Bank of India v Riat

Guarantee – Misrepresentation – Economic duress – Defendant providing two guarantees with claimant bank – Guarantees securing facilities for company owned by defendant and son – Claimant seeking to enforce guarantees – Defendant seeking to set aside guarantees on grounds of misrepresentation and duress – Whether guarantees being vitiated by negligent misrepresentation – Whether first guarantee being vitiated by economic duress – Whether guarantees to be set aside – Claim allowed – Counterclaim dismissed The defendant and his son were the sole directors and shareholders of a family run property development company. The defendant signed two limited guarantees as security for facilities provided to the company by the claimant bank. The first guarantee was signed in January 2006 and was limited to £1,237,000 together with interest, costs and expenses. The second guarantee was signed in July 2006 and was limited to £490,000 together with interest, costs and expenses. When the company went into administration in March 2010, the claimant brought proceedings to enforce the guarantees. The defendant counterclaimed to rescind the guarantees with consequential relief. The defendant contended that both guarantees were vitiated by negligent misrepresentation because, prior to the first facility, the bank’s branch manager had represented to him that the bank wished to expand its involvement in the property development sector. The claimant denied that that statement had been made. Alternatively, the defendant contended that the first guarantee was vitiated by economic duress since the claimant had not mentioned the requirement of a personal guarantee in respect of the first facility until a late stage, after he had terminated his relationship with the company’s previous bank and had no practical alternative with other financiers. The claimant relied on evidence that the defendant had other options for refinancing with sufficient time to obtain independent legal advice before signing the guarantee. Held: The claim was allowed. The counterclaim was dismissed. (1) In principle, a statement by a bank or other financial institution that it wanted to increase its exposure in a particular business sector might, if untrue, be capable of providing the basis for a claim in misrepresentation. Examples of that might be where the bank’s policy was, contrary to its representation, to reduce lending in that business sector or where, in fact, the lending was not core business or was limited to particular geographical areas. In order to succeed in setting aside a guarantee for misrepresentation, it was necessary to prove that: (i) the bank’s employee had made a statement of fact; (ii) the statement of fact was untrue; (iii) it was reasonable for a guarantor to rely upon the statement of fact made by the bank; and (iv) the guarantor had, in fact, relied upon it in entering the guarantees. On the facts of the present case, the defendant had failed to discharge the burden of proving that the representation had been false and, in any event, that it had been said negligently. The defendant had not relied on the statement which had probably been made only by the branch manager, given his role in the claimant. The company would have entered the facility agreements and the defendant would have given both guarantees in any event. Accordingly, the defence based upon misrepresentation failed: Mahon v FBN Bank (UK) Ltd [2011] EWHC 1432 (Ch) considered. (2) It was well settled that duress was not a tort and was only actionable in the sense that a party who had been a victim of duress could commence proceedings to set the agreement aside. Economic duress involved illegitimate pressure, meaning that it was without any commercial or similar justification. Illegitimate pressure had to be distinguished from the rough and tumble of normal commercial bargaining and would depend upon a consideration of all the circumstances in any given case. The party asserting duress carried the burden of proving causation, and had to prove that the duress was a significant cause, inducing that party to enter into the agreement. On the facts of the present case, the defendant had not been placed under any significant pressure by the claimant, let alone illegitimate pressure. The requirement of a personal guarantee was not unusual in the context of corporate lending. The need for a personal guarantee had been brought to the defendant’s attention by 15 November 2005 at the latest and most likely at an earlier date. The evidence showed that he had had other options for refinancing with other institutions and had had sufficient time to obtain independent legal advice before signing the guarantee, of which opportunity he had availed himself. Accordingly, the defence of economic duress failed and the counterclaim would be dismissed: DSDN Subsea Ltd v Petroleum Geo Services ASA [2000] BLR 530 applied. Geoffrey Zelin (instructed by Royds LLP) appeared for the claimant; Stuart Cakebread (instructed by Zaiwalla & Co) appeared for the defendant. Eileen O’Grady, barrister