The of Employee of Karen's Bank - Case Study Example

 Abstract Jack, an employee of Karen’s for five years, entered into a contract with the Karen’s bank to allow his flat to be used as security against the company’s overdraft. The business’s fortunes did not improve. The business failed and the bank is seeking possession of Jack’s flat’s to reclaim the £500,000 due to them from Karen’s company. The purpose of this report is to study the case and advise Jack regarding as to the possibility of him avoiding the consequences of the contract he had with the bank. Having researched the facts of the case presented we find that, subject to certain reservations, there are areas and actions taken before and within the original arrangement, which could enable Jack to defeat the banks proposed action. Joint and Several Liability Is it possible for a person who offers his property, as securities to a bank against funds lent to a third party, escape the consequences of that contract should the repayments not be met? And under what circumstances it is possible that a joint and several liability clauses not be enforceable? These questions have been the subject of a number of court cases over the past few years and the judgment in some cases conclude that if certain conditions and actions were not taken prior to the signature of the contract, it is possible to successfully defend any breach. The task of this document is to ascertain which of these circumstances could be relevant to Jack in defending himself against a claim by the bank for repossession of his property so that they can reclaim some of the monies owed to them. The facts of the case are that Karen’s import-export business had been experiencing cash flow difficulties and financial problems for some time, at least fifteen months with no improvement. Her bank had refused to assist her with an increased overdraft facility had been informed by her bank that they would not extend her business’s overdraft unless extra security is provided. Karen explained the situation to her employee of five years, Jack, who had also become a friend of the family and suggested that he find another job. Under the impression that the problem was temporary, Jack suggested that she use his flat, an inheritance from his aunt, as security against further borrowings. The flat at that time was worth £250,000. After consideration Karen took Jack up on his offer and informed him that it would also secure his job and that it was only a temporary situation that would soon be corrected. They went to the bank. The bank advised Jack to seek independent advice and introduced him to a solicitor. The solicitor advised Jack advised Jack of the risk to his home should Karen’s company fail to meet the terms of the overdraft and that the agreement was to be executed under the terms of a Joint and Several Guarantee1, which would appear to also need to be signed by Karen, were such that Jack could be liable for all of the debts company default. After the conclusion of the meeting the solicitor rang the bank and informed them “Jack understood the deal.” A few days later the contract was signed. During the next twenty months the company’s worsened and they had not made any payments to the bank for seven months. Having been unable to contact Karen, the bank commenced proceedings against Jack seeking possession of his flat in an attempt to recover some of the moneys, now standing at £500,000, owed to them. There is much dispute worldwide surrounding the morality of Joint and Several Liability. In Paul Bargren’s (1994) report on the subject, Senator Pressler is reported as claiming "Today, the true wrongdoer often escapes all liability because the focus is on the deep pocket…” and several attempts to reform this element of the law. Normally, in a situation where a bank or other lender has issued proceedings for the repossession of a property, and all aspects of the contract are valid, the only actions a defendant can take to avoid the repossession of their property is either to pay the amount owed in full, or to complete form N11M2. If the debt is being claimed in full from only one party to the contract that party would have the right to pursue others, who entered into the joint and several liability contract with them, in an attempt to recover the debt or share thereof. However, in the case in question, there are issues surrounding the events leading up to the execution of the joint and several guarantee that cast doubt on the legality of the contract itself. Jack had been an employee in Karen’s business for five years. In that position he had no access to, or input into the financial affairs or management of the business. From the facts available, it is apparent that he would not have been involved with the management or direction of the business. Although he had voluntarily offered to assist Karen by offering her his property as security, he did so on the assumption, supported by Karen’s word, that the difficulties were only temporary. Karen, as managing Director of the business, was well aware that the financial difficulties had been worsening for some considerable time. Therefore, her statement to Jack that, “the company is facing just a temporary slump”, was a misrepresentation3 of the facts. From the facts before us, it would appear that the bank were also party to this misrepresentation. There is no record of any discussion between the bank and Jack as to the state of the company’s finances or its history, nor was there any comment about the existing level of debt. The bank’s silence on these matters could be construed to be misrepresentation. Rochez Piggot Semple / Consilio (12 March 2001). Silence. It is usually said that silence cannot constitute misrepresentation although the exception is the class of contracts, which are termed ‘uberrimae fidei4’. With contracts ‘uberrimae fidei’ there is a duty to disclose material facts in some types of contracts, in which one party is in a particularly strong position, and the other in a particularly weak one, to know the material facts. Furthermore the bank and/or Karen committed what could be construed to be a second act of misinterpretation. The original request from the bank was for security to cover “additional borrowings” yet it appears, from the fact that the bank are seeking recovery of £500,000, that the guarantee and charge enacted was for all of the company’s borrowings. Had Jack been made aware of that his response to allowing the charge might have been different? It would have been more just for the bank to executed a charge against Jack’s property limited to the amount of the additional borrowings extended to the business. The bank was also lax in respect of the documentation trail regarding Jack’s meeting with the solicitor. According to information provided, the bank manager proceeded with the execution of the guarantee and charge immediately following a telephone call from the solicitor, from whom he asked no confirmation in writing. We understand that the comment made by the solicitor was “It’s fine – Jack understands the deal”. There are two contentious areas here. 1) The content of the telephone call was not explicit. The records do not show that the solicitor specifically mentions the joint and several guarantee or that Jack understood the implications of this. The second, and more crucial situation is that it does not appear that there was any correspondence between the solicitor and the bank regarding this matter. This is not normal banking practice. “The lender will normally not be prepared to take security without a certificate that the surety had the benefit of legal advice at the time of signing and the lender would be unwise to do so”: Cooke v National Westminster Bank (The Times 27th July 1998). The other element that is pertinent to the facts of this case is the question of “undue influence”5. As previously mentioned, during the initial discussions between Karen and Jack he was informed that his Job was at risk if the company could not secure additional funding. Once he agreed to his flat being used as security for addition funding he was assured that his job would then be secure. There is no doubt that these comments and statements made by his employer, Karen, would have had some bearing on his decision making process. In legal terms it could be construed that pressure was being brought to bear to ensure that he made the decision that his employers wish him to make. We also studied the solicitor’s actions and involvement in this case and found areas of concern. One of the main objectives of a solicitor when advising on this form of contract and commitment is to satisfy themselves that their client is not being coerced into entering into the contract as a result of undue influence. "A solicitor who is instructed to advise a person who may be subject to the undue influence of another must bear in mind that is not sufficient that she understands the nature and effect of the transaction if she is so affected by the influence of the other that she cannot make an independent decision of her own. It is not sufficient to explain the documentation and ensure that she understands the nature of the transaction and wishes to carry it out: see Powell v Powell [1900] 1 Ch. 243, 247, approved in Wright v Carter (supra). His duty is to satisfy himself that his client is free from improper influence, and the first step must be to ascertain whether it is one into which she could sensibly be advised to enter if free from such influence. If he is not so satisfied it is his duty to advise her not to enter into it, and to refuse to act further for her in the implementation of the transaction if she persists. In this event, while the contents of his advice must remain confidential, he should inform the other parties (including the bank) that he has seen his client and given her certain advice, and that as a result he has declined to act for her any further. He must in any event advise her that she is under no obligation to enter into the transaction at all and, if she still wishes to do so, that she is not bound to accept the terms of any document which has been put before her: Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144." (J. Odgers 1 December 1998) Results As a result of our studies into the circumstances surrounding Jack’s case, based upon the information and explanations placed before us, together with the independent research we have carried, we have come to the conclusion that there is the distinct possibility that Jack could avoid the consequences of his agreement with the bank if he takes the appropriate action. His defence against the bank claim would be based upon two instances of misrepresentation outlined earlier. Namely that the bank manager did not acquaint Jack with the history of the company’s financial performance and, secondly that, apparently without consultation, changed the bank’s security requirements by offering Jack a Joint and several guarantee limited to the additional finances advanced. Secondary to the issue with the bank, Jack may also have recourse to action against Karen and the solicitor. Karen for her misrepresentation and the undue influence exerted and the Solicitor for the way in which he conducted himself. However, bearing in mind that Karen has no assets of any note, pursuing her would achieve no material purpose. Discussions Overall, this study shows that, when considering entering into a contract arrangement with a financial institution, one should insure that there is a complete understanding of what is involved and what is being committed to. Additionally, if it is support of a business venture, one should demand independent evidence that what is being portrayed supported by fact. Generally there appears to be quite a divergence of views regarding Joint and Several Liability with one school of thought want to protect the interests of the plaintiff, in this case the financial institutions. The supporters of reform on the other hand, seek to protective the defendants; particularly those who are what they consider to be innocent victims or pursued simply they have the deepest of all those party to the guarantee. References Bargren, P (1994) Study Wis. L. Rev 453. Joint and Several Liability: Protection for Plaintiffs. Odgers, J. (1 December 1998). Transcript of A Talk to the Newcastle upon Tyne Law Society. Retrieved from the World Wide Web http://www.3vb.com/pgs-articles/jo-bank-security.shtml Rochez Piggot Semple / Consilio (12 March 2001) Review: Contract – Misrepresentation. http://www.spr-consilio.com/contramisrep.html The Times (27 July 1998) Report on the case. Cooke v National Westminster Bank Read More