#2178 - Non Commercial Guarantees And Unconscionable Bargains - Contract Law

Non-commercial guarantees

The problem

• Chen Wishart: problem = whether Bank can enforce a loan for debts of the husband against the wife as guarantor when the husband has induced this agreement?

  • On one side answer = yes

    • Because the wife should take financial responsibility for her apparent agreement to the guarantee

    • The wife might stand to benefit from the loan

    • It is the primary debtor, not the lender, who is at fault

    • Such lending is socially and economically useful, especially for small businesses – banks will be reluctant to lend if they have difficulty enforcing their guarantees.

  • On other side = no

    • Marriage relationship allows scope for abuse when one party gets desperate

    • Lender ought to be aware of the risk of abuse here

    • Guarantor’s interests might be linked to that of debtors, but might not be identical – saving home rather than business might be priority of guarantor.

Requirements for the defence

• Can G prove a vitiating factor against PD?

  • Guarantor must show a vitiating factor against the primary debtor. This may be:

    • Misrepresentation

    • Undue influence

    • Other legal/equitable wrongdoing

      • Royal Bank of Scotland v Etridge [2001]:

        • Lord Nicholls: a transaction should not be vitiated just because H exaggerates slightly

          • As a degree of hyperbole is to be expected in the circumstances.

          • Equally, W will often give money to H as a normal expression of love, trust and affection, and court should be careful to avoid disturbing this.

      • Chen Wishart: begs the question of what conduct and exaggerations are to be expected of a “reasonable husband”.

        • Equally, shouldn’t the law be vigilant over relationships of influence for the reason that they might be undue?

• Bank is put on notice

  • Barclay’s Bank v O’Brien [1993]:

    • Lord Scarman: where relationship of sexual/emotional nature and loan is for debtor’s benefit, bank is put on notice

  • Royal Bank of Scotland v Etridge [2001]:

    • Lord Nicholls:

      • Quite simply, a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts.

        • This is even so where a wife is nominally a director or shareholder.

      • However, the bank is not on inquiry if the mortgage is to both jointly unless the bank is aware that the money is mainly for the husband’s purposes

    • Lord Scott:

      • Where H has negotiated that W will become surety for H’s debts and no part in the negotiations having been played by W,

        • the bank should be aware of the vulnerability of W and the risk that her agreement might be procured by undue influence or misrepresentation by H

      • So they are put on inquiry - Not about the existence of undue influence,

        • but only to whether the wife understands the nature and effect of the transaction she was entering into.

          • This is not an "inquiry" in the traditional constructive notice sense

• Has L taken reasonable steps?

  • Royal Bank of Scotland v Ettirdge [2001]

    • Lord Nicholls:

      • All a bank is expected to do is take reasonable steps to satisfy itself that the wife has had brought home to her the practical implications of the proposed transaction

        • So that she goes into the transaction with her eyes open.

      • Thus, banks not expected to insist on confirmation from a solicitor that the wife's consent has not been procured by undue influence

        • And Knowledge of the solicitor acquired will not be imputed to the lender

      • Equally, advice given need not be independent from the bank or the husband and wife either,

        • so long as the solicitor pays attention to the wife’s interest only and after considering whether there is any conflict of duty.

  • Chen Wishart: balance of power in favour of the lender over the guarantor

    • If solicitor is incompetent, that is nothing to do with the lender

    • Advice is aimed at informing the guarantor, not freeing her from undue influence

      • Gardner: trouble is, information will only spell out to guarantor what she already knows

        • Not free her from the pressure of her husband

          • Knowing the fact she may be repossessed will not present her with any additional choice in the matter.

  • Are abnormal or exceptional occasions when the lender may have to take more steps

    • Royal Bank of Scotland v Ettirdge [2001]

      • Lord Scott:

        • Where Bank knows facts which suggest that the wife's consent has been procured by the husband's undue influence or misrepresentation,

          • may be necessary for the bank to take extra steps – e.g. that wife has received advice from a solicitor independent of the husband

            • before bank can reasonably rely on wife's apparent consent

    • Chen Wishart: Here, lenders proceed at their own risk –court will determine whether reasonable steps were taken in response to heightened suspicion

Remedy

• Primary relief is rescission of the guarantee, subject to the usual bars.

What is the basis of this doctrine?

• Good faith purchaser?

  • Erm.... Is something of a fiction

• An instance of undue influence

  • Chen Wishart: The position of current parties is generally unaffected by the wrongdoing of third parties

    • It begs the question why the primary debtor’s undue influence should taint the lender’s contract

  • Moi: Perhaps – but seems to have a lot in common with undue influence

    • Maybe the binding of the husband and wife necessitate this being a special case of undue influence

      • Contract tends to be for husband’s benefit – so abuses relationship of trust etc

      • C(R3P)A 1999? Contract purports to benefit him, so justified brining his influence into the equation.

Unconscionable Bargains

Requirements

• C must have been under an operative bargaining impairment placing it as a serious disadvantage in relation to D

  • Fry v Lane [1888]: C were brothers with poorly paid jobs, persuaded into selling their revisionary interest to D for a massively undervalued price. C attempted to have the contract set aside

    • Kay J:

      • Where a purchase is made from a poor and ignorant man at a considerable undervalue,

        • the seller having no independent legal advice,

          • a court of equity will set aside the transaction unless the purchaser can show the purchase was in fact just, fair and reasonable.

      • Clearly not reasonable that legal advice given by solicitor acting for both sides.

    • Burrows: the combination of mental inadequacy (ignorance) and substantive unfairness (undervalue)

      • Raise an evidential presumption of exploitation of weakness which will lead to the contract being set aside unless rebutted (by D showing independent legal advice).

  • Ayleford v Morris [1873]: C, a young man expecting his inheritance, was persuaded into a loan w/ 60% interest by D. C received no advice. C tried to set it aside.

    • Lord Selbourne LC:

      • Where stronger party, owing to surrounding circumstances, makes unconscientious use of the power over the weaker

        • and that weaker party is excluded from his guardians and any professional aid that would be available to him

          • The transaction can’t stand unless the person claiming the benefit proves that it is in fact just, fair and reasonable.

  • But category has been stretched....

    • Boustany v Piggott [1995]: D got C, her landlady, to grant her a 10 year lease with an option to renew on same terms for another 10 years while G, who managed C’s affairs, was away. C received legal advice saying that this was a bad idea, but insisted on it anyway.

      • Lord Templeman:

        • It is not sufficient to show that the transaction is unreasonable or foolish.

          • It must also be unconscionable in that one of the parties has imposed the objectionable terms in a morally reprehensible manner.

            • Here, unconscionable conduct has been shown by D even though C can’t be described as poor and ignorant

      • Burrows: decision is odd. Even if C could be described as poor and ignorant, she did receive independent legal advice.

    • Cresswell v Potter [1978]: C was a post office telephonist who had divorced from D. C sold her interest in the house in return for being indemnified from having to pay mortgage payments on it. D then sold the house for a tidy profit and C sought to claim a half share.

      • Megarry J:

        • C may be described as “poor and ignorant”, these words being applicable to different social conditions than today

          • Which can be translated as “belonging to a lower income group” and “less highly educated”

          • C can be described as poor – cases show that you need not be destitute

            • And “ignorant” in the context of property transactions and conveyancing in particular

      • Burrows: another odd decision – best to concentrate on “ignorance” explanation (more plausible) than explanation of “poor”.

  • Chen Wishart: model is outdated – should cover all personal weakness that affects us all from time to time per Australia,

    • But avoiding all such transactions being set aside by placing more emphasis on the unfairness of the transaction and the exploitation by D in a morally culpable manner.

• D must have exploited C’s weakness in a morally culpable manner

  • Boustany v Piggott [1995]:

    • Lord Templeman:

      • Unequal bargaining power of objectively unreasonable terms provide no basis for interference

        • In the absence of unconscientious or extortionate abuse of power

        • Thus no relief unless the beneficiary is guilty of unconscionable conduct.

  • But need not be actual fraud, constructive is sufficient

    • Cresswell v Potter [1978]:

      • Megarry J:

        • Regarding independent advice, what matters is not that she could have obtained proper advice

          • But whether she had it – and here she did not.

        • What matters is that no party can rely on an advantageous conveyancing transaction

          • unless something is done to bring to the notice of the other party the true...