Bank of India v Riat

A guarantee may be rescinded for negligent misrepresentation only where the claimant proves an actionable statement of fact, its untruth, reasonable reliance and actual reliance. A bank’s statement about an intention to expand lending in a sector is capable in principle of being actionable and is more than mere puff, but the claimant must still prove falsity, negligence and reliance.

Economic duress requires illegitimate pressure, practical compulsion or lack of practical choice, and causation. The pressure must be distinguished from ordinary commercial bargaining. Relevant circumstances include the availability of alternatives, protest, legal advice and subsequent affirmation or delay. A lender may insist on a personal guarantee during negotiations where there is no concluded agreement and the demand has commercial justification.

The Bank of India provided facilities to Globepark Developments Limited, a company owned and controlled by Nirpal Singh Riat and his son. Mr Riat gave two limited personal guarantees securing those facilities.

After Globepark entered administration, the Bank demanded payment. Mr Riat sought rescission of both guarantees for negligent misrepresentation and, alternatively, rescission of the first guarantee for economic duress. He alleged that the Bank had represented an intention to expand in property development and had demanded the first guarantee only at the last moment, when he had no practical alternative.

The issues were whether the representation was false and negligently made, whether it was relied upon, and whether the demand for the first guarantee involved illegitimate pressure causing entry into the guarantee.

1. Misrepresentation. The court accepted that a financial institution’s statement that it wished to increase its exposure to a particular business sector could, if untrue, support a misrepresentation claim. It was not mere puff. The alleged statement was probably made by Mr Singh, but the evidence showed that the Bank’s London office had both headroom and an actual intention to increase real-estate lending. The statement was therefore not false.
2. The negligence case also failed. No particulars of negligence had been pleaded, and the evidence did not show that the maker should have known or applied the internal policy relied upon. The court further found that Mr Riat had not relied on the statement. His focus was on the loan-to-value ratio and interest rate. In any event, the Company and Mr Riat would have proceeded with the facilities and guarantees even without the representation.
3. Economic duress. The applicable inquiry required pressure producing practical compulsion or lack of practical choice, illegitimate pressure, and significant causation. The court considered the circumstances, including whether there was a breach or threatened breach, good or bad faith, realistic alternatives, protest, and affirmation.
4. The Bank had informed Mr Riat of the guarantee requirement by 15 November 2005 at the latest. He had time to approach other lenders, had received indicative alternative terms, obtained independent legal advice, and signed without a contemporaneous protest. The Bank was still negotiating and was not obliged to lend. Insisting on a guarantee, particularly in light of the Company’s financial position, was commercially justified and did not amount to illegitimate pressure.
5. The defence of economic duress also failed because of the prolonged delay before it was raised and the subsequent rescheduling of the Company’s loans. The counterclaim was dismissed. Judgment was entered for the Bank for the sums due under both guarantees, with the precise amount, interest and costs to be dealt with by further order.