Court case shows perils of investing without a written agreement

A recent case before the High Court highlights the perils of investing large sums of money in a business venture without a written agreement.

It involved two couples who decided to work together developing holiday cottages. The defendant couple owned a farm, which included a farmhouse, café, restaurant, farming land and holiday cottages.

The couple got into financial difficulties and were obliged to sell the farmhouse when the mortgage lender was granted a possession order.

The claimant couple considered buying the farmhouse and became friendly with the defendants. They found they had a mutual interest in developing holiday cottages and decided to go into business together. They did not have a written agreement.

The claimants put just over £1m into the project. They then discovered that the development could not go ahead because the defendants had mortgaged other parts of the farm and could not clear their debts.

Relations between the two couples became strained. The defendants decided to put the project on a formal footing and wrote to the claimants saying that the money paid had been an investment. The claimants said it had been a loan, which they wanted to be repaid.

The court found in favour of the claimants. It said both parties had been at fault for not formalising the position earlier. The defendants had taken the initiative and drafted documents, but it did not reflect well on the claimants that they had been prepared to go along with a fluid situation. The court was satisfied, however, that the claimants always understood the payments to be a loan, and accepted their evidence that they would not have made the payments as an investment.

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