Corporate responsibility The Legal

Environment
Assignment

Contents
1. Introduction................................................................................................... 3

2. Main body...................................................................................................... 4
3. Conclusion..................................................................................................... 9
4. Bibliography................................................................................................ 10

1.Introduction
The main facts of the case assigned are as follows:

I am an MBA candidate. I have composed an excellent business plan, and

as a consequence it was suggested to me that I should secure finance in
order to set it up after I graduate. To that affect I have contacted Axo
Lending Bank for a loan. Because of my inexperience, they are willing to
only lend me 300.000 (provided that someone will back up the

guarantee).
As a result of my limited funds I have decided to approach my uncle and
ask him to guarantee the loan. He is an elderly man who currently lives in

a retirement home, but he does own a high valued property.

Accompanied by a representative from Axo I went to see my uncle. I
explained about the main features of my business plan and about the loan

I require.
The agent assured him that there is nothing to be worried about. He could
not conceive the possibility of the business failing and the guarantee was

only a procedural thing.

My uncle seemed slightly confused, as a result of the heavy medication he

was on, but he immediately signed the guarantee anyway.

Ultimately, my lack of experience prevailed and the business failed.
Now, the bank is trying to sell my uncles house.

The problem of the case:

The bank is requesting the property in question.

What arguments can be used so that the transaction made between my uncle
and the bank becomes voidable?
After reviewing everything that happened I am now trying to find a way to stop
the bank from selling the property. I have gone over the law of contract and case
law. In researching the material I found several points to be raised in favor of my
uncle. These include the following:
I.

Undue influence Both the representative from Axo and I exerted

II.

pressure on my uncle to sign the guarantee.

Lack of independent advice The agent did not give my uncle an
opportunity to seek independent advice. If he did, I am now certain that no
business adviser would instruct him to invest into something like this, by
signing over his house his sole remaining asset, and effectively become

III.

penniless if the business failed.

Misrepresentation The representative assured my uncle that the
business will most definitely be a success, and that he shouldnt worry
about it. It is my belief that he knowingly made a false statement of fact,
thus misleading and inducing him into signing.

IV.

Unconscionable bargain As a result of his old age and heavy

medication, I intend to state that my uncle did not know what he was
signing.
Lack of mental capacity I will contest that my uncle was of unsound

V.

mind when he signed the guarantee i.e. he wasnt capable of making an

informed judgment. The banks representative should have percepted this.
In the following section I intend to review these points through case law
precedents.

2.Main body
Undue influence
Undue influence is an unconscionable use of power over another in order to
compromise a property right (Legal Dictionary n.d.). In Lloyds Bank v Bundy
(1974) EWCA Civ. 8, Lord Denning suggested that the mere inequality of
bargaining power amounts to undue influence. He stated:
The English law gives relief to one who, without independent advice, enters
into a contract or transfers property for a consideration which is grossly
inadequate, when his bargaining power is grievously impaired by reason of
his own needs or desires, or by his own ignorance or infirmity, coupled with
undue influences or pressures brought to bear on him by or for the benefit of
the other (Lord Denning 1974).
This, although later overturned in National Westminster Bank v Morgan (1985)
UKHL 2 (where Lord Scarman held that although an unequal bargain is an
important factor - it does not equate to an equitable doctrine by itself),
definitely pertains to the case Im investigating. Im stating that the contract
should be dismissed because the guarantee was grossly disadvantageous to my
uncle.
And when it comes to the types of undue influence, I will stipulate a threefold
classification that is outlined (by the Court of Appeal) in Bank of credit and

Commerce International v Aboody (1990) 1 QB 923, and later reaffirmed in

Barclays Bank v OBrien (1992) EWCA Civ 11:
-

Class 1 Actual undue influence (see CIBC Mortgages plc. v Pitt (1993)
UKHL 7; Annulment Funding company Ltd. v Cowey and Anor (2010) EWCA

Civ 71; 1 and Royal Bank of Scotland v Etridge (1998) EWCA Civ 1372);
Class 2A Presumed undue influence that arises out of a recognized
relationship - between a parent and child (see Turkey v Awadh & Anor
(2005) EWCA Civ 382; Hogg v Hogg & Anor (2007) EWHC 2240 (Ch) and
Humphreys v Humphreys (2004) EWHC 2201), doctor and patient, lawyer
and client (see Westmelton (Vic) Pty Ltd v Archer & Schulman (1982) VR

305), and spiritual adviser and disciple;

Class 2B Presumed undue influence that requires proof of a relationship
based on trust and confidence between a husband and wife (see
Yerkey v Jones (1939) HCA 3; (1939) 63 CLR 649 later overruled in
Commercial Bank of Australia Ltd v Amadio (1983) HCA 14; (1983) 151;
Barclays Bank v OBrien (1992) EWCA Civ 11 and Barclays Bank plc. v
Rivett (1997) EWCA Civ 974), employer and employee (see Credit Lyonnais
Bank Nederland NV v Burch (1996) EWCA Civ 1292), and parent and child
living outside the household.

So which class applies to this case? In my opinion the answer is twofold:

-

Regarding the agents influence it is class 1, and that is because he

assured my uncle that investing in the project is the right and only decision

he could make. He influenced him into signing and is therefore liable.

Regarding my own influence exerted on my uncle I believe it is class 2B,
and that is primarily because we dont share the same household i.e. he
lives in a retirement home. In conclusion, my influence was of limited
range.

The leading case on undue influence is that of Royal Bank of Scotland v Etridge
(2001) UKHL 44. The summary of the case is as follows:
-

Appeals in eight cases were raised before the court. In each case a wife
was contesting the transaction, made in favor of the bank, by stating that

undue influence was exerted upon her to sign.

The Lords presiding in the case stipulated that any consent gained due to
unconscionable means or inducement should not stand, and that the

person alleging undue influence is the one who is tasked with proving it.
The need for independent advice was also highlighted.

In cases following that of Barclays Bank v OBrien (1992) EWCA Civ 11,
the wife usually won the appeal.

Based of the points made in this case, Im stipulating that this particular
guarantee was obtained thanks to undue influence and exploitation of the
relationship based on trust and confidence. Therefore it should be dismissed.
Another interesting case is that of Credit Lyonnais Bank Nederland NV v Burch
(1996) EWCA Civ 1292. Facts of the case include:
-

Ms. Burch was an employee of the bank, and between her and the banks

owner Mr. Pelosi existed a relationship of trust.

She mortgaged her flat as security for the banks overdraft.
However she was not told the extent of the charge.
Now shes trying to set aside the transaction based on undue influence,

lack of independent advice and manifest disadvantage.

The appeal was accepted.

Does this pertain to what Im researching? I believe that the answer is yes. Both
individuals (Ms. Burch and my uncle) were influenced to enter into the
transaction by someone they trusted. Secondly, in both cases the transaction was
of manifest disadvantage to them i.e. both were in the process of losing their
property and could become penniless. Finally no independent advice was offered
and that proved to be detrimental.
Lack of independent advice
Lack of independent advice is closely tied with undue influence. When filing
lawsuits, appellants usually raise both points. This is demonstrated in National
Westminster Bank Plc. v Breeds (2001) EWHC Ch 21, where Mrs. Breeds raised a
complaint against her husband stating that he had influenced her to sign over her
house to the bank, without having any real independent advice as to the
consequences of her actions. This lack of advice influenced the fairness of the
transaction. Ultimately, Collins J granted the appeal.
Another case is even more relevant to the point that Im trying to make. That is
Vale v Armstrong (2004) EWHC 1160 (Ch), where Mr. Vale tried to set aside the
transaction of property made between himself and his great nephew. In his
appeal he stated that the banks representative did not explain all the issues or

consequences of the charge, and therefore his so called advice was found to be
lacking. The transaction was overturned.
This surely correlates to the case of my uncle. The agreement made between
him and the bank could be found voidable on the grounds stipulated above.

Misrepresentation
Misrepresentation is a false statement that induces someone to enter into a
legally binding contract (Legal Dictionary n.d.).

In Bisset v Wilkinson & Anor

(1926) UKPC 1, the respondents stated that because the owner of the land they
purchased for sheep farming told them that it could house 2.000 sheep, which in
reality wasnt true, he was liable for misrepresentation. Sim J (1926), however,
concluded: The representation was only one of opinion. It was honestly made by
the appellant, and is therefore not actionable.
Does this apply to this case? By saying that the business will surely succeed, was
the agent only giving his opinion? I contest that this isnt entirely true. I believe
that he did give an opinion but he also knew for a fact that the business will not
succeed. Therefore his opinion was NOT honestly made and could be
characterized as a statement of fact. Thus, the agent is liable.
In relation to this, another case that has to be considered is that of Derry v Peek
(1889) UKHL 1, where it was stated that if a defendent made a statement for
which he had no reasonable grounds to believe in, or a false statement for which
he knew was untrue, he would be held liable. In my case this also applies.
Unconscionable bargain
Would a sensible person enter into the kind of contract thats being discussed?
The answer to this question is most definitely a negative one. Why would
someone sign over their sole possession, gain nothing in return and effectively
become penniless if the deal turns sour? They wouldnt. The only reason why my
uncle signed the transaction in the first place was because of the familial
affection he felt for me. And in the end, he had nothing to show for this. He was

taken advantage of, because of his old age, severe medical condition and his
naivety. Now what Im trying to find out is if this claim is substantiated by case
law.
One of the leading cases on unconscionability is the one between Lloyds Bank
Ltd v Bundy (1974) EWCA Civ 8. The main points of the case are as follows:
-

The father tried to help his sons business by mortgaging his house;
The venture failed and the bank tried to foreclose it;
The father claimed an unconscionable bargain, undue influence and

duress;
Ultimately the judge stated that because of the gross inadequacy,
unfairness, and impaired bargaining power the case was to be resolved in
favor of the plaintiff.

How does this case relate to that of my uncle? In both instances, the plaintiffs
wanted to provide assistance to the person they felt a natural affection for, and
consequently both paid a price for doing so. Not only that but it could also be said
that they were the weaker party in these proceedings, and because of the lack of
information, strong influence and lack of bargaining power the case could be
resolved in their favor.
Another interesting case is that of Commercial Bank of Australia v Amadio (1983)
HCA 14, (1983) 151. In this case Vincenzo Amadio (the son of Mr. and Mrs.
Amadio) was a successful businessman and developer whose business venture
got into some financial problems. In order to resolve them he asked his parents to
provide funds. To that affect they placed a mortgage on their property. The son
informed his parents that a guarantee would be given in the amount of $50.000
for a period of 6 months. They met with the banks representative, who provided
no additional information, and signed the papers. In the end the business failed
and the bank tried to reposes the house. This is when the parents found out that
the mortgage was for an unlimited amount and time. An appeal was brought
before the court primarily citing an unconscionable bargain because the Amadios
were elderly, and didnt fully understand what they were getting themselves into.
Deane J resolved the case by concluding that the whole guarantee should be set
aside on the grounds that it was not fair, just and reasonable (1983).
Lack of mental capacity

Under this heading I intend to explore the following questions: From the facts
stipulated in the introduction can it be said that my uncle was incapable of
making an informed decision? Did he fully understand that he was signing over
his house to the bank? Did the heavy medication he was on severely influence his
judgment, rendering him unaware to the consequences of his actions?
A case that relates this point is that of Hart v OConnor (1985) UKPC 1. The main
aspects of the case include:
-

An agreement for the sale of a land was made where the vendor was

pronounced to be of unsound mind and lacking mental capacity.

Mr. Hart was not aware of this.
An appeal was made for the transaction to be dismissed on the grounds of

low mental capacity, unfairness, and an unconscionable bargain.

Based on the evidence presented Cook J ruled that even though Mr. Hart
was unaware of the incapacity the transaction was to be set aside because
of the gross unfairness to the individual lacking it.

3.Conclusion
As outlined in the introduction, and then further substantiated trough cases in the
main body of this paper, the main points of my uncles defense include undue
influence, lack of independent advice, misrepresentation, unconscionable bargain
and lack of mental capacity. Therefore, in examining the facts I have come to the
conclusion that my uncle would have signed anything we gave him because:
-

He felt familial affection for me and this influenced his decision;

The agent rushed him into signing and offered no independent advice;
The agent misrepresented the future outcomes of the venture and induced

him into signing;

He wasnt capable of understanding the papers put before him because of
the heavy medication he was on.

It is my belief that enough evidence has been given so that this contract can be
found voidable on the grounds stipulated above.

4.Bibliography
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%22actual+undue+influence%22&method=boolean [Accessed October
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Bank of Credit and Commerce International v Aboody [1990] 1 QB 923 Court of
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