Undue influence in guarantor agreements

A guarantor who felt pressured into agreeing to provide a guarantee could challenge their liability on the basis of undue influence or duress.

Pressure could include abuse or threats. It can also include feeling unable to refuse for other reasons, such as not wanting to upset the principal debtor by refusing to act as surety for a loan or tenancy agreement.

Undue influence

Undue influence can result in the court setting a transaction to be set aside where one party has pressured the other party into entering into an agreement.

For undue influence cases, the court uses its power to grant equitable relief. Equitable relief sits outside the normal strict rules of contract law. A defendant can rely on it in some very limited circumstances.

Undue influence involves pressure applied by a person in a position of trust. The actions do not have to involve fear or intimidation, although actual undue influence could include unlawful acts.

The law of undue influence is intended to cover situations where a contracting party has been forced, tricked, or misled.[1]

Duress

A guarantor on the receiving end of duress can ask the court to release them from the agreement. Duress occurs if one person has intimidated, issued threats, used force, or otherwise coerced the other person into an agreement.

Duress usually involves one person committing illegal acts, such as violence. There does not need to be a pre-existing relationship between the victim and perpetrator.

The guarantor should consider reporting conduct amounting to duress to the police, especially if they intend to issue a claim to have the guarantee set aside. The police report can be included as evidence in the court claim.

Duress could have been directed at the spouse, child, or relative of the guarantor.[2]

A guarantor who can provide evidence of threats or violence does not have to prove that duress was the only reason for giving the guarantee. The burden of proof is shifted to the creditor to show that duress did not contribute to the decision. The duress does not need to be the only reason, but it must have been a significant factor.

A creditor has legal responsibilities towards the guarantor. The guarantor must have provided the guarantee on a non-commercial basis. That means the debtor or creditor has not paid the guarantor.

Different rules apply if the guarantor has been paid. Guarantees provided for money are more likely to be insurance or an indemnity.

Most guarantees for loans and tenancy agreements are given by a family member or friend of the principal debts. They are non-commercial agreements.

Rebuttable and irrebuttable presumptions of undue influence

A guarantor is assumed by the courts to have given a guarantee under some sort of influence from the principal debtor, as they are getting nothing out of it themselves. A creditor who informs the guarantor of all the risks and advises them to get legal advice could rebut a presumption of undue influence.

A creditor who fails to advise the guarantor about the risks of providing a guarantee causes a rebuttal presumption of undue influence. A rebuttable presumption of undue influence means the creditor must take steps to satisfy themselves (rebut the presumption) that the guarantor is not under undue influence from the principal debtor.

The courts apply an irrebuttable presumption of undue influence to certain relationships, for example:

• parent and child

• solicitor and client

• doctor and patient

An irrebuttable presumption of undue influence means the influenced party can undo the agreement at any time.

The court's approach to undue influence in guarantee agreements

In the leading judgment on undue influence for guarantors, the House of Lords confirmed that where the principal debtor's wife gave security for the borrowing of her husband, the bank is put on notice of the possibility of undue influence.[3] This notice is called constructive knowledge.

Once they have been put on notice, a creditor should take reasonable steps to explain the risks involved in being a guarantor. They should recommend the guarantor to get independent legal advice.

For the guarantor's defence of undue influence or duress to succeed, the creditor needs to have had knowledge, or constructive knowledge, of the situation.

What is constructive knowledge?

A creditor has constructive knowledge where reasonable care could reveal undue influence or duress. It does not require the creditor to actually be aware of the undue influence or duress.

In RBS v Etridge the court held that reasonable care includes advising a guarantor to take legal advice independently the principal debtor when providing a guarantee for their business debts.

Where the debtor and guarantor do not have a relationship, undue influence can be harder to evidence, although any non-commercial relationship should put a creditor on notice.

The court can put the parties in the position they were in before the guarantee was provided. This is called rescission of contract.

The guarantee is declared void if the court agrees they provided the guarantee as a result of undue influence or duress.

Guarantor's application to court

A guarantor who provided a guarantee as a result of undue influence can issue a claim in the County Court for a declaration that it is set aside.

The guarantor issues a claim on form N208. They must follow the claim procedure set out in Part 8 Civil Procedure Rules.

The County Court normally allocates the claim to the multi-track. Multi-track is for the most complicated County Court cases. It has strict procedural rules and serious costs sanctions if the rules are not followed correctly. Costs can be high in multi-track cases. The court normally orders the losing party to pay the winning party's costs.

Claims to set aside a transaction for undue influence are not in scope for legal aid.

Guarantor's defence to a claim

A guarantor could wait and see if the claimant issues a claim, and file a defence against it instead. The law on undue influence can be complicated, so the case might be listed in the fast track or multi-track even where the value of the claim is under the small claims limit of £10,000.

The court sends out allocations questionnaires to get more information from the parties to help them decide which track to allocate the claim to. A guarantor who is representing themselves could explain that paying the other side's costs would have a disproportionate impact on them. The court could agree to allocate the case to the small-claims track, which means the guarantor does not have to pay the claimant's costs even if they lose.