Posts Tagged ‘undue influence’

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