The Requirement of Independent Legal Advice - Essay Example

? To what extent do you think the "independent legal advice" requirement has proved to be an obstacle to banks taking security who may be ified as vulnerable? Introduction Vulnerable securities in banking law refer to guarantors or sureties who may have been or may be at risk of exploitation in.1 The risk of exploitation may arise in circumstances where the guarantor or surety can be said to have made a mistake, or acted on a misrepresentation, or was under duress or undue influence or was subject to “unconscionable dealing”. 2 In this regard, vulnerability refers to a party who is especially disadvantaged on account of “illness, ignorance, inexperience, impaired faculties, financial need or other circumstances” that can impact the individual’s “ability to conserve their own interests.”3 In those circumstances the bank is required to advise the surety to seek independent legal advice.4 In practice this simply means that when banks are dealing with non-commercial sureties, they ought to advise the surety to seek independent legal advice or take the risk that the surety will not be bound by the initial guarantee. However, this need not be an obstacle to banks taking security from those who may be classified as vulnerable as the court has provided guidelines for the steps banks can take to ensure the surety is bound by the guarantee. Vulnerable Securities and the Bank’s Duty: The Requirement of Independent Legal Advice The bank’s duty to advise a vulnerable surety to seek independent legal advice is borne out of necessity. The bank as lender is usually in a conflict of interest and cannot reasonably be “objective and assiduous” in explaining “where it hopes to benefit from the proposed security arrangement”.5 In transactions in which there is a relationship of trust in which the weaker party relies on the knowledge and expertise of the stronger party, it is presumed that there was undue influence and the burden then shifts to the stronger party to prove that there was no undue influence.6 The presumption of undue influence is therefore arguably problematic for banks and could create an obstacle to banks taking vulnerable securities. The burden can be discharged however and need not be an obstacle to banks taking on vulnerable securities. For example in Barclays Bank Plc v O’Brien the House of Lords ruled that when the burden shifts to the stronger party to prove that there was no undue influence, the burden can be discharged by proof that the weaker party voluntarily entered into the agreement or the transaction and this can be proven by showing that the weaker party had the benefit of independent legal advice.7 It has been subsequently ruled that where undue influence is presumed, the bank’s security will stand on whether or not the surety had the benefit of independent legal advice.8 It was not altogether clear whether banks had a duty to ensure that vulnerable sureties sought independent legal advice. The courts had merely stated that the burden of proof could be discharged by showing that the vulnerable surety had voluntarily entered into the transaction and this could be shown by proof that the vulnerable surety had the benefit of independent legal advice. The matter was more clearly stated by the House of Lords in Royal Bank of Scotland v Etridge (no.2). In Royal Bank of Scotland v Etridge, the House of Lords ruled that the bank is required to take all reasonable steps to ensure that the vulnerable surety was appropriately apprised of the transaction and what this means is that the bank would require that the vulnerable surety had the benefit of independent legal advice.9 Further guidance was provided by the House of Lords in National Westminster Bank v Amin. In the case, the bank applied to the court for the defendant’s defence of undue influence on the part of her son who was a business man. In this case, the bank had previously required that their solicitors clarify and explain the details and consequences of the transaction to which the defendant would provide security to the defendant. The defendant did not speak English.10 Nevertheless, the bank had been informed that the solicitors had explained the transaction to the defendant. The defendant argued that the solicitors explaining the transaction to her were in fact the bank’s agents and the House of Lords agreed that the matter was one that should be tried. In essence the House of Lords ruled that if the solicitors were in fact the bank’s solicitors their role in explaining the transaction to the defendant may not have met the required standard of independent legal advice as required by the ruling in Royal Bank of Scotland v Etridge.11 The House of Lords went on to rule however, that the requirement of independent legal advice in the present case was stricter than the requirement rules established by Royal Bank of Scotland v Etridge. In National Westminster Bank v Amin, the bank was aware that the defendant did not speak English and was equally aware that their solicitors did not speak the defendant’s language. In other words, where the bank was aware of special circumstances in which the surety was especially vulnerable to exploitation the requirement of independent legal advice was much stricter.12 In other words, it is necessarily a failure on the part of banks to meet the requirement of independent legal advice where the bank’s own solicitor provides the advice to the vulnerable security. Where there are special circumstances however, such as the language barrier in National Westminster v Amin, the bank’s solicitor was not an appropriate and independent source of legal advice. The duty is not a particularly onerous one, considering that the bank will rely on the surety who is not the recipient of the proceeds of the loan to discharge the debt in the even the principle debtor defaults. It would therefore be in the bank’s best interest to ensure that vulnerable sureties do not have grounds to renege upon the duty to repay the loan at a subsequent date. In UCB Corporate Services V Williams the Court of Appeal arguably makes it more difficult for the bank to discharge the requirement of independent legal advice. In this case the defendant (a vulnerable surety) pledged the matrimonial home as security for a loan to her husband’s company. At the trial of first instance it was held that although the defendant had received independent legal advice, the lender was unaware of this fact and thus could not have discharged the requirement of independent legal advice especially since they had not advised her to receive legal advice at all.13 On appeal, the Court of Appeal ruled that it was nothing more than a coincidence that the defendant actually received independent legal advice and the advice received was of a poor quality. Nonetheless, even if the advice had been of good quality, the lender could not claim that its duty of requiring the vulnerable surety to receive independent legal advice was discharged since they played no part in the surety’s decision to obtain legal advice. The fact is the bank did not know that surety had sought legal advice and had not made any inquires of the same and failed to advise the defendant to seek legal advice.14 Even where the bank is aware that the vulnerable surety has sought legal advice, it would not be sufficient to discharge the bank’s duty to require that vulnerable surety to seek independent legal advice. The requirement of independent legal advice means that the bank must make enquiries and must ascertain that the vulnerable surety seeks and receives independent legal advice.15 In other words, the banks must play an active role in the vulnerable surety’s acquisition of legal advice. The bank cannot simply be satisfied that the vulnerable surety has sought independent legal advice. It would therefore appear that a bank need only make the suggestion and this would protect the bank against a claim of undue influence whether the vulnerable surety seeks legal advice or not. The ruling by the Court of Appeal in UCB Corporate Services V Williams might suggest an onerous burden on banks with respect to the requirement of independent legal advice in the case of vulnerable securities. However the ruling by the Court of Appeal in Bank of Scotland v Hill and Tudor [2002] EWCA Civ 1081 offers further clarification suggesting that the requirement of independent legal advice is not as onerous as it might appear to be. In Bank of Scotland v Hill and Tudor Tudor agreed to a second mortgage on the matrimonial home to fund the business operated by husband. When the plaintiff bank applied for judgment Tudor alleged undue influence. Tudor and her husband had received independent legal advice which had been noted on a form returned to the bank by the solicitor representing Tudor and her husband. The issue for the court was whether or not the form and its notation had discharged the bank’s burden of proof with respect to the issue of undue influence.16 Tudor argued that the form and the solicitor’s notation could not provide the requisite proof there was no undue influence since the form did not state the nature of the legal advice provided to Tudor and her husband. In other words, the notation and the form were too general to discharge the burden of proof that there was no undue influence. The Court of Appeal did not agree and ruled that solicitors were familiar with the form and knew what was meant when they noted that legal advice was provided. Moreover, the bank was only required to advise Tudor to seek legal advice. The bank was not under an additional duty to follow-up on the advice provided, nor to determine whether or not the solicitors had performed a satisfactory job.17 The ruling in Bank of Scotland v Hill and Tudor adds an additional layer of clarity to the requirement of independent legal advice with respect to vulnerable securities. This case makes it clear that in the ordinary case where there are not special circumstances such as a vulnerable surety with a language impediment or a case in which the bank fails to advise the vulnerable surety to seek independent advice or fails to make inquiries, the duty to require independent legal advice will be discharged when the advice is given or enquiries are made to that effect. The only real requirement is that the bank ensures that the vulnerable surety receives legal advice which separates it from the advice that the surety would ordinarily receive from the bank itself. In other words, even if the vulnerable surety receives advice from the bank’s solicitors it should amount to the requisite independent legal advice as the solicitor is a party independent of the bank. The requirement of independent legal advice should not be an obstacle to banks taking vulnerable securities. At first glance it appears to be an onerous duty given that vulnerable sureties have an inherent right to claim undue influence and any number of special circumstances that would classify them as vulnerable and therefore entitle them to special protection. This is further buttressed by the fact that once undue influence is raised and proven to the satisfaction of the court, there is an automatic right to rescind the initial guarantee or security for a loan.18 However, the cases discussed in this paper indicate that it is not difficult for banks to ensure that vulnerable securities are enforced provided the follow the steps set forth by the courts. In general, where there is a mere presumption of undue influence, the bank will discharge its duty with respect to independent legal advice by merely advising the vulnerable surety to seek legal advice. Only in circumstances where there is evidence that the vulnerable surety is particularly vulnerable to exploitation is the requirement stricter. In other words, in a case in which the vulnerable surety does not speak English, or has some other impediment which would require special assistance would mere advice not suffice. Similarly, where the bank makes no inquiries and does not know whether or not the vulnerable surety sought legal advice, it will not be enough to claim that the duty was discharged when the bank subsequently discovers that the vulnerable surety did in fact receive legal advice. This is because the bank has an active duty to ensure that vulnerable sureties have the benefit of independent legal advice. Conclusion The courts are putting more responsibility on banks to ensure that sureties who do not receive the benefit of a loan seek independent legal advice. In the final analysis, the courts want to be sure that vulnerable sureties were voluntarily exercising their own free will in agreeing to repay a loan should the need arise. Banks should also want to be sure that vulnerable sureties are exercising free and unimpeded judgement from the onset. Therefore the requirement of independent legal advice should not be an obstacle to banks taking on vulnerable securities. It should merely be perceived as a necessary step toward ensuring that vulnerable securities may not be rescinded at a later date. The requirement of independent legal advice is commercial sound and reasonable in that it seeks to safeguard the interests of all parties involved, including the bank. The principle debtor is ensured that he or she will obtain the benefit of a loan on the strength of a promise that the surety will provide security for the loan or discharge the debt in the event he or she is unable to. The bank obtains the necessary security for the loan and the surety is committed to loan. Each of these interests are equally important and it is in each of the party’s best interest to ensure that the vulnerable surety is fully aware of his or her obligations and the consequences of the transaction. Neither the bank nor the principle debtor will benefit from a transaction in which the surety is unaware of the consequences of the transaction is unable to fully understand or appreciate the consequences of the transaction. It makes sense that since the bank wants to ensure the integrity of its securities, that it would take the minimal step of requiring that vulnerable sureties seek independent legal advice. Bibliography Textbooks Capper, ‘Protection of the Vulnerable in Financial Transaction – What the Common Law Vitiating Factors Can do for You.” In, M. Kenny, J. Devenney and L. F. O’Mahony, (Eds.) Unconsciionability in European Private Financial Transactions, (Cambridge, UK: Cambridge University Press, 2010). Meier, S. ‘Plurality of Debtors,’ In L. Anatoniolli and F. Fiorentini, (Eds.) A Factual Assessment of the Draft Common Frame of Reference, (Munich: European Law Publishers, 2011). Trebilcock, M.J. and Elliot, S. ‘The Scope and Limits of Legal Paternalism: Altruism and Coercion in Family Financial Arrangements,’ In, P. Benson, (Ed.) The Theory of Contract Law: New Essays, (Cambridge, UK: Cambridge University Press, 2001). Journal Articles Wong, ‘Revisiting Barclays Bank v. O'Brian and Independent Legal Advice for Vulnerable Sureties,’ (2002) July, Journal of Business Law, 439-456. Cases Banco Exterior Internacional v Mann [1995] 1 All ER 936. Bank of Credit and Commerce International SA v Aboody (1988) [1992] 4 All ER 955. Barclays Bank Plc v O’Brien [1993] UKHL 6. CIBC Mortgages v Pitt [1994] 1 AC 200. National Westminster Bank v Amin [2002] UKHL 9. Royal Bank of Scotland v Etridge (no.2) [2001] 3 WLR 1021. UCB Corporate Services V Williams [2002] EWCA Civ 555. Read More