If you enter into a business arrangement with a third party without completing the entire package of legal documents, the promissory note may become a vital contractual insurance policy, as was shown recently in a dispute at Belfast's High Court
A recent High Court action in Belfast showed only too clearly the dangers in getting into business with a third party prior to completing detailed agreements.
Oxigen Environmental Limited approached B Mullan & Sons Contractors Limited, a Limavady-based company, which owned a quarry and lands at Limavady that was considered suitable for landfill.
The intention was that the parties would establish a new joint venture in relation to the landfill business and heads of terms were signed which were stated as being non-binding and subject to contract.
They were also conditional on the requisite planning and licences being in place and the joint venture being successful in a tender process for the operation.
Prior to execution of any further agreements a cash input was required to enable the venture to obtain planning permission and undertake the necessary works for the purpose of the joint venture.
To this end Oxigen agreed to provide funding but contended in the Court hearing that it was not content to lend the monies to B Mullan & Sons Contractors Limited on the basis that it required security for the cash and that payment of cash was to be a goodwill gesture and not a percentage of any agreed input into the joint operation.
To this end, the monies were lent to two directors within B Mullan & Sons Contractors Limited who signed a promissory note to Oxigen.
Oxigen subsequently notified B Mullan & Sons Contractors that it no longer wished to proceed with the joint operation and demanded repayment of the monies on foot of the promissory note.
The Court held that, notwithstanding the background to the relationship between the parties, the promissory note was valid and payment fell due when demanded.
Judgment was awarded in favour of Oxigen and the directors were ordered to pay the monies into Court with a stay of execution of the judgment pending the hearing of the claim by B Mullan & Sons Contractors Limited against Oxigen for damages for breach of contract.
Whilst litigation in this case seems set to continue, the case highlights the downside for parties proceeding with complex business arrangements prior to completing the entire package of legal documents.
On the other hand, it illustrates the effectiveness of the contractual document known as a promissory note.
Celia Worthington, senior partner of the Commercial Department of Worthingtons Solicitors Belfast