Archive for the ‘surety’ Category

Undue influence: not enough to urge surety to take legal advice

October 8, 2013

In Credit Lyonnais Bank Nederland NV v Burch ([1997] CLC 95) Miss B was a junior employee of Mr P’s business. He wanted to extend the limit of the business’ overdraft facility and persuaded Miss B to sign an unlimited guarantee of the business’ liability. Although the bank’s solicitor urged her to take independent legal advice she did not and no effort was made to ensure that she did. It was found as a fact that the relationship between Mr P and Miss B was one of trust and confidence (they were employer – employee on friendly terms, there was no suggestion of a sexual relationship).

The bank attempted to enforce its security but was met with a successful undue influence defence. The bank knew that the transaction was to Miss B’s disadvantage (so much so that the inference that the relationship of trust and confidence was easy to draw). It knew that she was a fairly junior employee. It was on notice (see Millett LJ at pp. 104 – 105).

Simply suggesting to Miss B that she take independent legal advice, far from being sufficient to protect its security, emphasised the fact that it knew that such advice was necessary in the circumstances.

On the relevance of the suggestion that she should take independent legal advice (and the fact that she did not do so), Nourse LJ commented:

‘[I]t was not enough for Miss Burch to be advised to take independent legal advice. It was at the least necessary that she should receive such advice.’ (at p. 101).

Advising Miss B as to the financial background to the transaction was vital:

‘She could not assess the significance [of being informed that her liability under the charge was to be unlimited in time and amount] without being told of the extent of API’s current borrowings and the current limit.’ (Nourse LJ at p. 101).

Millett LJ also expressed the view that if a bank knew that no competent solicitor could advise his client to enter into a given transaction then the fact that some advice was given will not be enough to protect the bank against an undue influence defence:

‘I do not, therefore, accept that a bank, in circumstances where it ought to appreciate the possibility that undue influence has been exercised, can escape the consequences by putting forward an unnecessarily, onerous form of guarantee and relying on the failure of the guarantor’s solicitor to advise her of the possibility of offering a guarantee on less onerous terms and more appropriate to the situation.’ (Millett LJ at p. 106)

Michael Lower

Undue influence: bank not put on inquiry merely by disadvantageous transaction

September 26, 2013

In Bank of China (Hong Kong) Ltd v Leung Ngai Hang ([2006] HKCU 78, CA) Miss C and Miss L had been friends and business partners. They bought an investment property together. They borrowed money to fund the purchase into their names as joint tenants, the loan being secured by a legal charge. They subsequently remortgaged with the Bank of China replacing the fixed term loan with more general banking facilities. By this time, Miss C no longer had any business relationship with Miss L. One element of the loan package was the provision of open-ended banking facilities to Miss L’s business.

The loans were not repaid. The bank sold the property but there was an outstanding balance. Miss C relied on undue influence and misrepresentation as her defence.

This failed since there was nothing to implicate the bank in any wrongdoing (assuming there had been some impropriety). Was there anything to put the bank on inquiry ([14])? A disadvantageous transaction on its own was not sufficient to achieve this. There was nothing about the relationship between Miss C and Miss L to suggest that there was a risk that consent had been procured by some improper means ([17]).

In any event, it was not clear that the present transaction was manifestly to Miss C’s disadvantage. The money had been used to redeem an earlier charge. There were benefits in replacing a fixed term loan with general banking faclities ([18]).

Michael Lower

Misrepresentation and undue influence: where the wife benefits from the arrangement

September 24, 2013

In Bank of China (Hong Kong) Ltd v Leung Wai Man ([2011] 4 HKLRD 707) a husband and wife guaranteed the indebtedness of S Ltd to the bank. They also gave the bank a charge over their home. The husband did so because he hoped to become an employee or part owner of S Ltd. The wife joined in because she trusted her husband’s judgment in these matters and thought that she should defer to him. Things went badly and the bank sought to enforce its rights under the guarantee and charge.

The couple first sought to rely on misrepresentation as against the bank. They claimed to have told the bank’s employee responsible for the arrangement that they could not meet any liability exceeding HK$1 million. The charge was an all-monies charge and their eventual liability was higher than HK$ 1 million. The husband claimed that the employee had smiled and nodded at the suggestion that the liability was capped at HK$1 million and that this was an implied representation that the liability was so limited. This failed on the facts. In any event, silence and inaction do not amount to a representation unless there is a duty of disclosure or an important part of a representation is withheld ([44]).

The wife’s defence based on undue influence failed. The sources of the relevant legal principles were identified ([53]) as were the points to be considered when a wife seeks to set aside a guarantee in circumstances such as these ([54]).

There was no evidence of undue influence here ([56]). Here there was evidence pointing to the relationship between the husband and wife being one of trust and confidence ([56]). Even on this point, however, the court had to recall that in any healthy marriage there was a normal level of mutual trust that would not suffice for the purposes of undue influence ([57]). There was nothing about the transaction that called for an explanation since it was for the joint advantage of the husband and the wife: the couple secured an immediate benefit in that the original charge over their home had been paid off as part of the arrangement and they had hopes that the husband would secure an attractive business opportunity as a result of the arrangement ([58]).

As for the bank’s involvement, even if there had been undue influence there was nothing to put the bank on inquiry:

‘There is no evidence in the present case to show that the bank had suspected that the first defendant had exerted undue influence on the second defendant. In such circumstances, the bank did not have any responsibility to make inquiry.’ (Carlye Chu J at [59]).

Michael Lower

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

September 19, 2013

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

Effect of disclaimer on surety covenant

February 14, 2013

In RVB Investments Ltd v Bibby ([2013] EWHC 65) RVB granted two leases to CT. B, as surety, covenanted, among other things, to take a new lease for the residue of the lease terms if the leases were disclaimed. One lease was disclaimed by the liquidator and the other, after CT’s dissolution, by the Treasury Solicitors. RVB sought specific performance of B’s covenant to take new leases. RVB was successful.

As regards the lease disclaimed by the liquidator, the effect of section 178 of the Insolvency Act 1986 was that the guarantee remained alive even after disclaimer of the lease ([22] – [23]). The same was true of the lease that was disclaimed by the Treasury Solicitor after CT’s dissolution. The company’s own liability was brought to an end but not of the guarantor ([27] – [29]).

Nor was CT a ‘former tenant’ for the purposes of the Landlord and Tenant (Covenants) Act 1995 so there was no need for RVB to serve a notice before recovering any sums owed by CT to RVB ([35] – [36]).

Does the benefit of a guarantee pass on an assignment of the reversion?

November 17, 2010

This question was considered in P & A Swift Investments v Combined English Stores Group plc ([1989] AC 632, HL). Here a lease contained a surety covenant (or guarantee) that if the tenant failed to perform the lease covenants then the surety would do so. The landlord assigned the reversion but not the benefit of the covenant. The tenant failed to pay the rent and the new landlord wanted to enforce the guarantee. Had the benefit of the guarantee passed to the assignee of the reversion automatically? It would do so if the guarantee covenant could be said to ‘touch and concern’ the land. The House of Lords unanimously decided that the assignee could enforce the guarantee. Lord Templeman described a surety or guarantor as a ‘quasi-tenant’ (at 638).

Lord Oliver of Aylmerton proposed the following criteria to be applied when trying to decide on whether a covenant touches and concerns land:

‘(1) the covenant benefits only the reversioner for time being, and if separated from the reversion ceases to be of benefit to the covenantee; (2) the covenant affects the nature, quality, mode of user or value of the land of the reversioner; (3) the covenant is not expressed to be personal (that is to say neither being given only to a specific reversioner nor in respect of the obligations only of a specific tenant); (4) the fact that a covenant is to pay a sum of money will not prevent it from touching and concerning the land so long as the three foregoing conditions are satisfied and the covenant is connected with something to be done on to or in relation to the land.’ (at 642)