KhattarWong LLP

Asialaw Online March 2009

By Pearl Lim and Evelyn Lee Pei Qi

Introduction

The principle of undue influence which aims at protecting vulnerable sureties in possession proceedings, has time and again, baffled banks as to whether they hold good security vis-à-vis third party sureties. It is worthwhile to note that case law has established a series of guidelines which banks may find useful to adopt to safeguard their interest in third party securities.

It would be useful to first consider the main authorities governing undue influence.

Barclays Bank v O’Brien

In this case, Barclays Bank had taken a mortgage over Mr and Mrs O’Brien’s home to secure Mr O’Brien’s company’s liabilities. When the security documents were present for execution by Mrs O’Brien, the bank did not explain the effect of the documents, nor did they advise her to seek independent legal advice. When the bank sought to enforce its security, Mrs O’Brien alleged that she had acted under the undue influence of Mr O’Brien. The court held that as the bank knew that security was taken from a surety who was likely to be influenced by and likely to have some degree of reliance on the debtor, the bank should have sought to ensure that unfair advantage was not taken of the surety. As the bank did not do so, the security was held to be unenforceable.

Royal Bank of Scotland v Etridge

The principles of undue influence were re-interpreted in the case of Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773 (‘Etridge’) which involved eight conjoined appeals concerning wives who acted as sureties to secure the debts of their respective spouses. In each case, the bank sought to enforce their security whereas the surety alleged undue influence. The issue was whether the bank should be treated as having had notice of the undue influence. The court adopted a common sense approach by implementing the following line of enquiry:

·         Has the surety proved that the transaction was affected by the undue influence of the debtor?

·         If so, was the lender put on inquiry?

·         If so, did the lender take reasonable steps to satisfy itself that the nature and practical implications of the transaction have been understood by the surety?

Has the surety proved that the transaction was affected by the undue influence of the debtor?

There are two categories of undue influence, namely, actual and presumed undue influence. Actual undue influence involves overt conduct. Presumed undue influence, on the other hand, requires the complainant to show a relationship of trust and confidence between the complainant and wrongdoer to the extent that the presumption arises. Presumed undue influence can be established in two ways:

·         Certain relationships as a matter of law raise the presumption of undue influence (E.g. Solicitor and client).

·         Where the relationship does not fall within the first category, the complainant must prove that the relationship is one where the complainant generally places trust and confidence in the wrongdoer and that such a relationship raises the presumption of undue influence.

Was the bank put on inquiry?

Once the existence of undue influence is established, the bank has to determine whether the transaction is one that ‘calls for explanation’. In other words, the bank has to ascertain whether the surety is charging her interest in a property as security for the debtor’s liabilities where to do so is of no obvious advantage to her.

Reasonable steps by the bank

If the bank is put on notice, it has to take reasonable steps to ensure that the practical implications of the transaction had been explained to the surety.

The test which would be applied in determining whether such reasonable steps were taken by the bank would depend on the facts of each case and should be applied from the perspective of the bank. The court in Etridge held that it is not necessary for the bank to conduct a detailed examination of the circumstances behind the information provided by the debtor and surety.

The Singapore position

Singapore Courts have followed Etridge closely. In Susilawati v American Express Bank Ltd [2008] 1 SLR 237, the High Court held that the complainant failed to establish the presumption of undue influence as she failed to show that she had placed such a degree of trust and confidence in her son-in-law so as to allow him to be in a position of ascendancy over her.

In Malayan Banking Berhad v Hwang Rose [1997] 2 SLR 1, the Court of Appeal held that each father-son relationship must be examined to see whether a presumption of undue influence would arise. In that case, the father was an experienced businessman who knew the nature and legal consequences of a guarantee and there could be no presumption of undue influence.

Guidelines for banks

The following may serve to be useful guidelines for banks to address and rebut any possible argument of undue influence:

·         The bank should recommend that the surety seek independent legal advice as to the surety’s obligations and liabilities under the security documents. If the surety waives or chooses not to be independently advised and confirms this to the bank, the solicitor advising the surety should hold an independent meeting with the surety to advise the surety separately.

·         The bank should then obtain the debtor’s explicit written authority to override its statutory duties of confidentiality which, if refused, should prompt the intending surety to draw the appropriate conclusions.

·         The bank may arrange a joint meeting with the surety and debtor, at which the surety might, in the debtor’s presence ask for information concerning the debtor’s affairs.

·         Where the debtor has granted such written authority, the bank should provide the surety’s solicitor with the necessary information relating to the transaction so that the solicitor can explain the practical effect of the transaction to the surety.

·         The bank should then obtain written confirmation from the surety’s solicitor that the nature and effect of the transaction has been explained and understood by the surety.

It should be noted that the precise action to be adopted will depend on the circumstances of each case and a common sense approach should be adopted when assessing each case.

Conclusion

The principle of undue influence can be seen as a balance between protecting the vulnerable sureties and yet not rendering it unduly cumbersome for banks to procure and enforce their securities. The guidelines laid down by case law may assist banks to discharge the duty that is imposed on them when put on notice of presumption. However, the banks should assess each transaction individually rather than applying a blanket procedure for all such transactions.