Legal Updates

A promissory note signed against an oral commitment for investment is not enforceable if the investment did not go through

June 29, 2020

Two entrepreneurs were signed on a loan agreement and promissory notes in the amount of USD 350,000 by an investor promising against this to invest a million Dollars in a company of theirs. Until the point of signing the notes and the loan agreement the entrepreneurs did not personally owe the “lender” anything, because the “lender” transferred in several occasions amounts accumulating to USD 160,000 for activities of the “lender” with his partners and the entrepreneurs acted as part of a foreign company as contractors. The investment did not take place but years later the investor demanded the entrepreneurs to pay on the promissory notes.
The Court held that the promissory note was not supported by consideration and therefore the entrepreneurs do not owe any payment. A " failure of consideration" defense will be accepted when a party, the note grantor, did not receive "value" or "return" for the promissory note. Here, the signing of the promissory notes and the loan agreement did not stand on its own but was done as part of another transaction and against an oral commitment to invest a million dollar in a joint venture. It is unreasonable that the entrepreneurs willingly signed the notes to secure the transfer of funds that were already transferred (in an amount which is less than the amount of the notes) because a reasonable person who is a business person and operating for profit would not have entered into a transaction where he will have to repay double of a loan that he did not take and was not liable for. Because the execution of the notes was against an oral promise to invest a million Dollars in a joint venture that did not consummate and the investment was not made there is a full failure of consideration and therefore the entrepreneurs are not liable at all.
For full consideration it is noted that the entrepreneurs in this case were represented by attorneys Doron Afik and Yair Aloni of Afik & Co.