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In the case of Bank of India v Riat, Bank of India (the Bank) sought to enforce two limited guarantees signed by the defendant as security for facilities provided by the Bank to a property development company Globepark Developments Limited (Globepark) owned by the defendant and his son. The defendant contended that he was entitled to rescind the guarantees on the grounds of misrepresentation and economic duress.
Mr Riat held 98% of the shares in Globepark and his son held the remaining 2%. He was also a director. Globepark sought a facility from the Bank to refinance facilities from Natwest. As part of the collateral for the loan the Bank required a guarantee. Mr Riat was very reluctant to provide a personal guarantee and the information regarding his personal assets, including his own property portfolio, which was needed by the Bank to assess the collateral cover for the loan. Eventually, he signed the personal guarantee and fairly soon after entered a second guarantee to cover obligations of Globepark under a second facility from the Bank. Globepark went into administration almost four years after the second guarantee was executed and in March 2011 the Bank took proceedings to recover sums from Mr Riat under the two personal guarantees.
The defendant claimed that the Bank represented that it wished to expand its involvement in the property development sector. He said this was untrue and he had been induced by the Bank because of this representation to enter into the guarantees. On that basis he sought to rescind the guarantees. He also claimed he had only been advised about the need for the first guarantee just before he was asked to provide it and as it was too late to arrange alternative financing to refinance the Natwest indebtedness, he had been under illegitimate pressure from the Bank, which he claimed amounted to economic duress, to execute the guarantee. The Bank claimed that Mr Riat had affirmed the guarantee and had waived the right to rescind.
On the evidence the High Court, Chancery Division found in favour of the Bank on both counts and held that neither guarantee had been rescinded on either count.
The court confirmed that the type of representation made, was more than 'mere puff' and was capable of being relied upon. It held, however, that Mr Riat had not actually relied on the representation. It saw Mr Riat's main motivation for the financing was really the interest rate and the loan to value ratio for the loan. The judge thought that the intention of the Bank to expand its business in the property development market was of no importance to the defendant. The judge concluded that in any event, Mr Riat would have entered into the guarantee, and Globepark the facility agreement. The court found there was no evidence of pressure, nor illegitimate pressure and the borrower and guarantor had both had time to consider alternative financing. The delay from the time Mr Riat executed the guarantee to the time of the claim was too long, so any claim to economic duress had been lost.
This case is an important reminder on representations in business dealings. Here the court considered discussions at a social event, business letters between the parties, file and handwritten notes and notes of telephone conversations to try to establish whether such a statement had been made and by which member of the Bank's staff. The judgment also sets out the steps a party has to satisfy to rescind a guarantee on the basis of misrepresentation.
First published on LexisPSL Banking & Finance. Click here for a free trial.
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