MJM Successfully Defends Bank in Undue Influence Claim
About Jennifer Haworth
Jennifer Haworth is a Director in the firm’s Litigation & Dispute Resolution team. Jennifer has a wide practice in all aspects of civil and commercial litigation both in Bermuda’s courts as well as in mediation and arbitration.
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In May 2017, MJM obtained an order for possession and sale on behalf of HSBC Bank Bermuda Limited (the “Bank”) in respect of a mortgaged property owned by two guarantors following the default by the borrower. Approximately, one year later, after the Bank had actual possession of the property, the guarantors sought to injunct the Bank from selling the property on the basis that the guarantee should be set aside due to undue influence. In October 2019, the hearing of the matter took place before the Honourable Chief Justice Narinder Hargun. Judgment was rendered by the Chief Justice on 15 November 2019.
The case considered whether undue influence could occur by one joint guarantor over the other, whether the Bank had constructive notice of such alleged undue influence and whether the Bank took all reasonable steps having regard to the Etridge principles.
The two defendants were father and son, joint guarantors. The son alleged that he was unduly influenced by his father who pressured him into executing the guarantee. The father supported the claim and both sought to have the guarantee set aside and the property returned to them. Although the Bank acknowledged that the non-commercial nature of the transaction (the guarantors providing a guarantee to third party with whom they had no familial or commercial connection) was sufficient to put the Bank on inquiry under the Etridge principles, it did not agree that it was on inquiry regarding alleged undue influence between the guarantors.
The parties were not in agreement was how far the Bank’s duty extended as it relates to the guarantors. The defendants argued that the Bank ought to have protected them from undue influence between the father and son and ought to have insisted and ensured that they both obtained separate independent legal advice from one another. The defendants did acknowledge that no such concerns were raised with or in front of the Bank. They also complained that the legal advice they sought was inadequate and from an attorney that the borrower arranged for them to see.
The Bank maintained that it acted entirely within the remit of the Etridge principles. As indicated, the Bank accepted it was on inquiry but that was as between the guarantors and the borrower. For this reason, the Bank took steps to not only tell the guarantors that they were required to obtain independent legal advice, but also it drafted the terms of the borrowing (contained within the facility letter) making it a condition precedent of the loan that the guarantors obtain separate independent legal advice and a letter be produced by the independent attorney from whom the guarantors sought advice to confirm that the advice had not only been sought but that the guarantors appeared to understand the nature of the transaction.
The Chief Justice carefully considered the legal landscape governing the complicated area of law: undue influence. He considered evidence of the father and the son as well as the Bank’s Relationship Manager who managed the relationship for most of the life of the loan. Not only the Etridge case but other key legal authorities in this area were considered and analysed. The Chief Justice concluded, “…I am satisfied that the Bank had taken all reasonable steps which it could be expected to take and none of the complaints made about the lack of competent legal advice can affect the rights of the Bank under the Guarantee”. The Court held that the defendants did not have a meritorious defence to Bank’s claim to realise its security under the terms of the guarantee.
The HSBC v James and Lawrence case is an important case for the development of Bermuda’s jurisprudence given that there have previously been very few cases addressing the issue of undue influence. It is crucial for lending institutions, borrowers and guarantors to understand their obligations in any lending situation where the presumption of undue influence may arise. Contact us for further information and advice relating to this complicated area of law. Royal Bank of Scotland PLC v Etridge (No. 2)  2 AC 773