Guarantees and Independent Legal Advice

Guarantees and Independent Legal Advice

It is well recognised that in the context of certain types of banking transactions a presumption of undue influence can arise. An example of this would be where an individual is agreeing to charge a property which they own in order to secure the debts of their spouse. The question of whether a lack of independent legal advice invalidated a guarantee was considered recently in a case before the Chief Justice: Clarien Bank v E Kempe.

The Defendant in this case guaranteed the full mortgage debt of a trust which had been established by her former husband and to which a property was transferred subject to the existing mortgage with the relevant bank. The Defendant became Protector of the Trust and the ex-husband was released. The trust subsequently defaulted in its mortgage payment obligations and as a result, the bank took possession of the property and sold it. Because there was a fairly significant shortfall debt remaining, action was taken against the Defendant because of her personal guarantee.

Part of the Defendant’s counterclaim against the bank was for failure to ensure that she received independent legal advice. She alleged that the bank was aware that she was under pressure from her divorce lawyers to enter into the guarantee in order to settle matters with her ex-husband. Of note, the Chief Justice indicated, in terms of considering the presumption of undue influence, “In my judgment no such presumption arises in the context of the transaction entered into in the context of adversarial divorce proceedings between a husband and wife in which the wife is separately legally represented (the position here).”

The Court did indicate though that there are instances in which the doctrine of undue influence can be extended to other familiar relationships and circumstances even when the presumption arises, for example, where there is clear evidence of vulnerability and influence. However, he said, “In my judgment clear evidence of vulnerability and influence is required to impeach the validity of a contract where no presumed undue influence arises and there is nothing inherently unusual about the impugned transaction which on its face excites suspicion.” In examining the particular facts of the case, the Chief Justice concluded that there was no credible evidence before him that the Defendant’s guarantee was tainted by undue influence because she did not obtain independent legal advice. Importantly, he reached the conclusion that it was reasonable for the bank to assume that the Defendant would have been provided advice by her divorce lawyer with regard to the divorce settlement which included the guarantee. Further, the Court held that there was nothing sufficiently unusual about this transaction to put the Bank on inquiry with regard to any specific vulnerabilities on the part of the Defendant.

Importantly, the Chief Justice indicated, “Best banking practice would suggest that the Plaintiff [the bank] ought to have not just advised the [Defendant] to secure independent legal advice, but also to have sought either confirmation that she had obtained such advice or a waiver as part of the standard contractual process…” However, the Court was unable to find that the absence of a waiver in this instance invalidated the guarantee. The Chief Justice indicated that a bank’s policy of suggesting a customer obtain independent legal advice or obtaining a waiver from the customer were important mechanisms to have in place to avoid claims of undue influence but such policies are not required by the law. This decision illustrates that the failure to obtain independent legal advice does not necessarily invalidate a guarantee.