Finance litigation briefing June 2014: report and review on the latest cases and issues

13 minute read
27 June 2014

Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

Economic duress requires illegitimate pressure

In Bank of India v Riat, the Bank sought to enforce guarantees that Riat had entered into as security for facilities provided by the Bank to his property development company which subsequently went into administration.

Riat sought to rescind the guarantees, alleging negligent misrepresentation by the bank and economic duress. He alleged that the Bank's branch manager had told him prior to his entering into the first guarantee that it intended to expand its involvement in the property development sector.

Riat also alleged that it was only at a late stage, and after he had terminated his relationship with the company's previous bank, that the Bank told him for the first time that a personal guarantee was required. By this stage it was too late for him to obtain alternative finance. The Bank brought evidence to show Riat had had alternative finance available and had had sufficient time to take independent legal advice on the guarantee before entering into it.

The High Court held that a statement by a bank that it intended to increase its exposure in a particular business sector might, if untrue, be a misrepresentation. That might be the position if, for example, the bank actually intended to reduce its exposure in that sector, or where the lending was limited to specific geographical areas.

To be successful, Riat would have to prove that:

  • the Bank's employee had made the statement;
  • it was untrue;
  • it was reasonable for him to rely upon it; and
  • he had in fact done so.

The court found that there was no evidence to suggest the statement had been made falsely or negligently or that Riat had relied upon it. The company would still have entered into the facility and Riat would still have entered into the guarantees in any event.

For there to be economic duress, so that the guarantee could be set aside, there had to have been illegitimate pressure brought to bear i.e. there could be no commercial or similar justification. The party asserting duress had to prove that the duress was a significant cause inducing it to enter into the agreement.

The court found that Riat had not been placed under any significant pressure by the Bank, let alone illegitimate pressure. The requirement for a personal guarantee was not unusual where there was corporate lending. Riat had had time to obtain finance from elsewhere and to obtain legal advice on the guarantee. There had been no economic duress.

The Bank would succeed on its claim.

Things to consider

The question of whether there has been economic duress is highly fact-sensitive. In drawing the line between legitimate, inherently competitive, negotiation and illegitimate pressure, the courts look at a number of factors. These include whether the allegedly coerced party protested, whether there was an alternative course open to it (including a legal remedy), whether independent advice was taken and what steps were taken to avoid the contract.

In this case the evidence showed the Bank had done nothing out of the ordinary in requiring a director to provide a guarantee to support lending to a company.

Enforcing foreign judgment by summary judgment

The claimant in Open Joint Stock Co Alfa-Bank v Trefilov had obtained a judgment from the Russian district court. It sought to enforce it in England, on the basis it was a final and conclusive judgment of the Russian court for a debt due and the Russian court had jurisdiction over the defendant on a basis recognised by English rules of conflict of laws. The claimant sought enforcement of the judgment by way of summary judgment.

The underlying claim related to a personal guarantee given by the defendant to support short-term lending to his company. There were also performance guarantees from other companies in place to support that lending. The claimant made a demand on the guarantee, sending it to the address given in the guarantee which was the defendant's registered address given in his passport.

The defendant contended that the guarantee he entered into was subject to two conditions:

  • the claimant could only recover under the guarantee sums outstanding following proceedings against the corporate guarantors;
  • certain payments made to the claimant under certain leases were also to reduce the company's indebtedness to the claimant.

He also alleged a breach of natural justice, being that due to the claimant's conduct he had not engaged in the Russian proceedings and that the Russian court would not have entered judgment had it known the true facts. He argued there were compelling reasons for the case to go to trial.

The defendant was unable to provide a copy of the guarantee he alleged contained the two conditions. The signed and notarised copy before the court which was relied on by the claimant did not include them. The guarantee had been signed by the defendant on the last page. The High Court held it would be fanciful to imply that the claimant had substituted pages excluding those conditions.

The defendant also alleged that he had not received notice of the proceedings. He had, however, received the letter of demand served at his registered address and used that address in other proceedings. The defendant had only raised the issue of the terms of the guarantee for the first time six years after signing it and only in response to these summary judgment proceedings.

His failure to challenge the form of guarantee earlier was inexplicable. There was no prospect of proving the judgment had been obtained by fraud and no defence to the summary judgment application or anything that merited further investigation. The claimant could enforce its Russian judgment by way of summary judgment.

Things to consider

Whether a foreign judgment will be enforceable in England and Wales depends on where the judgment originates from. Even if none of the regulations, conventions or Acts dealing with enforcement for particular countries applies, the judgment may still be enforced under the common law, save in certain circumstances. These include where it would be contrary to public policy, where there has been no due service, and where the judgment was obtained by fraud.

Setting aside default judgment - real prospects of success, promptness and standing are all required

The right to set aside the judgment on which a bankruptcy order is made vests in the trustee in bankruptcy, not the bankrupt.

The High Court reaffirmed this was the position in Muhammed v Robert, in which the claimant applied to set aside a default judgment and for permission to appeal various other orders out of time.

The default judgment had been obtained by the defendant, who had taken an assignment of a debt owed to a bank. Notice of the assignment had been given to the claimant. A default judgment was obtained, as was a charging order over the claimant's property. A statutory demand was served and the claimant was made bankrupt.

Orders for possession and sale of the property were obtained but the eviction suspended. The claimant alleged she never owed any money to the bank which could have been assigned to the defendant, and so the default judgment had been improperly obtained, as had everything that followed.

The defendant was ordered to produce, among other things, the assignment upon which the judgment was based. The defendant could only produce the notice of assignment.

The High Court refused the application to set aside the default judgment. To be successful, it has to be shown that there are real prospects of successfully defending the claim and that the application has been made promptly.

The defendant could not produce the assignment or any documents from the bank, but that was unsurprising given the assignment took place more than nine years previously. However, the court held it was inherently unlikely that notice would have been given if there had been no debt and no assignment. It was possible a mistake had been made, but improbable that a non-existent debt had been assigned.

The claimant argued she had not received all the communications sent to her, albeit she had received and acted on some of them. She had not acted promptly as she had not previously challenged the validity of the assignment. There was no real prospect of a successful defence and no proper explanation for the delay.

The further, insuperable obstacle was that once a bankruptcy order had been made, the right to challenge the underlying judgment vested in the trustee in bankruptcy. It had to be assumed that the trustee would, if necessary, challenge the judgment underlying the bankruptcy order if there were good grounds for doing so. The trustee had not challenged the judgment and the claimant had no standing to do so.

Things to consider

Even had the trustee made the application to set aside, it is unlikely the court would have granted it given the lack of promptness in making the application. Promptness in making all applications is required by the court, especially where relief from a sanction is required.

Co-defendants and inconsistent judgments

Lenders will often litigate against multiple defendants and obtain judgment in default against some, but not all defendants.

This was the situation in Page v Champion Financial Management Ltd and others, where the court had to balance the possibility of inconsistent judgments within the same proceedings and the overriding objective of ensuring co-defendants are able to defend themselves.

In Page, the claimant brought proceedings against the defendants for negligent investment advice. The first defendant (D1) was the appointed representative of the fifth defendant (D5) pursuant to s39(1) of the Financial Services and Markets Act 2000.

D5 denied liability on the basis its role had not been advisory but only executionary. The claimant obtained judgment in default of acknowledgement of service against D1. D5 argued that the default judgment could not be relied upon to establish liability against it and, alternatively, applied to set it aside.

The issue was whether D5 was entitled to defend the claim on the ground that D1 was not liable for negligence or breach of contract, contrary to the default judgment. Such a defence would give rise to the possibility of mutually inconsistent judgments in the same action.

The High Court found that the public policy interest in the consistency of judgments could be outweighed by the overriding objective of a co-defendant being able to defend itself.

A co-defendant may be precluded from advancing a claim where the principle of res judicata applied (that is, the issue has been previously judged). However, it would be inappropriate to extend the circumstances in which a co-defendant was precluded from advancing a defence to include where it would be inconsistent with a default judgment obtained against another defendant.

Therefore, D5 should not be prejudiced by D1's decision not to participate in the proceedings. D5 could defend the claim on the ground that D1 was not negligent or in breach of contract.

Further, although D5 had been slow in applying to set the default judgment aside (a delay of three months), and delay can be fatal in such applications, the prejudice that D5 would suffer were it bound by the default judgment outweighed the lack of promptness. The court would have decided the set aside point in D5's favour (if it had had to).

Things to consider

The court looked to do justice as between the co-defendants where there was the relationship of principal and agent between them. There is a world of difference between a principal being found liable for the actions of its agent following a hearing of the evidence and a determination on the merits of a claim and being found liable where the agent has taken no part in the proceedings.

In case you missed them...

The court gets tough on refusal to mediate

It is a well-established principle that serious cost consequences may flow from an unreasonable refusal to engage in alternative dispute resolution.

Reasons such as a party thinking it has a very strong case, or believing the parties are "too far apart", or the relationship between the parties has broken down to the extent that they will not be able to agree anything are not necessarily good reasons, as seen in the case of Phillip Garritt-Critchley & Others v Andrew Ronnan & Solarpower PV Limited. A costs penalty can still be made against the refusing party - in this case an order to pay indemnity costs to the successful opponent.

Deemed agency and "unfair relationship"

The Court of Appeal has once again determined the issues of "unfair relationship" and agency in the borrowers' favour.

In Scotland and Reast v British Credit Trust Ltd, the Court of Appeal held that a broad approach as to the meaning of acting "on behalf of" should be adopted and that even if the Insurance: Conduct of Business rules do not apply to the lender, those rules still apply a benchmark against which a lender's (or its agent's) behaviour should be judged in determining whether an unfair relationship exists.

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