Guarantors: Independent Legal Advice?

The Court of Appeal's position is now very clear on the question of guarantors needing independent advice - unless an individual guarantor has an arguable defence that he/she has been the subject of undue influence or misrepresentation by the debtor, the Courts will not find that the lender was under a positive duty to ensure that the guarantor received independent legal advice.

ACC LOAN MANAGEMENT LIMITED VCONNOLLY1

The judgment of the Court of Appeal was delivered on 4 April 2017.

Facts: A father guaranteed the debts of his son to ACC. The son borrowed from ACC in 2005 and 2007, and his father provided guarantees in 2005 and 2008. The son defaulted in repayment of his loans, and ACC began legal proceedings in 2013. In February 2015, ACC successfully obtained summary judgment in the High Court against the son, and against the father in respect of the 2005 guarantee.2 High Court: The guarantor had signed a confirmation that he had been given the opportunity to take independent legal advice in relation to the 2005 guarantee, and that he had taken that advice. His son gave evidence that the advice was in fact given by the son's solicitor, and not by a separate solicitor acting for the father, and could not be said to be "independent". At no stage in the High Court did the father claim that he had provided the guarantee as a result of undue influence exerted by, or misrepresentations made by, his son. The High Court granted judgment in favour of ACC. Notably, on the question of independent legal advice, Fullam J held that while undue influence had not been alleged, the father-son relationship put ACC on inquiry (i.e. on notice of a possible non-commercial aspect to the guarantee) and under an obligation to take reasonable steps to ensure that the father had freely entered into the guarantee. Fullam J found that, in obtaining the confirmation from the father that he had received independent legal advice, ACC had taken "a sufficiently reasonable step". » Court of Appeal: The father appealed. The Court of Appeal (in a judgment delivered by Finlay Geoghegan J) found in favour of ACC, holding that: no evidence had been presented by the guarantor to the High Court to support an argument that he had been subjected to undue influence; and as the guarantor did not have an arguable defence that he was the subject of undue influence, he did not have an arguable defence that the bank (because it knew of the father-son relationship) should have ensured...