MIRPURI vs BANK OF INDIA
In the recent case of Mirpuri vs Bank of India ( JRC 129), the Royal Court of Jersey was asked to consider what powers a secured party could exercise to protect its security. In addition, the court made a number of comments on variation of contract, estoppel and mitigation of loss.
M was a client of BOI, holding a deposit account with BOI in Jersey. The deposit account was designated in sterling with the option of being re-designated by M into US dollars. Security was created over the deposit account in support of loans made by BOI to M. Under the security agreements, BOI had control over the deposit account and also had the right contractually "to take any such action as it may in its discretion think fit for the purpose of protecting the security constituted by this security agreement."
In 2005, BOI, without reference to M, converted the sterling amount in the deposit account to a US dollars amount in order to preserve margin requirements. BOI argued that it was relying upon the protection language in the security agreements when doing so. In 2008, M decided to convert the entire balance of the deposit account from US dollars into sterling. Unfortunately, the value of sterling declined dramatically against the US dollar leading to a shortfall on the margin requirement. After a period of non-communication by M, BOI made full demand for all amounts due under the loans and enforced against the accounts.
M argued, amongst other things:
- BOI did not have the power under the contractual provisions of the security agreement to convert the account from sterling to US dollars in 2005;
- Having done so, BOI had assumed a duty or obligation towards M to monitor the value of the security and intervene to protect the value of the security by switching currencies if necessary. This was argued to be a variation of the original terms and conditions of the security agreement.
- M was entitled to rely on the defence of estoppel on the basis that BOI had intervened to protect the security in 2005 and thereby gave an implied assurance that it would do so in the future.
- BOI was obliged to mitigate for the loss incurred as a result of the failure to convert the designated currency of the account in 2008.
- The court confirmed that the secured party had the power to take such action as it thought fit to protect the security, and the value of the security, as provided by the contractual provisions of the security agreement. This allowed it to convert the currency of the account in 2005.
- The requirements for an agreement to vary are the same as for a contract itself, namely consent, capacity, objet and cause (or consideration). It was accepted that a variation of contract can arise through conduct; however, it was not reasonable to argue that the exercise of a power to convert the designated currency of the account was an offer to assume a duty to do so. An account bank does not owe a duty, whether in contract or tort, to advise the borrower and is entitled to have regard only to its own interests. Further, there was lack of clarity to support any argument that there was any variation of contract.
- Estoppel requires there to have been a clear and unequivocal promise or assurance either by words (oral or written) or by conduct. The fact that BOI switched the designated currency of the deposit account in 2005 did not of itself give rise to such an assurance.
- The court held that, for any claim which is a simple action for a recovery of a debt, there can be no duty on a plaintiff to mitigate its loss, and principles of mitigation are not applicable in the absence of any contractual or other legal obligation on the plaintiff to monitor or protect the value of the security.
The judgement of the Royal Court gives strong support to the rights and powers of the secured party to take action necessary to protect its security, and the value represented by the security, in accordance with the usual provisions of a security agreement. It emphasises the fact that a bank and borrower are on the opposite sides of the contract and the bank should be entitled to have regard only to its own interests.