Staying silent to a letter of demand can count against you, depending on the situation – SC
Can the Facts Around a Deal Prove a Contract Even If Someone Denies It?
The Supreme Court has clarified how courts should determine whether a person truly intended to enter into a contract, especially when that person later denies it. Justice Arjuna Obeyesekere reaffirmed that when someone denies ever intending to enter a contract, the law looks not into their hidden thoughts, but into their actions and the surrounding circumstances.
Quoting from Justice C.G. Weeramantry’s classic Law of Contracts, the Court reminded that the law cannot read minds: “The law cannot fathom the depths of another’s thoughts. It proceeds upon the external manifestations of intention, by words or by acts, and from them infers the presumed or notional intentions of the parties.” The Court said that contracts are proved not by what people later say, but by what they actually did, their signatures, letters, and conduct at the time.
The Story Behind the Dispute
The dispute stemmed from a factoring facility, a financial arrangement where a small business obtains immediate cash by selling its postdated cheques to a finance company. A shoe manufacturer had such a facility with one finance company and by early 2014, owed over Rs. 5 million. To settle this, he requested another related finance company to grant him a loan of Rs. 5.2 million.
On 24 March 2014, he signed a loan offer and a loan agreement, both clearly stating that the money was to settle the earlier factoring debt. The funds were never handed to him directly, instead, at his written request, the company paid the full amount straight to the factoring firm to clear his dues.
But after paying only one instalment, he defaulted. A letter of demand followed on 29 January 2015, claiming Rs. 8,417,358 plus interest at 4% per month. The borrower never replied. Eventually, the finance company filed action in the Commercial High Court.
The Defence: “I Never Intended to Sign”
In court, the borrower denied ever intending to enter a loan agreement. He claimed that: He never requested the loan, He did not receive any money, He was forced to sign blank papers under duress, He had already settled the factoring facility. The High Court rejected these claims and ruled for the finance company. He appealed to the Supreme Court, repeating that he had no intention to sign or be bound.
How the Supreme Court Saw It
The Supreme Court examined the surrounding facts, what actually happened before, during, and after the loan, and concluded there was no doubt he intended to enter the agreement.
The Court found that the borrower had maintained the factoring facility until 2014, not settled in 2011 as he claimed, his own documents proved ongoing transactions. The loan documents bore his clear signatures, and their contents were directly linked to his existing liability. He had written a letter specifically instructing that the Rs. 5.2 million be paid to the factoring company. The factoring company’s account statements showed the exact amount being credited to his account. There was no police complaint or contemporaneous protest alleging duress. He had remained silent in response to the formal letter of demand. All these factors, the Court said, showed a clear and deliberate intention to contract. His later denial, unsupported by any evidence, was not credible.
Silence Can Be a Statement
The judgment also clarified how silence can be interpreted in business dealings. Justice Obeyesekere cited Saravanamuttu v. De Mel (49 NLR 529) and Chandrapala Meegahaarawa v. Samaraweera Meegahaarawa (SC Appeal No. 112/2018), explaining that not replying to a business letter can, in some cases, be taken as acceptance, though not always.
“…the failure to respond to a business letter must not be looked at in isolation of the other facts and that its impact would depend on the facts and circumstances of each case…” – Justice Obeyesekere
Fixing the Math: The Interest Error
Although the Court upheld the borrower’s liability, it discovered that the interest calculation in the High Court’s decree was flawed. Under the loan agreement, the borrower had obtained Rs. 5.2 million, repayable over five years, 12 instalments of Rs. 125,025, and 48 instalments of Rs. 142,908, at 20% annual interest. This meant that, had he paid properly, he would have paid Rs. 8,359,884 in total (capital plus interest).
He paid only one instalment of Rs. 125,000. By January 2015, the finance company claimed Rs. 8,417,358 as due, including overdue interest, and then demanded a further 4% monthly interest from that date forward.
The Supreme Court found that this amounted to charging interest twice, once already included in the total, and again compounded afterward. Justice Obeyesekere ruled that this was incorrect: “The plaintiff shall only be entitled to Rs. 8,417,358, together with interest at 20% per annum from 24 March 2019 on Rs. 5.1 million until the decree, and thereafter legal interest until payment in full.” The Court adjusted the award to prevent double recovery while still preserving the lender’s contractual rights.
Case No: SC/CHC/Appeal No. 26/2020 [Decided on 18.07.2025]
Before: S. Thurairaja,PC,J. Achala Wengappuli,J , Arjuna Obeyesekere,J.
