The relationship between
borrower and financier
20/04/2007 The Sun LAW REALTY By Nicholas Chang Chen Seng
IN most cases in Malaysia, the purchaser of a property will seek financial
assistance to finance his acquisition of the property and will apply for a
loan from a financier, usually a bank. This article will attempt to explain
the legal implications of such a borrower-financier relationship.
Generally, the borrower-financier relationship is purely contractual in
nature, created to facilitate a lender-creditor and borrower-debtor
situation. As a result of this relationship, the financier is legally deemed
to be the agent payee of the borrower. This means the financier would have
agreed to pay the loan sum, as part of the purchase price, to the vendor,
for and on behalf of the borrower, who is usually also the purchaser.
An agent-principal relationship exists when a “principal” authorises another
person to act on his behalf and the person so authorised is called an
“agent”. It is pertinent to note that in a principal-agent relationship, the
principal may authorise the agent to undertake or perform acts on his behalf
and such acts may be capable of altering the legal position of the
principal.
The financier in a property transaction has an obligation to release the
loan sum only when authorised to do so and that it must be for the benefit
of the borrower. This obligation suggests the existence of a relationship of
trust and confidence and, as a result thereof, the financier will owe a
fiduciary duty to the borrower. The fiduciary duty in this instance is the
duty or obligation to ensure that the borrower’s interest takes precedence
over the interest of the financier, when the financier is acting as the
agent payee of the borrower.
In most loan agreements or charge documents relating to a loan granted to a
borrower to finance the purchase of a property, there will be express
provisions requiring the borrower to irrevocably authorise the financier to
release the loan sum to the vendor, in accordance with the terms of the sale
and purchase agreement. The authority of the financier in such instance is
usually expressed to be unfettered. Further, in most property transactions,
the financier is usually required to issue a letter of undertaking to the
vendor to release the loan sum to the vendor.
One interesting question that arises from a borrower-financier relationship
is whether a borrower could validly stop his financier from releasing or
further releasing the loan sum to the vendor.
This question needs to be examined from three different angles.
Cannot be revoked
Firstly, when the financier issues its letter of undertaking to the vendor,
such an undertaking will generally be construed strictly against the
financier. This rule of construction is similar to that applied in
construing a bank guarantee or a performance bond or a letter of credit. In
short, if the financier elects to accept the instruction of the borrower to
stop the release or further release of the loan sum, the financier runs the
risk of being sued by the vendor to enforce the terms of the financier’s
letter of undertaking.
Secondly, if the financier has been irrevocably authorised by the borrower
to release the loan sum in accordance with the terms of the sale and
purchase agreement, the financier then is under no obligation to accept the
instruction of the borrower to countermand his earlier irrevocable
authority. “Irrevocable” means cannot be revoked. Strictly, it would appear
that a financier is entitled to ignore the instructions of the borrower to
stop release or further release of the loan sum when the borrower had
earlier given irrevocable authority to the financier to do so. Thirdly,
there is a need to weigh the fiduciary duty owed by the financier to the
borrower against the irrevocable authority given by the borrower. The key
factor here is that any release of the loan sum must be for the benefit of
the borrower. This means that if the borrower has legally valid reasons to
terminate the sale and purchase agreement and to be discharged from his
obligation to pay the purchase price to the vendor, and the financier has
been served with such a notice, it would appear that the financier is
required to comply with the instructions of the borrower and stop the
release or further release of the loan sum. This is despite the fact that
the financier may be sued by the vendor for breach of its undertaking given
to the vendor.
In such a case, the reasons for the termination of the sale and purchase
agreement by the purchaser-borrower must be good and valid If there are no
good and valid reasons, the financier may ignore such an order to
countermand the earlier irrevocable authority.
Loose ends
All loose ends can be nicely knitted up if the letter of undertaking to be
issued by the financier in the favour of the vendor is worded meticulously
to protect the financier in such an event. For example, the financier may
expressly state that it shall only be bound to perform its undertaking to
release the loan sum provided that the sale and purchase agreement remains
valid, binding and subsisting and that the vendor is not in breach of the
sale and purchase agreement.
In the above instance, the financier’s undertaking to the vendor would be
conditional. A vendor who is in breach of the sale and purchase agreement
would then not be entitled to call upon the performance of the financier’s
undertaking. Even if the financier’s undertaking is not conditional, a
vendor who is in breach of the sale and purchase agreement is unlikely to
succeed in his bid to enforce the undertaking as his hands would be tainted
by his breach of contract, and a court of law would be most hesitant to
assist a party whose hands are stained.
As a last word, it would be most wise for a borrower to engage the services
of an independent solicitor to, at least, peruse the letter of undertaking
to be issued by his financier to a vendor, to ensure that in the event he
has valid and good reasons to terminate his sale and purchase agreement with
the vendor, his agent payee will not release or further release the loan sum
and to avoid unnecessary legal complications.
The writer is a member of the Solicitors’ Remuneration Enforcement
Committee, Bar Council Malaysia www.malaysianbar.org.my
Note: This column is brought to you by the Malaysian Bar Council for your
information only. It does not constitute legal advice. You should therefore
seek professional legal advice for your specific needs. Neither the
Malaysian Bar nor the Sun Media Corp Sdn Bhd shall be liable to any reader
who suffers losses as a result of relying on this column.
