Undue influence: whether the lender is on notice has to be considered from its perspective

In Li Sau Ying v Bank of China (Hong Kong) Ltd ((2004) 7 HKCFAR 579, CFA)  a businesswoman (L) supplied goods on credit to X. X ran up an indebtedness to her of HK$1m. When pressed to pay, X suggested that L should, instead, act as surety for a loan to his business. She agreed and also gave a mortgage over her apartment as collateral. There were several re-mortgages culminating in the re-mortgage in favour of a lender later acquired by the Bank of China. When the principal borrower defaulted and the Bank exercised its rights under the surety agreement with L, she sought to have the agreement and documents set aside on the basis that they had been entered into as a result of X’s undue influence and that the bank was implicated in this.

Lord Scott echoed the view that the class 2B category is not a useful forensic tool:

‘I do not wish to leave this issue without expressing the hope that in future cases, where undue influence has to be proved but where the relationship between the parties is not a relationship that falls within Slade LJ’s Class 2A category, the parties will concentrate on whether the evidence justifies the inference that, on a balance of probabilities, the impugned transaction was procured by undue influence, that is to say, by an abuse by the allegedly dominant party of the trust and confidence reposed in him by the allegedly subservient party. References in such cases to, and attempts to invoke the assistance of, an alleged evidential presumption of undue influence are, in my opinion, likely to be, as they have been in this case, a source of confusion and an impediment to the evaluation of the available evidence.’ ([34])

Lord Scott explained that whether the bank is on notice depends on whether or not there are any circumstances that meant that knowledge of the initial impropriety could be attributed to the bank ([35]).

Where it is on notice, its duty is to take reasonable steps to ensure that the surety has had brought home to her, in a meaningful way, the potential implications for her of the proposed transaction (see Lord Nicholls in Etridge at [54]). What steps are reasonable is a question of fact in each case ([39]).

It is important to understand what these steps are trying to achieve and the limits of what is expected of the bank. The bank must take the reasonable steps needed to allow the surety to understand the transaction. It does not need to actually succeed in making the surety understand the transaction ([38]).

Lord Scott also commented on the category of ‘non-commercial’ surety arrangements established by Lord Nicholls, making the point that whether a case belonged to one category or another might not always be apparent to a bank unless it made unwarranted enquiries as to the nature of the relationship between the principal borrower and the surety. The lender is not expected to make any such enquiries and nothing that Lord Nicholls had said implied that such enquiries were necessary ([41]).

Lord Scott thought that the original surety agreement and mortgage may well have been the result of some undue influence ([30]).  So far as the Bank of China was concerned, however, this appeared to be a simple case of a borrower who wanted to re-mortgage on better terms. There was nothing in this to put the bank on inquiry. In any event, the solicitor acting for the bank had actually explained the documents to her and so the reasonable steps had been taken.

Michael Lower

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