The Court of Appeal’s position is now very clear on the question of guarantors needing independent advice - unless an individual guarantor has an arguable defence that he/she has been the subject of undue influence or misrepresentation by the debtor, the Courts will not find that the lender was under a positive duty to ensure that the guarantor received independent legal advice.
ACC LOAN MANAGEMENT LIMITED V CONNOLLY1
The judgment of the Court of Appeal was delivered on 4 April 2017.
» Facts:A father guaranteed the debts of his son to ACC. The son borrowed from ACC in 2005 and 2007, and his father provided guarantees in 2005 and 2008. The son defaulted in repayment of his loans, and ACC began legal proceedings in 2013. In February 2015, ACC successfully obtained summary judgment in the High Court against the son, and against the father in respect of the 2005 guarantee.2
» High Court: The guarantor had signed a confirmation that he had been given the opportunity to take independent legal advice in relation to the 2005 guarantee, and that he had taken that advice. His son gave evidence that the advice was in fact given by the son’s solicitor, and not by a separate solicitor acting for the father, and could not be said to be “independent”. At no stage in the High Court did the father claim that he had provided the guarantee as a result of undue influence exerted by, or misrepresentations made by, his son.
The High Court granted judgment in favour of ACC. Notably, on the question of independent legal advice, Fullam J held that while undue influence had not been alleged, the father-son relationship put ACC on inquiry (i.e. on notice of a possible non-commercial aspect to the guarantee) and under an obligation to take reasonable steps to ensure that the father had freely entered into the guarantee. Fullam J found that, in obtaining the confirmation from the father that he had received independent legal advice, ACC had taken “a sufficiently reasonable step”.
» Court of Appeal: The father appealed. The Court of Appeal (in a judgment delivered by Finlay Geoghegan J) found in favour of ACC, holding that:
• no evidence had been presented by the guarantor to the High Court to support an argument that he had been subjected to undue influence; and
• as the guarantor did not have an arguable defence that he was the subject of undue influence, he did not have an arguable defence that the bank (because it knew of the father-son relationship) should have ensured that he obtained independent legal advice or otherwise ensured that he freely entered into the guarantee.
The judgment considered key Irish decisions, and one English decision, in this area. Notably, Hogan J in the Court of Appeal delivered a separate judgment in which, while he ultimately supported the judgment of Finlay Geoghegan J, he disagreed with her on the relevance of the decisions in Roche and Etridge (each referred to in further detail on the next page).
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KEY FINDINGS OF THE COURT OF APPEAL
» Both Etridge and Roche dealt with situations where a finding of undue influence had been made, and the principles set out in both cases regarding further steps that a bank must take were set out only in the context of a prior finding of undue influence.
» Neither Etridge nor Roche is authority for the proposition that, where there is no arguable defence of undue influence, there is a separate defence available to the guarantor if the bank did not ensure that the guarantor fully and freely understood what he was agreeing to.
» There is no stand-alone obligation on a bank to ensure that a guarantor fully and freely understands what he is agreeing to.
» If the guarantor in this case had raised an arguable defence of undue influence, the judgment in Roche may have been relevant.
» As mentioned above, Hogan J also delivered a judgment in this case in which he disagreed with Finlay Geoghegan J as to the applicability of Etridge and Roche. However, having regard to the decisions of the Court of Appeal in de Kretser and Curran, he felt that it was clear that the Court of Appeal’s “settled view is that…absent an express claim of undue influence or…misrepresentation, a bank is under no affirmative duty to ensure that a surety receives independent legal advice.” He also noted that, unless special circumstances exist, a judge of the Court of Appeal should yield to the prevailing view set out in prior decisions. As a result, he agreed with the judgment of Finlay Geoghegan J.
NOTE IN RELATION TO CONDITIONS PRECEDENT
It is important to note that Finlay Geoghegan J distinguished the facts of this case from those in ACC Loan Management Ltd v Sheehan9 in which ACC had listed a confirmation that the guarantor had received independent legal advice as a condition precedent to the loan being advanced. In that case, both the High Court and Court of Appeal agreed that, as the borrower’s solicitor had confirmed to ACC that the guarantor had waived his right to seek independent legal advice, the guarantor had an arguable defence that the condition that ACC had imposed (which was arguably for the benefit for both parties) had been (and should not have been) unilaterally waived by ACC.