Legal Updates

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

August 17, 2023

An investor who invested a total of USD 160,000 in various ventures in Africa demanded that the entrepreneurs sign a loan agreement and promissory notes in the amount of USD 350,000, promising against this to invest one million dollars in their company. The investment did not take place but years later the investor demanded the entrepreneurs to pay on the promissory notes.

The Supreme Court rejected a motion for an additional hearing in the holding 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. Up to the date of the signing of the notes and the loan agreement the entrepreneurs were not personally liable for these amounts (which were twice the amount managed for the “lender” prior to signing the notes), so 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 joint venture 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.