Often when a commercial lender is discussing possible workout alternatives for a defaulted or troubled loan with a borrower or even when a lender is proposing loan terms to a new prospective borrower, a lender may mention all manner of ideas, proposals, options, and “what if” scenarios to a borrower.
A lender may make statements about what a lender might do or agree to under a given set of circumstances. Often such communications are embodied in a series of email exchanges or even text messages. In such communications (and perhaps even in regard to all communications), it is advisable to include a disclaimer to the effect that any statements made or options being discussed are for “discussion purposes only” and are not to be deemed binding on the lender in the absence of formal internal approval and until memorialized in a written agreement signed by all parties.
Why is this important? In Massachusetts, contracts can be created based on an exchange of emails or even oral communications. Similarly, liability can also arise for misrepresentation premised on an exchange of communication. Case law is replete with fact patterns where communications, whether written, oral, or electronic (emails and text messages) have been deemed sufficient to create an enforceable agreement or to give rise to liability under other theories of law. For example, “promissory estoppel” can give rise to a contract if (1) a party makes a promise which the party should reasonably expect to induce action or forbearance by the other party, (2) the promise induces such action or forbearance, and (3) injustice can be avoided only by enforcement of the promise. Similarly, a claim for misrepresentation can arise where a party makes a representation with knowledge of its falsity in order to induce another person to act thereon, the other person reasonably relies on the representation and acts on it to their detriment.
Practically speaking, when a lender tells a customer “if you were to do ‘x,’ the bank may be inclined to forbear or provide some other concession to the borrower,” it is critical to clearly state that such an exchange is not binding upon the lender. Otherwise, the borrower (particularly a borrower in economic distress) may rush to do “x” and then claim that the bank agreed to the forbearance or other concession. If the email exchanges are not clear, the borrower may be able to argue that it was the borrower’s reasonable belief that there was an agreement between the parties and thereby bind the bank by taking such actions. Alternatively, a borrower may argue that the borrower was somehow tricked or misled by the bank into doing action “x.”
By adding a disclaimer to any substantive communications with a borrower, a lender can avoid this potential pitfall. The disclaimer can take many forms but we often recommend the following example:
The Bank reserves all of its rights and remedies and waives none of the existing defaults. Nothing herein contained is to be deemed an agreement by the Bank to any waiver or modification of any terms of the loan documents or to any forbearance. Any proposed terms and conditions contained herein are provided for discussion purposes only and are not binding on the lender in the absence of a formal written document signed by all parties.
It would be hard for a borrower to claim that there was a binding commitment in the face of this type of language. Similar disclaimers should also be conveyed orally in all telephone conferences in which a lender and a borrower are discussing workout or loan terms. In our increasingly informal world, it is too easy to get mired in a “he said/she said” dispute based on less than clear or short-hand abbreviated communications. It is better to err on the side of appearing to be overly cautious than to have to explain how the bank finds itself embroiled in nasty litigation premised on less than clear communications with a borrower. Even as attorneys in negotiating settlement of a law suit, we use such disclaimers in all communications. Massachusetts case law has many examples of attorneys’ unintentionally binding their client to the terms of a settlement due to a lack of disclaimers and ambiguous communications.
Inclusion of disclaimers in all emails and other communications should be an automatic reaction for all lenders negotiating the terms of a workout or even a new loan. As they say, “an ounce of prevention is worth a pound of cure”!
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.