151, the Court was tasked with determining whether a mortgagee’s statements as to the right to extend the duration of the loan amounted to a representation sufficient to establish an equitable estoppel.
The case was an appeal from a decision granting the respondent summary judgement.
The respondent was a commercial lender who in October 2008 provided the appellant with a facility in the amount of $400,000 with a five year term. The appellant obtained the funds to assist with the purchase of a property and to fund farming operations.
The appellant’s evidence was that prior to entering into the loan, he had stressed to the lender the importance of obtaining a flexible loan that could be rolled over for an additional five year term. The appellant “did not want to be placed in a position where the Bank called up repayment of the entire loan at the end of the 5 year period”.
A number of telephone conversations and meetings took place between the appellant and representatives of the respondent whereby the respondent advised it did offer loans that could be rolled over at the end of the term, provided it was not in default.
An agreement was subsequently reached and the funds were advanced. The loan documents provided did not include an option clause enabling the appellant to roll over the loan.
At the end of the five year term, the respondent began undertaking a review of the facility. The appellant was understandably surprised as he assumed that as he “had not defaulted once and had made all…monthly interest payments”, the loan would automatically roll over for a further five year term.
The respondent began charging penalty interest and commenced proceedings to recover the loan. Summary judgement was granted for the respondent as the Court found that the representation by the respondent established merely a possibility, as opposed to a certainty, that the loan would be extended concluding that:
“The respondent assured the appellant that if he was not in default of the loan when the term of the loan expired, the respondent would look favourably on providing another loan on similar terms. It is difficult to see how the obligation undertaken by the respondent could extend any further.“
Relevant legal principles
The appellant contended that the respondent’s representation was sufficient to create a promissory estoppel which prohibited them from calling in the loan.
The Court referred to the case of Crown Melbourne Ltd v Cosmopolitan Hotel (VIC) Pty Ltd  HCA 26 for guidance. The case describes the character of a representation which amounts to promissory estoppel, stating:
- a representation must be clear;
- the language must be precise and unambiguous; and
- the statement must be capable of misleading a reasonable person.
The appellant argued that at all times he was of the belief that the loan would be rolled over if he had not defaulted under the loan. The appellant considered the option to roll over to be an essential term, so much so that “if [the respondent] had not made those representations, [he] would have taken out a longer term”.
The respondent disputed this, stating that the representation was not sufficiently clear and certain to found an estoppel. This is supported by the uncertainty regarding the operation of the roll over, for example: would it occur automatically and if so, how would it occur.
The respondent also relied on the fact that the loan documents referred to a five year loan only. It submitted that “no reasonable person” would infer a loan term of anything other than the term expressly discussed in the loan documents.
Decision on appeal
The Court ultimately decided that the appellant had an arguable case and therefore set aside the summary judgment.
The conduct of the respondent’s agents “were capable of leading a reasonable person to believe that…[the loan] would be rolled over at the end of the loan term for a further five years”.
This is supported by the fact that:
- the respondent’s prior statements that the loan “would be rolled over” amounted to a representation;
- the representation, when considered against the banks established commercial practice, were capable of inducing a reasonable person;
- the appellant would suffer detriment in the event the loan would not be rolled over;
- the respondent would be acting unconscionably if it failed to fulfil the assumption; and
- the appellant was right to rely on these statements to support his belief.
The decision to deny the appellant the right to roll over the loan would be contrary to the purpose of equity, this being the opportunity to do what is necessary to prevent injustice between the parties. In this regard, the Court said:
“The object of equity is not to compel the party bound to fulfil the assumption or expectation; it is to avoid the detriment which, if the assumption or expectation goes unfulfilled, will be suffered by the party who has been induced to act or to abstain” (referring to the High Court authority in Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387, 423).
It is important that lenders understand the implications of the statements they make. This is particularly relevant when speaking to new clients about the loan products they offer.
Cases such as these reiterate the fact that a lender cannot merely rely on the terms contained in their loan agreements.
If a lender represents a certain state of affairs which is mutually accepted by a borrower, these conditions will be binding on both parties, regardless of the written terms of an agreement.