Neutral Citation Number  IEHC 280
THE HIGH COURT
[2013 No. 3806 P]
AIB MORTGAGE BANK
PATRICK HAYES AND HELENA CROWLEY HAYES
JUDGMENT of Ms. Justice Baker delivered on the 6 th day of May, 2016.
1. AIB Mortgage Bank (“the Bank”) seeks judgment against the defendants on foot of a loan facility of the 2nd June, 2005, by which they borrowed the sum of €4 million, repayable over the term of 20 years and subject to the conditions therein contained.
2. The defendants do not deny that they borrowed the money, and that the loan monies remain outstanding. They defend the proceedings on the grounds that the Bank made its demand for payment other than in accordance with the terms of the agreement, and assert that the loan was subject to a provision that, for the first ten years of its term, repayments would be of interest only at the agreed rate, and that the Bank unlawfully and in breach of contract demanded repayment prematurely.
3. The Bank denies that the loan contract was subject to a term that repayment be on an interest only basis for ten years, and says that the interest only repayments were agreed for a period of five years, whereafter the monies became repayable on an annuity basis, i.e. by payment of interest and capital.
4. The loan was secured on 22 residential units, and no issue arises in these proceedings with regard to the security, although the defendants have issued proceedings against the Bank and the receiver appointed by the Bank over certain of the secured properties. It was agreed at the commencement of the trial that those proceedings would stand adjourned pending the determination of the judgment proceedings.
5. The first named defendant, Patrick Hayes, is a civil engineer and was a successful property developer and builder. He retained units from many of his developments over the years and has a significant and valuable property portfolio.
6. The second named defendant is the wife, or former wife, of the first named defendant and was a joint borrower and owner of some or all of the secured properties. Mrs. Hayes took no part in these proceedings.
7. The amount currently said to be due and owing on foot of the loan is the sum of €3,987,139.94, being the aggregate amount of principal and interest since the 8th November, 2012, the date on which the loan was called in. There is no dispute with regard to the interest rate, agreed as a tracker rate of 1% above ECB rates.
8. This judgment is given primarily on the matters raised in the defence and counterclaim of the defendants, and I now set out the matters pleaded in the counterclaim.
9. The counterclaim seeks damages for breach of contract, misrepresentation, negligence and breach of duty and a declaration that the plaintiff is estopped from seeking repayment of the loan arising from an alleged breach of representation and/or breach of contract.
10. In particular the following is pleaded:
11. The first named defendant gave evidence that a contractual provision by which the loan would be repayable on an interest only basis for ten years was of central importance to him, having regard to a number of factors. The primary factor he identified was anticipated expenditure on his children who were still at school or university. He also gave evidence that he was seeking what he described as "safe harbour" for his assets in the light of what he perceived to be an overheating of the property market, and because he considered it prudent to protect his assets from the vagaries of a cyclical property market. I will return later to these propositions.
(a) That there was express and/or implied term that the loan would be repayable on an interest only basis for a period of ten years from the date of the agreement.
(b) That the plaintiff through itself or its servants or agent represented that the loan would be available on a ten-year interest only basis, for the purposes of inducing the defendants to enter into the agreement, and on which they relied.
(c) That the making of demand for repayment after five years was in breach of that implied and/or express term and/or in breach of the representation so alleged to have been made.
12. His evidence was that he had a long and successful banking relationship with the Bank and had dealt primarily with its branch at South Mall in Cork. Much of the subject borrowings related to pre-existing loans, and at the time the loan was negotiated his overall liability to the Bank stood at approximately €3.5 million. He sought the further capital sum of €500,000 to tide him over his anticipated expenditure, to consolidate existing loans and securities and in the light of his long term financial objectives.
13. He had commenced negotiations with AIB through Denis Dudley in early 2005, but that he had also engaged in negotiation with Bank of Ireland with a view to obtaining more favourable loan conditions from that bank. He accepted in evidence that his preferred option was to stay with AIB, partly as a result of loyalty, but also because a certain amount of expense and inconvenience would result from a transfer of his loans and the securities supporting those loans to the other financial institution, and because he would suffer a penalty were he to break some fixed term loan agreements.
14. The Bank does not deny the making of certain pre-contract statements but does deny that they have the alleged effect whether as matter of contract or in tort. The Bank accepts that the agreement between it and the defendants was that after the expiration of the initial period of five years, during which it was agreed that repayments would be on an interest only basis, the loan facility would be reviewed, but asserts that at the date of renewal, in or around May, 2010 that the financial circumstances of the defendants has altered considerably. The Bank pleads in those circumstances that it was contractually entitled to, and did then, refuse to extend the interest only facility for a further period of five years.
15. Having reviewed the evidence and arguments, I consider that the following matters fall to be determined:
16. The pre-contract negotiations were conducted to some extent face to face, but the primary evidence of those discussions is contained in a series of eleven e-mails between Mr. Hayes and Denis Dudley of AIB. The e-mails are helpfully clear in their sequence and they show that Mr. Hayes was pressing the Bank to facilitate him with a ten-year interest only period, and that he had secured an offer of such a facility from Bank of Ireland. The e-mails show that the Bank did agree that at the end of the five-year period, the facility would be reviewed with a view to offering a further five-year period. Mr. Hayes sought clarification, and asked the Bank to indicate what was meant by Mr Dudley when he said in the e-mail of the 22nd February, 2005, (e-mail 1) that on review, there was “no reason why” the interest only period would not be extended for a further term of five years. On the 28th February, 2005, (e-mail 4) Mr. Hayes sought further clarification and this came on the 9th March, 2005, (e-mail 7) where Mr. Dudley said: “Our normal scenario for interest only is five years and review at that stage.”
i. Was the loan document dated the 5th May, 2005, and executed by the defendants on the 2nd June, 2005 intended to, and did it in fact, comprise the entire contract between the parties?
ii. Was the loan between the Bank and the defendants subject to an agreement that the Bank would review the interest only repayment facility on the expiration of the five-year period?
iii. If so, was there an agreement that at that review the interest only facility would automatically be renewed for a further five years?
iv. If not, what were the factors that might have influenced the Bank in agreeing to extend the interest only facility for a further period, whether of five years or a lesser period?
v. Did the Bank make a representation that the interest only facility would automatically be renewed after five years, and if so, did the representation operate as a preliminary or collateral contract or warranty?
vi. If there was an agreement that the loan facility be reviewed after five years, did the Bank breach that agreement?
vii. Did Mr. and Mrs. Hayes rely on the representation such that a claim in tort arises?
17. This proposition is consistent with all of the evidence I have heard, namely that the Bank did not have a ten year interest only product, and that the product available from Bank of Ireland was not one that the AIB could offer even to valuable and compliant customers such as the defendants. It was the next part of that e-mail that became the focus of much argument and evidence in the course of trial. Mr. Dudley went on to say:
18. The e-mail exchange continued for a further period of approximately two weeks, where the focus was on the percentage margin over ECB base rates the Bank would offer. The final rate offered by the Bank tracked ECB rates plus 1%, but the Bank also offered to refund the break costs of terminating the fixed rate arrangements.
“All things being equal there wouldn’t be an issue in extending at that stage for a further term of five years.”
19. In the events, the formal loan documentation that issued from the Bank did not contain any reference to a review after five years, and the first question to be determined is whether this accurately reflected the agreement made between the parties.
The formal written loan documentation
20. At the conclusion of the email exchange, by a letter of the 14th April, 2005, sent from the Cork Business Banking Branch to the defendants, the terms of the loan sanction were set out and that letter identified the interest only payments were to apply for a period of five years and “subject to review at that stage”. That letter also contained particulars of the contribution agreed to be made by the Bank to the cost of breaking the existing fixed rate loan agreements, a total of €14,000, repayable over an agreed period. That letter has the form of a loan offer, in that it invited the defendants to indicate whether they were “happy to proceed as outlined”, and said that were they to confirm their agreement, formal letters of offer would issue.
21. The formal letters of offer issued on the 5th May, 2005, in the form of a seven-part formal document containing special and general conditions and in Part 1, the particulars of the loan. The loan was described as “interest only for five years reverting to annuity”. There was no reference either to the repayment by the Bank of the break costs, or of the review after five years. That document contained a formal written acceptance in Part 7 which was executed by both of the borrowers in the presence of their solicitor on the 2nd June, 2005. By that acceptance, the defendants accepted the conditions of the offer and agreed to put in place the security over the properties, particulars of which were contained in Part 2. Counsel for the Bank argues that this loan offer is the entire of the agreement reached between the parties, and that the defendants may not adduce parol evidence to support their claim that additional terms were agreed. The Bank relies on the parol evidence rule to which I now turn.
The parol evidence rule
22. The parol evidence rule has been long considered as a rule observed as much by reason of its exceptions than as arising from observance of the rule itself. I adopt the reasoning of Hogan J. in Tennants Building Products Ltd. v. O’Connell  IEHC 197 where, at para. 19, he explained the parol evidence rule as:
23. Hogan J. explained the parol evidence rule as meaning inter alia that the Court will not hear evidence as to what one party subjectively believes the contract meant, and quoted the Supreme Court judgment in Macklin v. Graecen & Co. Ltd.  I.R. 61 as authority for that proposition. As Hogan J. correctly said, the parol evidence rule has been “consistently diluted” by various doctrines including misrepresentation and the recognition that collateral contracts may exist side-by-side with a main contract found in a written document.
“By virtue of this rule, the parties to a written contract are presumed to have reduced the entirety of their agreement to writing and that to permit one party to introduce new oral evidence which in effect contradicts the terms of the written agreement would be destructive of legal certainty.”
24. In Analog Devices B.V. & Ors. v. Zurich Insurance Co. & Anor.  1 IR 274 at p. 281, Geoghegan J. identified the rule as the third proposition stated by Lord Hoffmann in I.C.S Ltd v. West Bromwich Building Society & Anor.  1 WLR 896 as follows:
25. That statement of principle is relied on by counsel for the plaintiff. It is, in my view, not a precise statement of the parol evidence rule, in that the rule relates to circumstances where the parties commit their contract to writing, and where the evidence shows that the contract was intended to be found in that written document. The third principle of Lord Hoffmann is rather a more general proposition relating to the law of contract, i.e. that the court will look to find the meaning of a contract in the terms actually agreed, and whether they be written or in other form is irrelevant to that proposition, and evidence of intention or what was said or discussed in negotiations is not evidence which is admissible as evidence either to vary the contract or to explain what it means. This arises from the first principles of contract law that a contract evolves from the unequivocal and complete acceptance of an offer, and in complex contractual negotiations it is the final terms offered and accepted which form the basis of the contract, and not terms varied in the course of negotiations. The court will not look to the negotiations to ascertain why the parties reached a particular position, as the focus of the court in interpreting contractual obligations is on what was agreed, not on why it was agreed or what was varied in the course of negotiations and why.
“The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.”
26. In Bula Ltd. v. Tara Mines Ltd.  IESC 17 the Supreme Court quoted with approval the dicta of Lord Wilberforce in Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen  1 W.L.R. 989 at pp. 995-6 as follows:
27. In that case, the Supreme Court said that while the general rule is that evidence is not admissible to vary the terms of a contract which has been reduced to writing, the rule was subject, inter alia to a qualification that oral evidence may be received as to the “factual matrix”. It is the evidence of the negotiations and subjective intentions that is not admissible.
“No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as ‘the surrounding circumstances’ but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating…”
28. Counsel for the Bank also relies on two judgments of McGovern J., Ulster Bank Ireland Ltd. v. Deane  IEHC 248 and Allied Irish Banks Plc. v. Taylor & Anor.  IEHC 121. In the first of these cases, the Court refused to permit the defendants to defend summary proceedings when they sought to advance evidence which contradicted the terms of a written facility letter which the bank asserted contained the agreement between the parties. McGovern J. rejected that evidence as inadmissible as being an impermissible breach of the parol evidence rule, and in reliance on Macklin v. Graecen & Co. Ltd. and O'Neill v. Ryan & Ors.  1 I.R. 166 he described the rule as:
29. McGovern J. followed his own judgment in the later case of Allied Irish Banks Plc. v. Taylor.
“In short, a party is not permitted to adduce evidence which, in effect, contradicts the reasonable construction of words used in a written agreement.”
30. In each of these cases McGovern J. predicated his decision on a view, not seriously contested, that the parties intended the written document to comprise the contract, i.e. he explained the test as being that extraneous evidence could not contradict or defeat a contract which was reduced to writing. Implicit in that approach is that the parties intend that the written document be the sole repository of the contract. Those judgments of Mc Govern J. do not deal with circumstances where the contract is found in other documents or exchanges.
31. The parol evidence rule does not exclude the argument that express assurances can have contractual force, or can sound in the law of tort as a misrepresentation. In that regard Hogan J. in Tennants Building Products Ltd. v. O’Connell adopted the analysis of Finlay Geoghegan J. in Allied Irish Banks Plc. v. Galvin Developments (Killarney) Limited & Ors.  IEHC 314 which was also referred to extensively by counsel for both parties in the present case, and to which I now turn.
32. I find most useful for the purposes of the analysis of the factual circumstances in the present case the authoritative analysis contained in the judgment of Finlay Geoghegan J. in Allied Irish Banks Plc. v. Galvin Developments (Killarney) Limited & Ors. The bank in that case argued that the contract was to be found in the suite of written documents. While she did not analyse the matter by reference to the parol evidence rule, Finlay Geoghegan J. did find that there existed a collateral contract by which the bank agreed to limit its right of recourse to 50% of the loan advanced. She used the term “collateral contract” with some hesitation and pointed out that it was not intended to denote a contract existing side by side with the main contract, but rather a contract preliminary to the main contract, arising from a promise made in the context of the main contract and but for which the main contract would not have been made.
33. I consider the analysis of Hogan J. of the relationship between the pure parol evidence rule as explained by McGovern J. in Ulster Bank Ireland Ltd. v. Deane, and the finding of a collateral contract as was done by Finlay Geoghegan J. in Allied Irish Banks Plc. v. Galvin Developments (Killarney) Limited & Ors., to point to the power of the court to recognise the existence of a collateral or preliminary contract arising from a promise intended to have contractual effect made in the course of negotiations. The written contract may not always contain the whole of the evidence of the terms on which the parties have contracted, albeit this may arise in exceptional cases and only where the evidence is clear. As Hogan J. said in Tennants Building Products Ltd. v. O’Connell, the finding of such a collateral contract is not the norm, and will require cogent evidence, often found in pre-contract documents.
34. The defendants argue that the loan sanction letter of the 14th April, 2005 and the emails were not intended by either party to be devoid of legal effect or purpose. It is argued that in the case of negotiations between commercial entities the court should assume there existed an intention to create legal relations. Reliance is placed on the decision of Megaw J. in Edwards v. Skyways Ltd  1 W.L.R. 349. That case involved a negotiation between representatives of the British Airline Pilots Association and the airline company regarding pension rights of pilots who were made redundant. The company contended that the representation made by it in the course of negotiations was not intended to give rise to legal relations, and the High Court of England and Wales disagreed. Megaw J. found that the promise and agreement made by the airline was made in the context of a business relationship and not in a domestic or social context, and accordingly, the onus would be on the party denying that legal relations were intended to show that there was no intention to create legal relations. I accept that proposition and consider this to follow form the analysis of Finlay Geoghegan J. in Allied Irish Banks Plc. v. Galvin Developments (Killarney) Limited & Ors. and Hogan J. in Tennants Building Products Ltd. v. O’Connell.
35. The leading recent Irish case which deals with whether a representation has become a term of a contract is the considered judgment of Gilligan J. in Carey v. Independent Newspapers (Ireland) Ltd  3 I.R 52. In that case the plaintiff joined the staff of one of the newspapers operated by the defendant as a political correspondent. She had discussed her working arrangements with the editor before taking the position, and had made it clear that for personal reasons, she would not be in a position to work the early morning shift. The editor discussed the plaintiff’s working requirements with a member of senior management, who expressed serious reservations about the possibility that the plaintiff could work from home for the early morning shift, as was proposed. The editor was advised by the senior manager that if the editor did support the plaintiff’s proposal, that he too would support it, but that he would not confirm the arrangement in writing as he felt the newspaper might wish to review the working arrangements at a later date. The plaintiff was not advised of these reservations.
36. When the editor was subsequently replaced, the plaintiff was required to work the early morning shift and brought proceedings in the High Court claiming damages for breach of contract and/or damages for misrepresentation. The legal proposition relevant to the present case was that the representations made by the editor to the plaintiff had contractual force. Gilligan J. reviewed the law relating to when a statement and representation made in pre-contractual negotiations could be said to form part of a concluded contract. He pointed to the fact that the text books often distinguished between representations which did not become terms of a contract, and those which did, sometimes described as “warranties”, this term meaning “a term having contractual effect” and denoting a contractual term.
37. Gilligan J. made the point, which I accept, that a pre-contract representation may become a term of a contract even if it is not called or characterised as a warranty in the negotiations or conversations in which the representation was made. I also accept the general proposition stated by Gilligan J., that the significance of the term to the “eventual entry into the contract on the part of either or other of the parties” is a relevant factor in determining whether a representation has contractual effect. In that case, Gilligan J. found that the agreement with regard to morning working was a fundamental term of the agreement reached between the defendant and the plaintiff, and “constituted a warranty and inducement” to the plaintiff to take the position offered.
38. In the present case the loan offer and the emails made the loan available initially on a five-year interest only basis and subject to review at that stage. In the letter of the 14th April, 2005, the defendants were invited to say whether they were happy to proceed on that basis, and the letter presents the terms as an offer. It was in that context that the formal loan offer issued and I consider that the defendants are correct that that letter was intended to be considered and formally accepted by the defendants. This is consistent with the e-mail correspondence between February and April, 2005 and the letter of loan sanction of the 19th April, 2005 refers expressly to those discussions. I consider that certain open, plain and unambiguous assurances were given by the Bank in the course of those negotiations that the interest only facility would be reviewed at the expiration of the initial five-year period. This is also consistent with some of the internal documents of the Bank and there is a reference in an internal review document of the 26th March, 2009 that the agreement reached in 2010 was for five years with a review thereafter. That precise phrase is also found in an internal document on the 27th August, 2007. In each case, the reference was to the request by the defendants for a ten-year interest only facility, and the internal documentation suggests that five years was agreed, with a review thereafter. Both of these internal documents were prepared before the relationship with Mr. Hayes soured considerably, and the internal documentation is to be given weight in that context.
39. I am satisfied that negotiations between Mr. Hayes and the Bank were focused on a number of issues, but that the primary focus of Mr. Hayes was to achieve a substantial interest only period and to achieve a satisfactory interest rate. I am also satisfied that the preference of Mr. Hayes was to remain with AIB for the reasons identified above. I am satisfied however, that the Bank did not have a ten-year interest only product at the time. Mr. Hayes pressed hard for a ten-year interest only arrangement, and indeed as late as the 3rd March, 2005, in an e-mail he asked “Why not a ten-year interest only period?” I consider that the length of the interest only period was important, but not the most important element in those negotiations. I accept Mr. Dudley’s evidence that Mr. Hayes was “margin sensitive”, and that the interest rate rather than any other factor was his key concern. Allied to this was the fact that the Bank was prepared to meet some of the costs of breaking the fixed rate loans, and that Mr. Hayes would not incur the additional expense of remortgaging to meet the requirements of another bank.
40. The AIB loan was therefore attractive enough to Mr. Hayes for him to continue and conclude the negotiations. I am satisfied that by the e-mail of the 9th March, 2005, Mr. Dudley answered the request for a ten-year interest only period by saying that the Bank’s “normal scenario” was for five years with review thereafter, and he was confident that the five-year review would result in an extended interest only period thereafter. I am satisfied that between early March, 2005 and the end of March, 2005 when the e-mail correspondence ended, that Mr. Hayes no longer pressed for a ten-year interest only period and was satisfied to accept five years, but this was because he was assured that at the end of the five years there would be a review of his facility.
Conflict between formal written documents and prior assurances
41. How then is one to reconcile the fact that Mr. and Mrs. Hayes both signed a formal loan offer document which did not contain a reference to a review after five years?
42. Mr. and Mrs. Hayes engaged with their solicitor for the purposes of witnessing the document, and Mr. Hayes spoke highly of her, a partner in the firm of McCarthy and McCarthy, Ballincollig, Co. Cork, with whom Mr. and Mrs. Hayes had dealt in regards to all or most of their financial and personal property deals. I regard it as significant in that context that when Mr. and Mrs. Hayes came to sign the loan offer in the presence of their solicitor, they did not discuss with her that the loan offer did not mention a review after five years. Mr. Hayes gave evidence that he phoned Mr. Dudley before he signed the document. He was unable to remember whether he phoned Mr. Dudley from the Ballincollig office of his solicitor, or from an office in Cork. That this phone call occurred was never put to Mr. Dudley in cross-examination. What exactly was said in the course of conversation was also not identified by Mr. Hayes. He never mentioned the phone call to his solicitor, and I heard no evidence at all from Mrs. Hayes in the course of the case. Mr. Hayes says that he brought the difference to Mr. Dudley's attention before he signed the loan offer, but that he was told a further five years interest free would be granted as a matter of “a rubber stamp”, and that the final loan documentation took the form it did to suit the “paperwork”, in the context where Mr. Hayes knew and was expressly told that the Bank did not have a ten year product. That the five year offer issued in order to suit the paperwork requirement of the bank was put to Mr. Dudley, and his reply was that he had never issued a ten year loan offer, that such a product was not available, and that he never had, nor would he have, issued a loan offer to a customer and then told them that the terms were different from those expressed in writing.
43. I accept Mr. Dudley’s evidence in this regard, and reject that of Mr. Hayes. Mr. Hayes said he was happy to sign the document on the 2nd June, 2005, because of his conversation with Mr. Dudley on that day. I do not accept that this conversation happened, and if it did, I do not accept the evidence of Mr. Hayes that he was assured by Mr. Dudley that in essence, the document that he was signing did not mean what it said. Mr. Hayes is a very experienced businessman, and I found him to be a very intelligent witness. He had built a very substantial property portfolio, he is a qualified engineer and has been engaged in business for a long number of years, and must have in the course of his business dealings executed very many documents. He took the trouble of executing the loan offer in the presence of his solicitor, a solicitor with whom he had a lot of dealings over a long number of years. Almost two months had passed from the date of the letter from Mr. Dudley on the 14th April, 2005 and the formal loan offer acceptance. Mr. Hayes knew he was a valued customer of the Bank and he could have reverted to Mr. Dudley or to another person in the Bank, or had his solicitor revert, to have the formal loan document revised to reflect what he said was agreed. I regard it as not credible, that Mr Hayes would not have mentioned the phone conversation and the assurance said to have been given to him by Mr Dudley because he had such trust in his solicitor and her expertise.
44. However, I cannot ignore the fact that the agreement that the Bank would meet the costs of breaking the fixed rate loans was also not reflected in the loan document, and that agreement was performed and agreed to have been a term of the loan.
45. Counsel for the defendants argues that the expression “all things being equal there wouldn’t be any issue in extending at that stage for a further five years”, must have been, was intended to, and did in fact have contractual import. In my view this is correct and the Bank did intend to give a degree of comfort or assurance to Mr. Hayes in the negotiation, that should he accept the loan offer, the interest only facility would be favourably reviewed after the five years, and that it was anticipated that the interest only period would be continued for another five years.
46. It is in the circumstances my view that the formal loan document was not intended to comprise all of the elements of the agreement for loan. Two elements at least were omitted from the written document, although both found clear expression in other written documents adduced in evidence, primarily the letter of the 14th April, 2005. I am satisfied that there was an agreement between the parties, that the Bank would meet the cost of breaking the fixed interest loans, and note that was a complex agreement by which Mr. Hayes met half of the cost in the first year and was reimbursed those monies the following year subject to certain conditions which were met. I am also satisfied that there was an agreement that the facility would be reviewed after five years and that there was to be no automatic reverting to annuity at that stage. This is borne out also by the internal Bank documents in 2007 and 2009. I accept the evidence of Mr. Dudley that it would have been unusual, if indeed impossible, for Bank headquarters to have issued a mortgage loan offer that made express reference to a review after five years. Mr. Hayes, in the course of his evidence, suggested that Mr. Dudley had said to him that the Bank “paperwork” would not normally include a reference to a review, and I accept that that is so.
47. In the circumstances the matter can be dealt with by means of the analysis conducted by Finlay Geoghegan J. in Allied Irish Banks Plc. v. Galvin Developments (Killarney) Limited & Ors., i.e. that there is sufficient written evidence of a collateral agreement between the parties and that the evidence points me to a conclusion that the formal offer of mortgage loan dated the 5th May, 2005, did not contain the entire of the agreement between the parties
48. Thus it seems to me that counsel for the Bank is incorrect in arguing that this case may be answered by application of the parol evidence rule, as that rule has no application when the parties do not commit the entire of their agreement to writing.
Conclusion on contractual force of assurances
49. Accordingly, the contract between the Bank and Mr. and Mrs. Hayes did provide for a review of the facility after five years, with regard to whether Mr. and Mrs. Hayes should be offered a further period during which repayments would be on an interest only basis. I consider that this was a term of the contract, or that it operates as a preliminary contract.
50. Mr Hayes however asserts that the agreement with the Bank was that the interest only facility would automatically be renewed at the five-year review and that it was a matter of a “rubber stamp”. I turn now to consider this argument
Automatic renewal of the interest only facility?
51. The expression “All things being equal there wouldn’t be any issue in extending at that stage for a further five years” did not find its way into the written formal loan documentation signed by Mr. and Mrs. Hayes. This is not surprising as the phrase is loose and is not of the type found in standard bank or other written contractual documents. I accept however, that the phrase did have a meaning and was intended to have contractual import.
52. Counsel for the defendants argues in reliance on the judgment of the High Court in Analog Devices B.V. & Ors. v. Zurich Insurance Co. & Anor., that if I am to give any contractual import to that phrase I must construe the terminology used objectively. Geoghegan J. giving the judgment of the Supreme Court quoted with approval the statement of the modern principles of contractual interpretation found in the judgment of Lord Hoffmann in I.C.S. Ltd. v. West Bromwich Building Society & Anor.  1 WLR 896. The relevant fourth principle is as follows:
53. The phrase “all things being equal” is one commonly used, and on objective analysis it suggests that the Bank would be favourably disposed, absent some change in circumstances, to continuing the interest only arrangement for a further period of five years. Counsel for the defendants argues that that the Bank could not refuse to extend the interest only period on the five year review on the basis of then operating economic circumstances, or on account of the fact that the economic profile of the defendants themselves, and of the economy as a whole had changed. By 2010 the position of the Bank had deteriorated, the rental income of the defendants had dropped, and the loan-to-value ratio of the security was such that the Bank did not have sufficient security cover for the entirety of the loan.
“The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.”
54. Both Mr. Hayes and the Bank were operating in a commercial context. A reasonable bystander in 2005 would not, in my view have agreed that if the commercial realities of the Bank, of the property market, of the rental income of Mr. Hayes, and of the loan to value ratio of the security, had all changed materially that the Bank would be obliged to continue with the interest only facility.
55. The interest only facility was offered to Mr. Hayes primarily because he was a very valued customer of the Bank, and all his other loans had been fully performing. The other reason, and this is very clear in the e-mail correspondence, why the Bank was prepared to offer Mr. Hayes a satisfactory tracker rate and the interest only facility was that the loan-to-value ratio of the security was satisfactory to the Bank. That loan-to-value was relevant to the Bank is evident from the e-mails in 2005, and a percentage of 81% or 82% was mentioned in the e-mail of the 23rd February, 2005, (e-mail 3) and led to Mr. Hayes offering a replacement or additional property in Bandon to improve the ratio at that time.
56. Thus I consider that even in 2005, both Mr. Hayes and the Bank were alive to the requirement of a realistic and secure loan-to-value ratio, and had either of the parties to the negotiations in 2005 been asked what was agreed to happen should the ratio fall to 110 per cent or 120 per cent, I consider that both of them would have agreed that the review would have been problematic at best, and unlikely to have achieved a fresh agreement for a further five years at interest only after the expiry of the first five year term.
57. A review did take place on the 25th February, 2010, some three months before the five year period expired, and the actions of Mr Hayes around that review are of some importance. Mr. Hayes formally sought that the loan facility would be extended on an interest only basis for a further five years “as discussed”. He did not in this letter assert the proposition he now asserts, that the further five-year period was agreed, but he asserts that it was discussed. On the 25th February, 2010, the Bank in response to that request indicated through the then manager Stephen Rowe that it would be “supportive” of a further twelve month interest only period. Mrs. Hayes in a letter of the 29th March, 2010, confirmed her husband’s request for an extension for that twelve month period. A phone call was had with Mr. Hayes on the 14th May, 2010, and a formal meeting held on the 18th May, 2010. The contemporaneous record of this meeting is that Mr. Hayes pressed for a further five years interest only facility, and that Denis Dudley had “verbally signalled” a further five years “would be no issue”. Again, there is no reference to an agreement that the facility would be automatically renewed. It was not until the 28th May, 2010 that Mr. Hayes, in an email, asserted that there was an agreement for a further extension and that this had been made in 2005 with Mr. Dudley. By letter of the 8th June, 2010, Mr. Hayes formally accepted the offer of a one year extension of the interest only facility, and a second option of a two year extension which required additional security.
58. Mr. Hayes continued to engage with the Bank through 2011, although the relationship became difficult. A six month interest only arrangement was agreed in May, 2011 although Mr. Hayes, in a letter of the 6th May, 2011, expressed disappointment that the extension was for such a short period. In that letter he refers to a “clear understanding” having been given to him that a further five-year extension would be available and that he had accepted the facility in 2005 on that basis.
59. The defendants have argued that the real and undisclosed reason why the Bank refused to renew the five year interest only term in 2010, was that the Bank had an “underlying problem” with the number of tracker mortgage loans on its books, and that the Bank’s profits were thereby being impacted. It is suggested that the Bank was anxious to remove the beneficial tracker rate from Mr. Hayes, and that on the review in 2010, the Bank was seeking an opportunity to replace the tracker with a market rate. The tracker rate was always available to the defendants for the purposes of the 2005 loan, which was not an issue in 2005, and did not become an issue at all in the negotiations in 2010, and still operates. The loan was always to be at a tracker rate for the entire term of 20 years, and it was the extension of repayment on an interest only basis that was the core area of dispute in 2010.
60. I have heard evidence from members of staff of the Bank and from Mr. Hayes, and I am satisfied, that the tracker rate was never an issue between them, and it was always accepted that the Hayes loan would be at a tracker interest rate. I also accept as a matter of fact, that the Bank considered its own financial circumstances and those of Mr. Hayes to have changed materially by 2010 when the review came to be conducted. This is scarcely surprising. Property prices had fallen steadily from 2008, as had the rental income of Mr. and Mrs. Hayes. I find as a matter of fact, that the negotiations that were had with Mr. Hayes in 2010 were not done with a view, whether express or implied, to replacing the tracker rate with a market rate, and the focus and intention of the negotiations was to agree the means by which the Hayes loans could be repaid on an annuity basis.
Conclusion on breach of contract
61. I consider the agreement that the facility be reviewed after the expiration of the five year period meant that if the financial circumstances of the defendant and of the Bank had remained broadly speaking, materially the same as those that prevailed in 2005, that the Bank would extend the interest only period for a further five years. Thus there was agreement for automatic renewal of the interest only period, and the review was not to be a “rubber stamp” of a proposal that the facility be extended for a further five years after May 2010.
62. The financial circumstances had change materially and I consider that the Bank was entitled to refuse to extend the interest only period beyond the year 2011, and no breach of contract has been shown.
Liability in tort
63. The judgment of Gilligan J. in Carey v. Independent Newspapers Ireland Ltd. dealt extensively with the fact that claim was made both in tort, in negligent misrepresentation, and for breach of contract, and said that:
64. While the defendants have pleaded and argued in the course of the trial that certain pre-contract representations became terms of the contract, the claim was also pleaded in negligent misstatement. That the relationship between the Bank and the defendants was one of proximity is not denied, but the Bank does deny that any representations can be treated as implied terms of the contract, and also denies that there was any reliance by the defendants on the representations.
“The boundaries of contract and tort actions suggest that there is no conceptual objection to imposing liability in both contract and tort provided the facts as found meet the criteria of liability of the type of tort and contract action taken.”
65. The defendants do not argue that a fiduciary relationship exists between them as customers of the Bank and the Bank, and such a fiduciary relationship cannot generally be found in the case law relating to the relationship between a bank and its customers. They do however argue that the relationship is one of sufficient proximity, that a duty not to mislead the customer in the course of negotiations can be said to be implied. Reliance is placed on the judgment of Kelly J. in Darlington Properties Ltd v. Meath Co. Council  IEHC 70 who explained at p.36 of the judgment that:
66. Reliance is also placed on the judgment of Keane J. in Doolan v. Murray & Ors.  WJSC-HC as authority for the proposition that rights and duties of parties who enter into a contract are not capable of also being considered under the law of tort. This is clear from the judgment of Gilligan J. in Carey v. Independent Newspapers Ireland Ltd. which authoritatively sets out the basis of the proposition that liability can arise in contract and in tort from the same set of circumstances. I do not consider that there is anything controversial in the assertion made by counsel for the defendants that a duty of care can arise in the context of negotiations between a bank and a customer or a person negotiating the terms of a loan. The duty is a duty not to mislead, or not to tell a half-truth with regard to matters under discussion. In general, silence cannot be regarded as a sufficient representation to found an action in tort, but I accept the proposition stated by Keane J. in Eily Doolan v. Peter Murray & Ors. that:
“The duty of care is not confined to professional persons expressing opinions or giving information. For example, a vendor has a duty to take reasonable care so as to ensure that statements he makes in seeking to induce a sale are true (see Doran v. Delaney  2 I.R. 61). In Gran Gelato Limited v. Richcliff (Group) Limited  Ch. 560, it was common ground that the vendor owed a duty of care to a prospective purchaser…”
67. I too adopt that proposition as a correct statement of the law, but note that the proposition is not that silence may constitute a representation, but that silence may be part of, or distort, something that is actually said or asserted. This is also apparent from the judgment of Gilligan J. in Carey v. Independent Newspapers Ireland Ltd. where he held that the editor had made a negligent misrepresentation by positively affirming the morning working arrangements with the plaintiff and failing to advise her that senior management had reservations about the position.
“In the case of parties to a contract, the authorities suggest that there are three categories of cases in which silence can amount to misrepresentation giving rise to a cause of action. One of them, when a contract requires uberrima fides, does not arise in the present case. The others are where the silence distorts a positive representation and where a fiduciary relation exists between the contracting parties. I would adopt as a correct statement of the law of this jurisdiction the following statement of Cheshire, Fifoot and Furmston’s Law of Contract 12th Ed. at p.273:
“Silence upon some of the relevant factors may obviously distort a positive assertion. A party to a contract may be legally justified in remaining silent about some material fact, but if he ventures to make a representation upon the matter it must be a full and frank statement, and not such a partial and fragmentary account that what is withheld makes what is said absolutely false. A half truth may be in fact false because of what it leaves unsaid and although what a man actually says may be true in every detail, he is guilty of misrepresentation unless he tells the whole truth.””
68. I am not persuaded that the Bank did in fact misrepresent to Mr. Hayes the basis of the contract, or remain silent as to the true intention of the Bank or other factors that might have influenced Mr. Hayes in deciding to accept the offer. I have heard evidence from Mr. Dudley and from Mr. Hayes regarding their engagement and with regard to the e-mails, which helpfully are a contemporaneous and fairly complete source of evidence regarding the negotiations. The e-mails suggest that the Bank would be favourably disposed towards granting a further five-year interest only arrangement to Mr. and Mrs. Hayes on the expiration of the first five-year term. Neither the Bank nor Mr. Hayes knew at that stage that the financial crisis in the subsequent years would have such a catastrophic impact on the Bank’s profits, on the loan to value ratio of the securities, and the rental income of Mr. and Mrs. Hayes. I am not satisfied that Mr. Dudley acted mala fides in suggesting to Mr. Hayes in the e-mails that, “all things being equal” there would be no problem in the Bank extending the interest only period for another five years. The problem is that all things were not equal when the review came to happen. What was promised by the Bank was a review, the review did in fact take place, but in circumstances quite different from those in which the loan was negotiated in 2005. Had the parties alerted themselves to the possibility that the property element of the economy in particular would collapse to the extent it did, I am satisfied that neither of them would have expected that it would have been a mere matter of formality that the Bank would extend its interest only facility for another five years.
69. Mr. Hayes might have indeed wished to shore up his loans by continuing with an interest only schedule had he anticipated the financial crisis in 2005, and from his point of view the longer the period during which he did not have to meet any capital payments, the better for his general finances. However, in reply to a question in the course of his evidence he was unable to explain how he considered that he would have been in a “safe harbour” were he to have paid interest only on his loans after 2010 in the context of decreasing property prices, reduced rents, and when property prices had not yet stabilised. Mr. Hayes was not convincing in his response. He said that one element of his “safe harbour” was that he would build up a little “nest egg” so that he would have property or capital to meet capital and interest payments from 2015, when the ten-year interest only period had expired. He accepted that at the date he gave evidence on the 9th March, 2016, he was not “back where he started” in terms of his property portfolio and the value of his equity. He did not in the events build any nest egg because, as he put it bluntly, his rental income “was thrashed” and because his children were at an expensive stage. He also confirmed that he did not buy any further property after 2005.
70. I do not in those circumstances accept that Mr. Hayes anticipated the financial crash in 2005, or that he made provision for that contingency in the context of his desire to build a “safe harbour” for his assets. I do not for that reason accept that he had a long-term investment plan, or that if he did, that it was one which he was capable of implementing after 2008 when his rental income started to fall. His own actions then, do not support the proposition that he was seeking a ten-year interest only repayment arrangement because he wanted to build an asset or income base over those ten years with the benefit of reduced loan repayments. I consider that Mr. Hayes’s real objective was somewhat different, and I consider that he did have some expectation that property prices would collapse, he did expect that his children would be expensive, and he was anxious also to make provision for, and anticipated arrangements that he was negotiating with his wife, from whom he was in the course of separating. I consider that they were the real factors that influenced him, and not the desire to create a property portfolio or other investments or funds that would enable him to meet capital and income after ten years.
71. Further, I consider that Mr. Hayes was well aware that although he negotiated through Mr. Denis Dudley, Mr. Dudley did not have authority to conclude the deal. He says however, that he did not make a distinction between the Dublin head office from where the loan offer ultimately issued, and the local Cork office where Mr. Dudley worked and from where all negotiations had been conducted, and did not make a distinction in his own mind between those he called the “superiors” of Mr. Dudley and Mr. Dudley.
72. I consider the evidence of Mr. Hayes to be elusive in regard to this question, and that he did know that Mr. Dudley did not have authority to conclude all of the elements of the deal, although he did actively pursue the best deal on his behalf, and presented it to head office in the most favourable light possible.
73. The loan offer from Bank of Ireland contained a number of conditions not acceptable to the defendants. There was a condition by which Bank of Ireland reserved the right to further security, over and above that offered over the 22 properties which were broadly the same as those made available to AIB. Of more significance is the fact that the Bank of Ireland loan offer was subject to an express covenant that the maximum loan to value ratio not fall below 80%. I have heard evidence which I accept, that the existence of such a covenant would have meant that Bank of Ireland could have called in the entire facility and/or sought additional security once this covenant was breached. This is of particular significance as the evidence unequivocally points to a significant fall in the value of the property of the defendant on which the loan by AIB was secured, and which, ipso facto would have been that available to Bank of Ireland for the equivalent loan. The values fell in the years from 2008, and by 2009 were such that the latest loan to value ratio was much less than 80%, and was probably closer to 100% or slightly worse. At the lowest part of the market the loan to value ratio was approximately 115%.
74. The defendants were averse to providing security in addition to the 22 individual properties made available to AIB. Mr. Hayes, in evidence made it clear that he wished to keep the bulk of his assets mortgage free, to ensure that he did have the other element of his safe harbour, i.e. a source of assets to meet any contingencies or crisis in his finances. The defendants were in my view wholly averse to offering more than the security made available to AIB in 2005, and I consider that that was a significant factor that weighed in the mind of Mr. Hayes when he negotiated the agreement with AIB at that time.
75. I consider that, even if there was a representation made by AIB in circumstances where it owed a duty of care to the defendants, that the defendants did not rely on such representation in choosing to accept the AIB offer rather than that of Bank of Ireland. The two loans offered a different degree of advantage, and I am satisfied on the evidence of Mr. Hayes, albeit given somewhat reluctantly, that Mr Hayes made his election to accept the AIB loan offer after weighing all of the factors, including the element of the cost of moving the securities, the cost of breaking the fixed term loans, the element of loyalty he felt to AIB, and the fact that he was particularly averse to making available any further security. The AIB loan facility had a particular advantage in that it did not contain the possibility that the Bank could seek additional security during the currency of the five year interest only period, and no covenant was required to be provided by the borrower that might have enabled the Bank to seek additional security in the event of a deterioration in the loan to value ratio.
76. Further, the defendants have not offered any evidence of any loss that they claim to have suffered by reason of their acceptance of the offer from the Bank instead of the offer from Bank of Ireland.
77. I find that the defendants have not made out their claim in negligent misrepresentation
78. In the circumstances I answer the questions posed by me at para. 13 above as follows:
79. I propose in the circumstances entering judgment against the defendants in the sum of €3,972,093.57.
i. The mortgage loan document dated the 5th May, 2005, and executed on the 2nd June, 2005 by the defendants did not comprise the entire contract between the parties,
ii. The loan between the Bank and the defendants was subject to an agreement that the Bank would review the interest only repayment facility on the expiration of the five year period,
iii. There was no agreement that at that review the interest only facility would automatically be renewed,
iv. The factors that might have influenced the Bank on a review were the financial circumstances of the defendants, including the loan to value ratio of the securities, the rent roll form the properties and general economic factors.
v. The provision that the interest only facility would be reviewed after five years operates as a preliminary or collateral contract or warranty and/or as a representation,
vi. The Bank did not breach the agreement that the loan facility be reviewed after five years, and
vii. Mr. and Mrs. Hayes did not rely on any representation and their claim in tort fails.