Personal Guarantees and Promissory Estoppel - A 'Sleeping Pill'?

An analysis of the recent decision in Umrish Limited and others v Bobby Gill

Material Facts

Mr Gill operated an investment company, known as Swisspro Asset Management AG (“Swisspro”), in which he claimed that investors would receive a fixed return of 2% per month.

The Claimants, acting via Mr Venkatesh, were introduced to Mr Gill and agreed to invest with Swisspro on the condition that Mr Gill enter into personal guarantees with each of the Claimants for a total value of £1.5 million (plus interest).When the Claimants attempted to call on the guarantees, Mr Gill denied liability and contended that (1) the guarantees were never delivered by him to the Claimants and (2) that the Claimants were estopped from claiming under the guarantees by reason of certain assurances he was given on their behalf by Mr Venkatesh.

The Law

1. Delivery

Mr Gill's case in relation to the delivery of the guarantees hinged on the fact that Mr Gill signed the guarantees but transmitted only the signature pages to the Claimants. Mr Gill argued that this did not constitute delivery of the guarantees because greater formality was required and would be expected in the form of passing across the complete documents with original signatures.

This was held to be entirely unrealistic, particularly in the current age of instant communication. The court considered that if one party sent to the other a scanned copy of that party's signature on an identifiable document then, subject to any contrary context, that party indicated to the other an intention to be bound by the terms of that document.

The court held that what matters is not the subjective intention of either party, but the objective assessment of what Mr Gill did. In other words, the test was whether a reasonable recipient in the Claimants' position would have understood Mr Gill to have delivered the guarantees unconditionally. On the facts, the guarantees were delivered unconditionally, as indicated on the face of the document that Mr Gill had signed, witnessed, scanned and sent to the Claimants.

2. Promissory Estoppel

Mr Gill's promissory estoppel claim depended on representations allegedly made by Mr Venkatesh during a meeting between the two and during a subsequent telephone conversation, in which Mr Gill claimed that Mr Venkatesh represented that Mr Gill should not regard the guarantees as enforceable as they were 'simply to act as a sleeping pill' and that, in any event, the guarantees were to have effect only until 31 March 2017.

Naturally, Mr Venkatesh disputed making these representations. The court determined in favour of the Claimants, finding only that a representation had been made that the Claimants would not call upon the guarantees for minor infractions.

In light of these findings, the court held that those statements that were made were not clear and unequivocal, and, indeed, there was nothing inequitable about the conduct of the Claimants in claiming under the guarantees in the light of the statements which the court found were made.

The court did, however, go on to consider a point of law which, whilst not requiring determination on the facts, it considered appropriate to comment on in light of submissions made by counsel.

The Claimant argued that promissory estoppel could not arise otherwise than in the context of a pre-existing legal relationship. The Claimant relied on the judgment of the House of Lords in Thorner v Major, which supported the assertion that promissory estoppel required an existing legal relationship. The Defendant, on the other hand, argued that there was no independent requirement of a legal relationship as such; there was simply the inherent limit that promissory estoppel may only affect a right that one party would otherwise have against another.

The Defendant argued that all of the authority on this point of law was obiter dicta and therefore it was open to the court to find that promissory estoppel could apply without a pre-existing legal relationship.

Having reviewed the authorities, the court found that they were strongly to the effect that promissory estoppel required a pre-existing legal relationship between the promisor and promisee. Whilst the court left open the possibility of higher courts broadening the approach as part of a development of a single over-arching principle of estoppel, its view was that the facts of this case exhibited why a change in approach to allow the effect of promissory estoppel in cases where there was no pre-existing legal relationship was not desirable.

Conclusion

It seems that the requirement for promissory estoppel that there be a pre-existing legal relationship between the promisee and promisor remains. However, given the court's comments in Umrish were obiter it appears likely that this will not be the last case where the legal relationship, or otherwise, between the promisee and promisor is examined.

The facts of Umrish do, however, expose the deficiencies in raising promissory estoppel in support of a defence under a personal guarantee. Whilst the court in Umrish did not find that the alleged representations were made, the court determined that had it found that the Claimants had made representations not to enforce the guarantees and that Mr Gill had relied on that promise in deciding to enter into the guarantees, the reliance alleged would have been the entry into the very legal relationship which the promise is said to have varied. Thus, there is an inherent contradiction between the promise not to enforce certain terms and the act done in supposed reliance i.e. agreement to those terms.Given the court's reluctance to expand promissory estoppel to cover such circumstances, it seems sensible to instead consider other available defences to personal guarantees where such representations are made such as a collateral warranty, misrepresentation or estoppel by convention. Also see: Personal Guarantees: How can we help you?

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Jade Flint Managing Associate 0345 050 3698 jade.flint@freeths.co.uk Gregg Parkin Associate 0345 274 6876 gregg.parkin@freeths.co.uk