Undue influence clarified in the context of family guarantors

The High Court has revisited the authorities on undue influence and held in this case that there was not sufficient evidence to grant summary judgment.

The case1 involved an application for summary judgment brought by a creditor against a wife who personally guaranteed her husband's company's debts.

In late 2001, the creditor advanced funds to the company for the purchase of two truck and trailer units. A security interest was taken over the truck and trailer units and personal guarantees were given by five individuals (including the wife).

When, in 2004, the company defaulted on its obligations, the creditor terminated the agreement and sold the truck and trailer units. However, the proceeds were insufficient to repay the debt.

The husband subsequently passed away and the company went into liquidation.

The creditor served notice on the remaining guarantors who each admitted liability except the wife, who claimed that her guarantee was unenforceable because she was unduly influenced to enter the agreement by her late husband.

The High Court noted that, to avoid a guarantee by reason of undue influence, the following three elements must be proved:

1.    The guarantor was subject to undue influence

The Court considered the decision in Hogan v Commercial Factors Limited.2 In that case, the judge suggested that a wife who has provided a guarantee for her husband can only avoid liability by establishing that her husband actually exercised undue influence over her (as opposed to earlier authorities that suggested the relationship itself gave rise to a presumption of undue influence). The judge stated that this is now the position in New Zealand.

Bearing in mind that this was a summary judgment application, the judge was of the view that the wife was subject to undue influence. She had little understanding of commercial affairs, always allowed her husband to make the business decisions and trusted his judgement absolutely in that respect.

2.    The creditor had been "put on inquiry" as to the risk of undue influence.

The Court had to determine whether the creditor had constructive knowledge of the undue influence. In doing so, the Court had to decide whether to apply the rule in the English case Royal Bank of Scotland v Etridge (No. 2),3 where a bank is put on inquiry in every case where a wife stands as surety for her husband's debts, or the more stringent test in Wilkinson v ASB Bank Limited,4 where a creditor is put on inquiry where:

• the transaction on the face of it is not advantageous to the wife; and
• there is a substantial risk that the husband has committed a legal or equitable wrong.

The Judge noted that the Court of Appeal in Hogan praised the Etridge approach. Nevertheless, bearing in mind the nature of the application, the Judge followed what he considered to be the existing law in New Zealand and applied the Wilkinson approach. Accordingly, he found that the creditor had been put on inquiry because the transaction was not advantageous to the wife.

3.    The creditor had failed to take "reasonable steps" to insulate itself from such undue influence.

The guarantee document contained a clear explanation of the effect of the guarantee and a waiver of independent legal advice, which the wife had signed. However, this was not enough. Based on the principles in Hogan and Wilkinson, the Judge held that the creditor had a duty to bring home to the wife the risk she was running and it failed to do so.

The application for summary judgment was declined.

 

1 Rabobank New Zealand Limited V Logan Donald Balderston & Anor (Wellington High Court, 30 March 2006, Civ-2006-485-117)

2 Hogan v Commercial Factors Limited CA225/03, 10 November 2005

3 Royal Bank of Scotland v Etridge (No. 2) [2001] 4 All ER 449 (HL)

4 Wilkinson v ASB Bank Limited [1998] 1 NZLR 674

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