The High Court recently considered misrepresentation and economic duress in the context of personal guarantees provided by individuals when entering into commercial lending facilities.
The Defendant, Riat, signed two limited guarantees as security for facilities provided by the Claimant, the Bank of India (the Bank’), to the Defendant’s family run property development business, Globepark Developments Limited (‘Globepark’). The first guarantee was signed in January 2006 and was limited to £1,237,000 plus interest, cost and expenses, the second guarantee was signed in July 2006 and was limited to £490,000 plus interest, costs and expenses.
Globepark entered administration in March 2010. In March 2011, the Bank sought to enforce the guarantees. Riat counterclaimed, submitting that the guarantees should be rescinded.
Riat alleged that prior to the first guarantee, the Bank negligently misrepresented that they intended to expend their involvement in the property development sector. Riat submitted that these representations induced him to enter into the guarantees; however they were not a true representation of the Bank’s intention.
Further, Riat submitted that the requirement of a personal guarantee in respect of the facilities was not mentioned by the Bank until he was at the point of no return, having terminated his relationship with the company’s previous bank and having no alternative option with any other financial institution.
As a result of the above, Riat submitted that the guarantees were therefore voided due to negligent misrepresentation and economic duress.
The Bank rejected the allegation of negligent misrepresentation and relied on evidence that Riat had other refinancing options along with sufficient time to seek legal advice. Further, it was submitted that the Bank had made Riat aware of the requirement for a personal guarantee by November 2005, at the very latest.
The Court accepted in principle that a statement by the Bank that it wanted to increase its exposure in a particular section may, if untrue, be capable of forming the basis of a claim for misrepresentation. The Court looked at the facts of this case and found that the Bank’s total exposure in the property sector had increased and therefore the Bank’s representation to Riat was in fact true.
Additionally, the Court found that had the representation not been true, Riat had failed to persuade the Court that he relied on the representation when entering into the guarantees. There was no link between the Bank’s representation and Globepark taking out the facilities and the facilities would have been taken out regardless.
The Court reviewed the legal position in respect of the claim of economic duress, considering the case of Mahon v FBN Bank (UK) Ltd  All ER (D) 175 (Jun). The Court found that in order to prove economic duress it had to be shown that the duress involved illegitimate pressure, being without justification (commercial or otherwise). The party alleging economic duress carried the burden of proof in respect of causation with the need to show that economic duress was a significant factor in causing the party to enter the agreement.
In applying this test to the current case, the Court found that Riat’s allegations of economic duress failed. The requirement of a personal guarantee was standard practice under the Bank’s policies and in commercial lending generally. Accordingly, Riat was not subject to undue or illegitimate pressure. Further, the requirement of a personal guarantee had been discussed by the parties in November 2005, if not earlier, thereby providing Riat was sufficient time to obtain legal advice. Additionally, the Court found that other financing options were available to Riat, again negating any allegation of economic duress.
Accordingly, the Court refused Riat’s counterclaim and found that he was bound by the guarantees, refusing to grant a declaration that he could cancel them.
This case is another victory for lenders seeking to enforce guarantees. It is clear from this case that the Court will assess the surrounding circumstances of any guarantee when considering arguments of misrepresentation and economic duress. However, the Court has made it clear that a personal guarantee is standard practice and will not usually amount to economic duress.
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