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
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).