Can You Deny a Contract After Signing It? What the Law Says
Case: SC CHC Appeal No. 26/2020
Decided on: 18 July 2025
Coram: S. Thurairaja, PC, J., Achala Wengappuli, J., and Arjuna Obeyesekere, J.
(Judgment delivered by Justice Arjuna Obeyesekere.)
Can someone deny a contract after signing it by later claiming they never intended to enter into the agreement?
The Supreme Court of Sri Lanka addressed this important question in SC/CHC/Appeal No. 26/2020, reaffirming that courts determine the existence of a contract by examining objective evidence rather than a party’s later denial or undisclosed intentions.
The judgment also delivers another important message for businesses and individuals alike:
Ignored a Letter of Demand? Your Silence Could Cost You, Says the Supreme Court.
While silence does not automatically amount to acceptance, the Court clarified that a failure to respond to a business letter or Letter of Demand may, depending on the surrounding circumstances, strengthen the opposing party’s case.
Core Legal Rule
The Supreme Court reaffirmed that a court does not decide whether a contract exists by looking at what a person later says they intended or by attempting to determine their private thoughts. Instead, the court examines the person’s actions, words, documents, and all the surrounding circumstances to determine whether there was an intention to enter into a legally binding contract.
Referring to Justice C.G. Weeramantry’s Law of Contracts, Justice Arjuna Obeyesekere reaffirmed this well-established principle by stating:
“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.”
In other words, what you do and say matters more than what you later claim you were thinking.
If your conduct, signatures, letters, and the surrounding circumstances objectively demonstrate an intention to enter into a contract, a court may find that a valid contract exists, even if you later deny having intended to be legally bound.
Background of the Dispute
The dispute arose from a shoe manufacturer who had obtained financing through a factoring facility offered by a finance company.
Under this arrangement, the manufacturer received immediate cash by selling post-dated cheques to the finance company.
By early 2014, the borrower owed more than Rs. 5 million under the factoring facility.
To settle that outstanding liability, he requested a fresh loan of Rs. 5.2 million from a related finance company.
On 24 March 2014, the borrower:
- signed a Loan Offer;
- signed a Loan Agreement;
- agreed that the new loan would be used to settle the outstanding factoring liability; and
- instructed that the loan proceeds be paid directly to the factoring company.
Following those instructions, the finance company transferred the loan proceeds directly to the factoring company.
Although the borrower initially made one instalment payment, he subsequently defaulted on the loan.
As a result, on 29 January 2015, the finance company issued a Letter of Demand, claiming Rs. 8,417,358, together with interest at 4% per month.
The borrower did not respond to the Letter of Demand.
Consequently, the finance company instituted proceedings before the Commercial High Court to recover the outstanding debt.
The Borrower’s Defence
Before the Commercial High Court, the borrower attempted to deny the contract after signing by arguing that he had never intended to enter into the loan agreement.
He claimed that:
- he had never requested the loan;
- he had never received the loan proceeds;
- he had been compelled to sign blank documents under duress; and
- the earlier factoring facility had already been settled.
Based on these allegations, he argued that he had never intended to enter into a legally binding agreement.
However, the Commercial High Court rejected those arguments and entered judgment in favour of the finance company.
The borrower subsequently appealed to the Supreme Court, once again maintaining that he had never intended to sign the agreement or become legally bound by its terms.
Why the Supreme Court Rejected the Borrower’s Arguments
When the appeal came before the Supreme Court, the Court did not rely on the borrower’s later claims about what he intended. Instead, it carefully examined everything that happened before, during, and after the loan transaction.
After considering all the surrounding circumstances, the Court found clear evidence that the borrower had intended to enter into the loan agreement.
Among the key facts relied upon by the Court were:
- The borrower had continued using the factoring facility until 2014, contrary to his claim that it had ended in 2011.
- His own documents and signatures clearly connected him to the outstanding liability.
- He had personally written a letter instructing that the Rs. 5.2 million loan be paid directly to the factoring company, and the exact amount was credited accordingly.
- He never made a police complaint or raised any contemporaneous protest alleging that he had signed the documents under duress.
- He remained completely silent after receiving the finance company’s formal Letter of Demand.
Taking these facts together, the Supreme Court concluded that the borrower’s conduct clearly demonstrated an intention to enter into the loan agreement.
Accordingly, the Court held that his later attempt to deny the contract after signing was unsupported by evidence and therefore lacked credibility.
Can Silence Have Legal Consequences?
One of the most significant aspects of this judgment is the Court’s clarification on the legal effect of silence in commercial transactions.
Justice Obeyesekere explained that remaining silent after receiving a business letter does not automatically amount to acceptance. However, silence may still have legal significance when considered alongside the surrounding facts of a case.
In reaching this conclusion, the Court referred to:
- Saravanamuttu v. De Mel (49 NLR 529); and
- Chandrapala Meegaharawa v. Samarawera Meegaharawa (SC Appeal No. 112/2018).
These authorities recognise that a party’s failure to respond to a business letter may, in appropriate circumstances, be treated as conduct supporting the opposing party’s case.
However, Justice Obeyesekere made it clear that silence should never be considered in isolation.
As the Court stated:
“…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.”
Accordingly, in this case, the borrower’s failure to respond to the Letter of Demand was only one factor among several that supported the conclusion that he intended to enter into the agreement.
The Supreme Court Corrected the Interest Calculation
Although the Supreme Court agreed that the finance company was entitled to recover the outstanding debt, it found an error in the way the claim had been calculated.
The Court observed that the finance company had claimed Rs. 8,417,358 and then attempted to add a further 4% monthly interest to an amount that already included interest.
This resulted in an impermissible double recovery.
To correct this error, the Supreme Court held that the finance company was entitled to recover:
- Rs. 8,417,358; together with
- Legal interest at 20% per annum on Rs. 5.1 million, calculated from 24 March 2019 until the date of the decree, and thereafter until the full amount is paid.
This part of the judgment demonstrates that while courts will enforce valid contractual obligations, they will also ensure that damages and interest are calculated in accordance with the law.
Why This Judgment Matters
This decision reinforces several important principles of Sri Lankan contract law.
First, the existence of a contract is determined objectively. A court will assess a party’s conduct, words, documents, and the surrounding circumstances rather than relying on a later denial or an undisclosed state of mind.
Secondly, the judgment clarifies that although silence does not automatically amount to acceptance, a failure to respond to a business letter or Letter of Demand may, when considered together with other evidence, strengthen the opposing party’s case.
Finally, the decision highlights that courts will carefully examine financial claims to ensure that contractual remedies remain both legally and mathematically correct.
Key Takeaways
- A person cannot successfully deny a contract after signing simply by later claiming that they never intended to enter into the agreement.
- Courts determine contractual intention by examining objective evidence, including conduct, signed documents, correspondence, and the surrounding circumstances.
- What a person does carries greater legal weight than what they later claim they were thinking.
- Silence does not automatically amount to acceptance. However, depending on the facts, failing to respond to a business letter or Letter of Demand may strengthen the opposing party’s case.
- Courts will also ensure that interest and financial claims are calculated lawfully and do not result in double recovery.
Conclusion
The Supreme Court’s decision in SC/CHC/Appeal No. 26/2020 serves as an important reminder that contractual obligations are determined by objective evidence, not by a party’s later denial or undisclosed intentions.
Where a person’s conduct, signed documents, written instructions, and surrounding circumstances demonstrate an intention to create legal relations, a court may conclude that a valid contract exists, even if that person later attempts to deny the contract after signing.
The judgment also confirms that while silence does not automatically amount to acceptance, failing to respond to a business letter or Letter of Demand may carry evidentiary significance when viewed together with the surrounding facts.
As a result, this decision stands as an important authority in Sri Lankan commercial law, reaffirming the objective approach to contract formation, clarifying the evidentiary value of commercial silence, and ensuring that contractual remedies remain legally and mathematically sound.
Download the original Judgement PDF SC CHC Appeal No. 26/2020