Guarding Against Undue Influence in Guarantor Relationships

Guarantors are prone to undue influence in case there is a personal relation between them and the debtor. There is a certain level of trust and confidence between them, which opens up the opportunity of the guarantor being under undue influence from the debtor. Relationship like between spouses creates presumes undue influence in favour of the guarantor.

There are few precautionary steps that a commercial lender can undertake to protect a guarantor. Firstly, it needs to identify the relationship between the debtor and the guarantor, which may give rise to undue influence. Secondly, it needs to lay down steps to rebut any presumption of under influence, such as to have constructive notice or have reasonably known about the existence of undue influence. This will enable the lendor to accept the guarantee after rebutting presumption of undue influence. The lender needs to very that the contract of guarantee is entered free will and undue influence was not exerted. If you are seeking law dissertation help, understanding these precautions and legal nuances is crucial.

Guarantors must freely decide to provide a guarantee. Lenders need to put more care in determining existence of undue influence in cases where there is presumed undue influence such as in relationships between husband and wife. This is the reason w lender has to have steps to satisfy itself first that there was free will. This principle is clearly laid out in the case of in Barclays Bank Ltd v O’Brien, that observed that the doctrine of undue influence aim to establish unless the lender demonstrates that they have undertaken all reasonable steps to rebut presumption of undue influence between the debtor and guarantor, they are deemed to notice undue influence, the guarantee is unenforceable.

To elaborate on the reasonable steps, they may include one-to-one meeting between the lender and the guarantor to identity risks, if any, and explain them to the guarantee. In order to protect the guarantor, the lender can refer the guarantor to an independent attorney, without the debtor, for legal advice about risks and steps to secure himself. The lender may even set a precondition to have a legal certificate including the advice to validating the guarantee. Having this independent meeting with guarantor and setting the need for a legal certificate will ensure the guarantor is aware of the risk involved, which in turn satisfies the lender as well as the guarantor that there is free will in the guarantee. This will also enable identifying the effect or the level of effect of undue influence by the debtor on the guarantor, and confirming or rebutting the presumption of undue influence, which will decide the enforceability of the guarantee.

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1. Dr. James O'Donovan, Lender Liability (Sweet & Maxwell 2005)279.
2. Barclays Bank Ltd v O’Brien [1994] 1 AC 180.
3. Royal Bank of Scotland Plc v Etridge [2001] UKHL 44.

Problem Question

The approach to a problem question comprises the steps of identifying issue in hand, the relevant rules and their application to the issue and conclusive step to be taken. This could be gathered from understanding the facts of the case, in this write-up particularly the S4H case, which helped in firstly identifying the vitiating factors to deduce presence of misrepresentation. A contract is an exchange of promises. Cottgrub entered into contract with S4H based on the promise given by S4H, which S4H did not live up to. Seminar 2 gives insight to this particular aspect of contract and the practical approach to problem solving the issue in hand. It facilitated in understanding principle of misrepresentation and how the course of dealing of S4H suits the applicability of this principle.

One must firstly understand the facts and circumstance around the contract. In the current case, based on the statement made by S4H, Cottgrub entered into the contract. But, did the “firm plans” as stated by S4H really happen? No, it did not. Understanding the concept of and rules around misrepresentation will enable innocent contractual parties to escape obligations and liabilities from the contract. Important factors such as ambiguity, opinion, intention, position of parties in the contract, professional expertise, and duty to disclose information, have to be considered while determining existence of misrepresentation.

The seminar helped in understanding the rules around determining vitiating factors that amount to misrepresentation in order to protect the innocent parties. For example, it helps understand that misrepresentation can be fraudulent, innocent or negligent, which makes the contract voidable. If untrue statement induces contributes to the decision of other contractual party to enter into the contract, there is inducement. The same goes with S4H‘s statement untrue statement. All remedies give an innocent party access to the protection, like suing for damages under tort or under the Misrepresentation Act 1967. But on other hand it is necessary to consider that the other party may not be at fault all the times. Like, when it is an opinion of a party which is honest, or just a statement of intention, But, this does not waive the wrongdoing if statement is made carelessly. The test of reasonableness is a good test to determine misrepresentation. In the current case, the current statement is not statement of opinion or intention, as there was implicit assertion of facts, which are false.

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4. A Burrows, A Casebook on Contract (6th edn, Hart Publishing 2018) 11.
5. Ibid
6. T T Arvind, Contract Law (2nd edn, Oxford University Press 2019) 309.
7. A Burrows, A Casebook on Contract (6th edn, Hart Publishing 2018) 11.
8. T T Arvind, Contract Law (2nd edn, Oxford University Press 2019) 314.
9. Wales v Wadham [1977] 1 WLR 199.
10. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465.
11. Heilbut, Symons and Co. v Buckleton [1913] AC 30.

Understanding all the relevant rules help in preparing defence or proving wrongdoing. In the current case, there are rules identified, such as around duties of the representor, which enables protection of innocent parties. For instance is a duty to disclose all relevant facts where there element of utmost good faith, common law duty to disclose changed circumstance, or by law or contract, such as which as when the representor is in a better position to know the correct position. Given these rules, S4H cannot present a defense that it was not obligated to give further relevant information unless asked and hence it committed misrepresentation. Further reviewing the rules helped in identifying protective remedies to the innocent parties, such as rescission and damages, with necessity to proof fraud. Knowing each element of a transaction of contract helped in identifying and applying relevant rules. The same holds true when knowing the rules helps in better clarity of identifying the relevant portions of facts.

Continue your exploration of Government's Derogation Decisions under Article 15 with our related content.



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12. T T Arvind, Contract Law (2nd edn, Oxford University Press 2019) 311-312.
13. Smith v Land and House Property Corporation (1884) LR 28 Ch D 7.
14. T T Arvind, Contract Law (2nd edn, Oxford University Press 2019) 309.
15. Derry v Peek [1889] UKHL 1.

Legislation

Misrepresentation Act 1967

Cases

Barclays Bank Ltd v O’Brien [1994] 1 AC 180.

Derry v Peek [1889] UKHL 1.

Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465

Heilbut, Symons and Co. v Buckleton [1913] AC 30.

Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4.

Wales v Wadham [1977] 1 WLR 199.

Royal Bank of Scotland Plc v Etridge [2001] UKHL 44.

Smith v Land and House Property Corporation (1884) LR 28 Ch D 7.

Books

Arvind TT, Contract Law (2nd edn, Oxford University Press 2019) 309.

Burrows A, A Casebook on Contract (6th edn, Hart Publishing 2018) 11.

O'Donovan J, Lender Liability (Sweet & Maxwell 2005)279.