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Law Notes Contract Law Notes

Non Commercial Guarantees And Unconscionable Bargains Notes

Updated Non Commercial Guarantees And Unconscionable Bargains Notes

Contract Law Notes

Contract Law

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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...

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