JUDGE1
KING CJ. In this action the plaintiff sues thirteen
guarantors for amounts
alleged to be due under a Deed of Guarantee and Indemnity. The thirteen
guarantors are shown on the summons
as the first defendant to the twelfth
defendant, the eleventh defendant consisting of two persons being husband and
wife. All defendants
have raised pleas of misrepresentation, misleading and
deceptive conduct, estoppel and unconscionability.
2. The action arises out
of a transaction in which Lakshmi-Nivas Pty Ltd, as
trustee of the Lakshmi-Nivas Unit Trust, purchased the Cremorne Plaza Shopping
Centre. The purchase price of the shopping centre was $3,400,000. The
purchaser borrowed $2,800,000 from the plaintiff. The plaintiff's
loan was
secured by a first mortgage over the purchased property. There was a second
mortgage securing $200,000 in favour of the
vendor. The defendants were the
holders of all issued units in the unit trust at the time of the transaction.
They each executed
the Deed of Guarantee and Indemnity in favour of the
plaintiff. The twelfth defendant was the promoter of the enterprise and he
and a financial consultant by the name of Fimeri conducted the negotiations
with the plaintiff. Negotiations were conducted on the
plaintiff's side by
its State Manager, Mr Pinyon, and another officer of the Bank by the name of
Noack. The legal work was conducted
for the plaintiff by Mr D H Bache of
Mollison Litchfield, Solicitors. Mr Bridges of the same firm formed the unit
trust and performed
the legal work in connection with the purchase of the
property for the purchaser.
3. Messrs Pinyon, Noack, Bache and Bridges gave
evidence for the plaintiff.
All defendants with the exception of the fifth defendant and the tenth
defendant, gave evidence. The
tenth defendant was unable to give evidence due
to ill health. The fifth defendant was absent from the State and it had not
been
possible to notify him of the time at which it was necessary for him to
give evidence. Fimeri was a witness called by counsel for
the twelfth
defendant. Before proceeding to discuss the facts, I indicate my views as to
the various witnesses.
4. Pinyon and Noack
did not have notes or diary entries to assist them and
were vague about the details of events which occurred more than four years
ago. I am satisfied that they both endeavoured to tell me the truth about the
matter to the best of their recollection and that
on the critical matters they
were substantially accurate. Bache and Bridges were truthful and generally
accurate witnesses. The
first eleven defendants, with the exception of the
fifth and tenth defendants who did not give evidence, were honest witnesses.
I
do not think that any of them had any clear grasp of business matters and
certainly no clear grasp of this type of transaction.
Moreover their memories
of events, having regard to the lapse of time, varied considerably in quality.
The twelfth defendant gave the impression of being clear and definite in his
answers but I am satisfied both from his demeanour and the content of his
evidence that he could not be relied upon to tell the truth
when it was
contrary to his interests to do so. I think that certain of his actions at
the time were devious and that his evidence
on certain vital issues was
unreliable and self-serving. Fimeri was honest but vague.
5. The twelfth defendant is a radiographer
by profession. Since coming from
Singapore in 1969 he has had a considerable amount of business experience. He
has been engaged
in two business enterprises in which he has secured
investments in those enterprises from other people. I formed the impression
that he possesses a shrewd business mind and was well aware of the business
implications of his actions.
6. In the early part of
1988 the twelfth defendant conceived the idea of
securing investments from professional people with whom he was acquainted as a
result
of his professional activities, and of purchasing a shopping centre.
He obtained investments from the twelve persons who are the
first to eleventh
defendants named in the summons. The first defendant is his daughter and is a
radiographer. The second defendant
is a dentist. The male eleventh defendant
is a librarian. Apart from those persons, and the twelfth defendant himself,
all defendants
are medical practitioners. In May 1988, the twelfth defendant
became interested in the Cremorne Plaza Shopping Centre as a suitable
project
for the trust. He negotiated for the purchase of the shopping centre. He
instructed Fimeri's firm of financial consultants
to obtain finance on the
best available terms. Fimeri entered into negotiations with the plaintiff.
At some stage of these negotiations,
the twelfth defendant convened a meeting
of the investors at the Brahma Lodge Hotel. His evidence was that that
meeting took place
in the late afternoon of the 2nd June which was a Thursday.
There are indications in the evidence of other defendants that the meeting
occurred on a weekend. I am inclined to think on the probabilities that the
meeting occurred on the weekend of the 21st/22nd May
or the weekend of
28th/29th May. The meeting was attended by a number, but not all, of the
defendants. The twelfth defendant explained
that the project was the purchase
of the Cremorne Plaza Shopping Centre and that it would be financed by a bank.
He may have mentioned
the name of the plaintiff. He made some mention of the
need of guarantees. At that stage the twelfth defendant did not have the
plaintiff's letter of offer but he must have been aware of the course of
discussions between Fimeri and the bank officers as to the
need for guarantees
in view of the high proportion of the purchase price which was to be borrowed.
I think that there must have been
demonstrated a general disinclination on the
part of the unit holders to risk more than the amount of their respective
investments.
I think that as a result of the discussion some of the unit
holders accepted that it would be necessary to give guarantees to operate
until the fund reached an acceptable level, but insisted that their liability
cease when the fund reached $1,000,000. A number of
participants, however,
remained with the impression that each individual would be required to risk
only the amount which he subscribed
to the unit trust. On 27th May 1988 the
contract for the purchase of the Cremorne Plaza Shopping Centre was signed,
the twelfth
defendant signing for the purchaser company. The contract was
expressed to be subject to the condition that the plaintiff would
agree on or
before the 1st June to grant a loan of not less than $2,800,000.
7. The initial negotiations with the plaintiff were
conducted by Mr Fimeri.
I think that in the witness box he was genuinely endeavouring to tell the
Court what occurred. He appeared
to have only the vaguest memory of the
matter. I accept his evidence that originally the plaintiff had wanted a
standard joint and several guarantee from each
of the unit holders, of the
amount of the loan. Mr Pandya, the twelfth defendant, informed him that the
unit holders would not agree
to give such a guarantee, that their guarantee
would "need to be limited to their investment or contribution to the trust."
8. He
put that to Mr Pinyon but received no response until receipt of the
letter of offer to which I shall now refer.
9. On 1st June,
the plaintiff's letter of offer, signed by Pinyon, was
transmitted to Pandya and Fimeri. It conveyed approval of the requested loan
in principle subject to the conditions in the letter. One such condition was
expressed as follows: "Guarantor(s): Dr Bachu B Pandya
jointly and severally
with eleven unit holders in the trust to the extent of their separate
contributions to the trust."
10. Pandya
was not satisfied with this offer in a number of respects and he
sought to renegotiate it. As a result, the repayment instalments
were
adjusted to match the anticipated rentals. Discussions took place between
Pinyon and Pandya as to the terms of the proposed
guarantees. I accept
Pinyon's evidence that a compromise was arrived at in the terms which he
described in his evidence and I reject
Pandya's evidence to the contrary.
Pinyon described the outcome of the discussions in a passage in his evidence
which I now quote:
"Q. What was the outcome which you recollect.
A. The outcome initially, when there were $570,000 invested in
the trust
were that those guarantees have a limitation on them
proportionate to the value of the investments in those trusts as
a ratio
to an unlimited liability.
Q. You say that, in telling the court that you said
'initially'. Did that subsequently change.
A. That changed by agreement wherein once one million dollars
in investments was obtained by the trust, and those presumably
additional unit holders in the trust were joined in as
guarantors to the bank, then the limitation continued to be
proportionate
relevant to the investment made in the trust, but
it had an overall limit on it then of $1 million."
11. It is not possible
to be specific about the process by which this
compromise was arrived at because Pinyon is unable to remember the details. I
think,
however, that the broad process can be deduced from the circumstances
and the evidence. The letter of offer is not happily expressed
as to the
guarantee clause, but I am satisfied that it was not intended to be an
acceptance of Fimeri's proposal. I am satisfied
that the intention was to
require a guarantee from each of the unit holders of that proportion of the
whole loan which the individual
guarantor's investment in the unit trust bore
to the total investments in the trust. Pandya realised that as a result of
his understanding
of the use of the expression "jointly and severally" and, no
doubt, his discussions with Pinyon. The offer on that basis did not
meet
Pandya's wishes and it involved a liability which exceeded that which the unit
holders were willing to undertake. I am satisfied
that in the discussions
which followed the receipt of the letter, Pandya put to Pinyon the
counterproposal, based upon his discussions
with the unit holders, that the
guarantors would be each liable only for an amount equal to the amount of
their respective investments
in the trust and that upon the investments in the
trust reaching the figure of $1,000,000 the guarantees would cease. I do not
accept
Pandya's evidence that Pinyon viewed that counterproposal favourably.
I have no doubt that Pinyon considered that as the plaintiff
was lending more
than 80 per cent of the purchase price of the property a continuing guarantee
was necessary. He considered, however,
that when the trust had acquired
sufficient financial strength, guarantees limited to the amount of $1,000,000
would be sufficient.
I think that the compromise emerged in that way. Pandya
wanted the project to proceed and therefore needed the finance. He was
confident,
as he said in his evidence, that the figure of $1,000,000 would
easily be achieved. There was therefore, from his point of view,
no risk in
exposing himself and the unit holders to a greater liability pending the
achievement of the figure of $1,000,000. He was
obliged to accept that the
plaintiff would not dispense with guarantees upon achievement of the figure of
$1,000,000. Pinyon seems
to have thought that the arrangement that upon the
achievement of the figure of $1,000,000 the guarantors would be liable only
for
an amount equal to their respective contributions to the trust, implied a
limit of $1,000,000 on the total liabilities under the
guarantees. He does
not seem to have applied his mind to the situation which would arise if
contributions exceeded $1,000,000.
Even in the witness box, he seemed to
think that the guarantee in its final form contained such a limit.
12. The compromise to which
I have referred did not take the form of a
binding agreement. Pinyon no doubt wanted to see a draft prepared by the
plaintiff's
solicitors. Pandya had no authority to bind the unit holders to
the compromise arrangement. The arrangement was that a draft would
be
prepared by the plaintiff's solicitors for consideration by the parties.
13. On 3rd June Pinyon wrote a letter of instructions
to Mollison Litchfield,
the plaintiff's solicitors, for the preparation of a draft guarantee. I
admitted this letter into evidence,
over objection, on a limited basis. There
is a claim for rectification of the Deed of Guarantee and Indemnity by all
defendants
on the ground that the Deed prepared by the solicitors does not
reflect the true agreement between the parties. It would be relevant
on that
issue to ascertain whether a mistake was made by the solicitors and the nature
and circumstances of that mistake. I admitted
the letter for that limited
purpose. It is not evidence in favour of the plaintiff as to the
understanding reached with Pandya and
I do not use it for that purpose.
Indeed I think as the case developed, it cannot be put to any admissible use.
The draft guarantee
was prepared by Mr D Bache of Mollison Litchfield and was
collected by Pandya, or on his behalf, on that afternoon. Clause 30 of
the
draft is as follows:
"30. Notwithstanding any provisions herein to the contrary the
liability of each separate Guarantor
to repayment of the Secured
Monies shall be limited to only repayment of that amount of the
Secured Monies that bears to
the whole of the Secured Monies the
same proportion as the amount paid by each separate Guarantor
for such Guarantor's unit
holdings in the said Lakshmi-Nivas
Unit Trust bears to the amount paid by all the Guarantors for
their unit holdings in the
said Lakshmi-Nivas Unit Trust
PROVIDED HOWEVER that upon:-
(a) the said Lakshmi-Nivas Unit Trust having received funds
from
unit holders in excess or equal to one million dollars
($1,000,000.00), and
(d)(sic) all unit holders having entered
into a Deed or Deeds of
Guarantee in favour of the Bank upon the same terms and
conditions as are contained in this Deed;
THEN the liability of
each separate Guarantor to repayment of the Securied (sic)
Monies shall be limited to an amount equal
to the amount paid by
such Guarantor for such Guarantor's unit holding in the said
Lakshmi-Nivas Unit Trust AND it is agreed
for the purposes of
this Clause 30 that the expressions 'the Guarantor' and 'the
Guarantors' shall include all the Guarantors
that are party to
this Deed and also all other guarantors who enter into a Deed or
Deeds of Guarantee as referred to in paragraph
(b) of this
Clause 30."
14. There is a covering letter from Mollison Litchfield to Pandya in the
following terms:
"Dear
Mr. Pandya, re: The Lakshmi-Nivals Pty. Ltd. Unit Trust
We refer to our recent telephone conversations. Please find
enclosed a draft Guarantee, clause 30 of which
has been included
so as to limit the liability of the guarantors as discussed
between yourself and Challenge Bank Limited.
We note that
Challenge Bank Limited has not had a chance as yet to approve
the clause 30 and may require some amendment
prior to the final
documents being prepared. We believe however that in its
present form it does contain the essential elements
of the
agreed limitation. Should you have any queries please do not
hesitate to contact the writer."
15. Clause 30 of the
draft made explicit that the trigger for the reduction
of the liability under the guarantee is to be not only the achievement of
contributions equal to or in excess of $1,000,000 but also the entry by all
new unit holders into guarantees. I do not know whether
the latter point was
discussed in terms between Pinyon and Pandya but it was certainly implicit in
the arrangement. It would have
been quite clear to Pandya that Pinyon's
insistence was on having guarantees to the amount of $1,000,000.
16. I do not accept Pandya's
evidence that he did not understand Clause 30.
He has an astute business mind and the terms of the guarantee were important
to him.
Moreover the terms as drafted were in substance what he had agreed
with Pinyon. I think that his subsequent behaviour in relation
to the Deed
confirms that he well understood its terms and that the liability imposed
exceeded that which was expected by the unit
holders.
17. Pandya's evidence is that he forwarded the pages of the draft containing
Clause 30 to all the unit holders. Some of
the unit holders deny that they
received any part of the draft. The third defendant said that the only
document which he received
arrived after he had signed the guarantee. The
fourth, ninth and eleventh defendants were given a complete copy of the draft.
I
do not accept Pandya's evidence on this point, but I think that he supplied
the draft or the part containing Clause 30 to certain
of the unit holders.
18. Copies of the draft supplied to the ninth and eleventh defendants were
marked by highlighting pencil.
The fourth defendant did not produce his copy
of the draft but he gave evidence that it was marked in a similar way. The
yellow
pencil highlighting marked item 3 of the schedule which refers to the
limit on liability provided in Clause 30. It marked Clause
30 as far as the
end of paragraph (a) but did not mark paragraph (b). The words following
"THEN the liability" down to and including
"for the purposes of this Clause
30" were highlighted. Attention was drawn to the word "limited" by circling it
in ink in the two
places in which it appears in Clause 30.
19. Pandya did not obtain legal advice as to the effect of the Deed. Mr
Bridges of Mollison
Litchfield acted only in relation to the formation of the
trust and the purchase of the property. He expressly indicated to Pandya
that
he was unable to act in relation to the guarantees as his firm was acting for
the plaintiff. That resolved a problem which
had occupied Pinyon's mind at
one stage. He realised that there was a potential conflict of interest
arising out of Mollison Litchfield's
position. His evidence was that the
conflict of interest issue was resolved. He claimed that he believed that
Pandya was receiving
legal advice in relation to the guarantees from Bridges.
That could not be so. I am satisfied that Pinyon was aware that the conflict
of interest issue was resolved by Bridges declining to advise Pandya in
relation to the guarantees. I am sure that he realised that
at the time,
although he may have forgotten it at the time he gave evidence. I am satisfied
that Pandya did not feel the need of
legal advice as he well understood the
effect of Clause 30 and that it was in accord with his arrangement with
Pinyon.
20. On 21st
June Pandya notified the bank that the guarantors were ready to
sign the guarantee. Mr Bache then prepared the Deed in its final form. He
made two sets of alterations to the
draft. The first was the inclusion of a
new Clause 10.2 in the following terms: "If at any time any one or more of
the provisions
of this Guarantee is or becomes invalid, illegal or
unenforceable in any respect under any law, the validity, legality and
enforceability
of the remaining provisions shall not in any way be affected or
impaired."
21. The second was a redraft of Clause 30 to provide
in each reference to
amounts paid by a guarantor to the unit trust that the payments would include
any payments made by a trust of
which the guarantor was a beneficiary.
Pandya's attention would not have been drawn to these changes. The first was
in the nature
of a legal tidying up of the agreement. The second was clearly
intended to cover the possibility that unit holders might make contributions
to a private or family trust and was also therefore merely in the nature of a
legal tidying up of the agreement. I do not think
that either set of
alterations called for any express mention to the guarantors. The covering
letter to Pandya with the draft mentioned
the possibility of the bank
requiring alterations and there was an obvious need for a comparison of the
final form of the guarantee
with the draft.
22. Pandya's arrangement with Pinyon was that he would obtain the signatures
of the guarantors. The plaintiff left
it entirely to Pandya to secure the
signatures of the guarantors. With one exception, there was no contact
between the officers
of the bank and the guarantors other than Pandya. The
one exception was Pandya's daughter who is the first defendant. She was
abroad
when the others signed and on her return went to the office of the
bank, in accordance with her father's instructions, and signed
the guarantee
in the presence of Noack. There was no conversation between them as to the
meaning or effect of the guarantee or even
the nature of the document which
she was signing. Noack made no attempt to explain its contents to her, but
merely witnessed her
signature.
23. When the guarantee documents were given to Pandya to obtain the signature
of the other guarantors, there was a discussion
between him and Pinyon as to
forms of certificates which were attached in accordance with the standard
practice of the bank. These
were certificates of independent advice by a
solicitor or accountant. There was discussion as to the difficulty of
obtaining signatures
from all guarantors by the settlement date the 30th June
if they were to obtain independent advice. Pinyon and Pandya decided that
it
was expedient to remove the certificates and they were removed. Pandya
thereupon took the guarantees to each of the unit holders
separately. None of
them read the guarantee in its final form and merely placed their respective
signatures on the page which Pandya
indicated to them. Pandya returned the
signed copies to the bank. The guarantee was dated the 29th June 1988 and the
settlement
for the property took place on that day.
24. The total of amounts contributed to the unit trust by the defendants as
at 29th June
1988 was $570,000, including a sum of $20,000 which had been
pledged but the cash for which was paid a little later. The figure
of
$1,000,000 in contributions was apparently achieved before very long because
the balance sheet as at the 31st January 1989 shows
total units issued as
$1,450,000. The units were for $1 each. Presumably the new unit holders did
not execute guarantees because
there was no plea that the proviso to Clause 30
had become operative, and the trial was conducted upon the basis that it had
not
become operative. Default was made by Lakshmi-Nivas Pty Ltd in payments
of principal and interest under the loan agreement with
the plaintiff. On 27th
August 1991 a notice of demand was given to the principal debtor for payment
of the sum of $3,315,422.29 together
with accruing interest. On the same day
notice of demand was given to the defendants under the guarantee. This action
was brought to enforce payment.
25.
It is convenient to deal first with the defences raised by the twelfth
defendant. He raised defences of breach of duty, unconscionable
conduct,
misrepresentation and breaches of the Trade Practices Act 1974 and the
Misrepresentation Act 1971. The essence of his defence was that there was an
agreement between him and Pinyon in terms of
the letter of offer but subject
to the proviso that upon the total number of issued units in the trust
reaching $1,000,000 the guarantors
would be released from their obligations
under the guarantee. He claimed that Pinyon had assured him that the
guarantee would embody
terms limiting the guarantee as to amount and duration
as agreed. I have already indicated that I reject these claims. I am
satisfied
that no concluded agreement was arrived at between Pinyon and Pandya
before the signing of the guarantee and that the understanding
which was
arrived at as the basis upon which the documents would be drafted, was
substantially in the terms deposed to by Pinyon
and subsequently embodied in
the Deed. There was no misrepresentation by Pinyon. I am satisfied that
Pandya read and understood
the Deed. I reject his defences and hold that he
is bound by the document which he signed.
26. I now turn to the defences of the
first to eleventh defendants. I accept
the evidence of the defendants, other than the twelfth defendant, who gave
evidence as to
what was told them by Pandya and as to their understanding of
the transaction. They were professional people occupied with their
professional affairs and possessing only the haziest idea of the implications
of the transaction into which they were entering.
Some of them were unaware
that they were signing a guarantee and thought that their only risk was the
amount they had contributed
to the trust. Others knew that it was a guarantee
but in some confused way thought that it did not expose them to any greater
risk
than the amount which they had contributed. Others realised that the
guarantee must expose them to some additional liability but
believed that that
was limited to an additional amount equal to the amount of their contribution
to the trust and that their liability
would cease upon contributions to the
trust equalling or exceeding $1,000,000. They either did not read the Deed,
or if they did
read it, did not understand its meaning, being totally
influenced by what Pandya told them as to the effect of the transaction.
They
were educated people but all those who gave evidence impressed me as being
quite naive in business matters.
27. When Pandya
found himself in the position of having to agree, if the
project was to proceed, to a compromise which exposed the unit holders to
greater liability than they envisaged, he faced a considerable problem. It
was almost certain that the unit holders would not agree
to assume additional
liability if the position were frankly explained to them. Pandya wanted his
project to proceed. I believe
that he deliberately set about the concealment
of the true extent of the guarantors' liability from his unit holders. His
method
of highlighting certain portions of the draft Deed was calculated to
impress on those unit holders to whom it was supplied, the limited
nature of
the guarantee and to divert their attention from the additional liability
involved. He even provided the ninth defendant
with a copy of the unit trust
Deed in which he highlighted the clause which provided that the unit holders
were under no personal
liability. This was done at the time of providing her
with the draft guarantee and was calculated to mislead her into thinking that
what she was signing did not involve any additional liability.
28. Pandya gave evidence that he told each of the unit holders that
their
liability was limited to an amount equal to their contributions and that it
would cease upon the trust fund reaching $1,000,000.
I think that, subject to
some qualification, that evidence is accurate. The qualification, in my
opinion, is that where Pandya realised
that the unit holder was assuming,
based upon what he had previously been told by Pandya, that there was no
additional liability
and that the only amount at risk was the amount
contributed to the fund, he did not go into any explanation of the extent of
the guarantee and did not disabuse those unit holders
of their mistaken
impression. Where, however, a unit holder realised that a guarantee involved
some additional liability, Pandya
gave the explanations which he stated in his
evidence. It follows that the two defendants who did not give evidence were
either
under the mistaken belief that they were not at risk for more than the
amount which they had contributed, or, if they realised that
the guarantee
involved some additional liability, were told, and no doubt believed, that
their liability was limited to an additional
amount equal only to their
contribution and that it would cease upon the fund attaining $1,000,000.
29. I find that all the defendants
signed the Deed of Guarantee and Indemnity
under a mistaken belief as to its terms. Some believed that it did not create
any liability
additional to the risk of losing the amount of their
contributions to the unit trust. Others believed that it did create an
additional
liability for an amount equal to their respective contributions to
the trust but they believed that that liability would cease upon
the total of
unit trust contributions reaching $1,000,000. This unilateral mistake on the
part of the first to eleventh defendants
was not known to the plaintiff. The
plaintiff's conduct did not, in my opinion, cause or contribute to it. It was
caused by the
false representations of the twelfth defendant of which the
plaintiff's officers were unaware. In those circumstances the existence
of
the unilateral mistake does not of itself operate to relieve the deceived
defendants of liability under the guarantee. The question
in the case is
whether the plaintiff is in some way affected by Pandya's actions so as to be
precluded in equity from enforcing the
guarantee.
30. The relevant principle is stated by Neill LJ in Shephard v Midland Bank
PLC [1960] VicRp 42; (1987) 2 FLR 175 at 181 as follows: "The court will not enforce a
transaction at the suit of a creditor if it can be shown that the creditor
entrusted
the task of obtaining the alleged debtor's signature to the relevant
document to someone who was, to the knowledge of the creditor,
in a position
to influence the debtor and who procured the signature of the debtor by means
of undue influence or by means of fraudulent
misrepresentation."
31. That was not a guarantee case but a case of a mandate for a joint
account, but the principle was applied
to a guarantee in Barclays Bank PLC v
Kennedy (1989) 1 FLR 356, and has been so applied in other cases.
32. The principle was developed in cases in which the creditor had left a
husband to procure
his wife's signature to a security or guarantee; Cairncross
v Paterson [1894] VicLawRp 56; (1894) 20 VLR 258; Turnbull and Co v Duval 1902 AC 429; Chaplin and
Co Limited v Brammall 1908 1 KB 233; The Bank of Victoria v Mueller [1925] VicLawRp 74; 1925 VLR
642; Kings North Trust Ltd v Bell 1986 1 WLR 119. The principle with respect
to that situation was expressed in Yerkey and Anor v Jones [1939] HCA 3; (1940) 63 CLR 649
by Dixon J at p.683. Although Shephard v Midland Bank PLC supra was a husband
and wife case, the formulation of Neill LJ is not confined
to the husband and
wife situation but extends to any situation in which the person entrusted with
the task of obtaining the guarantor's
signature is, to the knowledge of the
creditor, in a position to influence the guarantor. In expressing the
principle in terms which
apply outside the husband and wife situation, Neill
LJ was applying Avon Finance Co Ltd v Bridger 1985 2 All ER 281 and a passage
in the judgment of Dillon LJ in Kings North Ltd v Bell supra at p.124.
33. The essential element which affects the
creditor with the wrongdoing of
another, is the leaving to that other the task of procuring the guarantor's
signature. In Turnbull
and Co v Duval supra at p.435, Lord Lindley expressed
the ratio of the case as follows: "They left everything to Duval, and must
abide the consequences."
34. That test was applied in Chaplin and Co v Brammall supra per Vaughan
Williams LJ at p.238 and in Avon
Finance Co Ltd v Bridger 1985 2 All ER 281
esp per Brandon LJ at p.288. In Kings North Ltd v Bell supra at p.123, Dillon
LJ, speaking of a wife's execution of a second mortgage
of the matrimonial
home to secure a loan to the husband for business purposes, as a result of the
undue influence of the husband,
said that if the creditor entrusts to the
husband himself the task of obtaining the execution of the relevant document
by the wife,
then the creditor can be in no better position than the husband
himself, and the creditor cannot enforce the guarantee or the security
against
the wife if it is established that the execution of the document by the wife
was procured by undue influence by the husband
and the wife had no independent
advice. The same principle applies to a guarantor other than a wife, who
comes within the scope
of the protection of the rule and who has been induced
to sign not by undue influence but by misrepresentation. The principle was
emphasised by Dillon LJ at p.125 in the following passage:
"The moral is that where a creditor (or intending lender)
desires
the protection of a guarantee or charge on property from
a third party other than the debtor and the circumstances are
such
that the debtor could be expected to have influence over
that third party, the creditor ought for his own protection to
insist
that the third party has independent advice. That is the
obvious means of avoiding the risk that the creditor will be
held
to have left it to the debtor to procure the execution of
the relevant guarantee or security document by the third party."
35.
In Barclays Bank PLC v Kennedy supra, it was pointed out that, although
the person entrusted by the creditor with the task of procuring
the
guarantor's signature, may be referred to, in a sense, as the creditor's
agent, the test for determining whether the creditor
is affected by his
actions for the purpose of the rule under discussion, differs from the test
for determining the existence of agency
in the true sense. The latter test is
whether there has been a conferral of actual or ostensible authority. Purchas
LJ at p.363
distinguished the test of "agency" for present purposes from the
test of true agency as follows: "Again, the concentration on actual
or
ostensible authority being 'given to the husband to act on behalf of the Bank'
may not be a reliable way of applying the test
now well established by
authority, albeit since this judgment was delivered, that the real question is
whether the Bank were content
to leave it to the husband to obtain the wife's
signature upon the charge."
36. A more recent pronouncement concerning the notion
of agency for the
purpose of this rule, has been made by the English Court of Appeal in Bank of
Credit and Commerce v Aboody 1990 1 QB 923 at p.972.
"Some confusion may have been caused by the use of the word
'agent.' We are not concerned here with the question
as to
whether or not the bank is vicariously responsible for the acts
of Mr. Aboody. The issue is whether the bank can
be in any
better position than Mr. Aboody if, when Mr. Aboody was acting
on its behalf, Mr Aboody exerted (or, if this
had been a class 2
case, was presumed to have exerted) undue influence. As we have
made clear in answer to issue (4), the
undue influence is
required to have brought about the transaction, and it would be
inconsistent with the equitable nature
of the relief for the
bank not to be affected by the undue influence exerted by its
agent when the transaction would not
exist but for the wrongful
acts of its agent. As a matter of principle, the bank in such
circumstances should not be entitled
to rely on the transaction
and this is the view which has been taken by a series of
authorities going back to the beginning
of this century. The
clearest statement of the principle, which we would adopt, is to
be found in the judgment of Dillon
L.J. in Kings North Trust
Ltd. v. Bell (1986) 1 WLR 119, 123: 'if a creditor, or
potential creditor, of a husband desires to obtain, by way of
security for the husband's indebtedness,
a guarantee from his
wife or a charge on property of his wife and if the creditor
entrusts to the husband himself the task
of obtaining the
execution of the relevant document by the wife, then the
creditor can be in no better position than the
husband himself,
and the creditor cannot enforce the guarantee or the security
against the wife if it is established that
the execution of the
document by the wife was procured by undue influence by the
husband and the wife had no independent
advice.'
As Dillon L.J. made clear, this approach is in accord with the
approach of the general law of principal and agent
in relation
to fraudulent misrepresentations made by an agent in carrying
out the specific instructions of his principal.
Examples of
liability on the basis of agency in similar circumstances are to
be found in Turnbull and Co. v. Duval (1902) AC 429 and
Chaplin and Co. Ltd. v. Brammall (1908) 1 KB 233. Whether
in any particular case the person who exerts the undue influence
is the agent (in this sense) of the principal creditor
must be a
question of fact. For an example of a recent case where agency
was not established, see Coldunell Ltd. v. Gallon
(1986) QB
1184. Miss Williamson, for the bank, submitted that agency only
was insufficient to found liability; there must also be notice