Undue Influence: Clarification Of The Requirements On Lenders

Published date24 August 2020
Subject MatterLitigation, Mediation & Arbitration, Trials & Appeals & Compensation
Law FirmConyers
AuthorMichele Gavin-Rizzuto, Ben Adamson and Christian Luthi

The recent decision of the Bermuda Court of Appeal in Keimon Lavan Lawrence v. HSBC Bank Bermuda Ltd [2020] CA (Bda) Civ 10, clarifies the steps required by lenders to protect themselves from a claim of undue influence in relation to loan transactions.

The appeal in this case followed the decision of the Supreme Court not to set aside two default judgments entered against Keimon Lawrence and his father, Keith James. The judgments held that Mr Lawrence and Mr James should pay HSBC Bank Bermuda Ltd $3,609,666 million, together with interest, charges and costs, under the terms of a guarantee given by both men for a loan made by the bank to The Fitz Group Ltd (the driving force behind which was Alexander "Jerry" Ming, a friend of Mr James). Mr Lawrence and Mr James had put up their jointly-owned property in Warwick as security for the loan, which subsequently fell into default. The Court also declined to grant the defendants an injunction restraining the Bank from selling the Warwick property.

The Court of Appeal found that HSBC Bank Bermuda had failed to take adequate steps to ensure that Keimon Lawrence was not acting under the undue influence of his father, Keith James, when he agreed to put up his half of the house as security for the loan. In his judgment, the President of the Court of Appeal, Sir Christopher Clarke, identified several requirements that a lender should meet in order to protect itself from any later claim of undue influence.

Background

In 2008, Mr Ming was attempting to secure over $3 million in financing for a business venture. He asked his friend Mr James, who owned a large property, to assist him by standing as guarantor However, Mr James owned the property jointly with his son, Mr Lawrence; both would therefore need to stand as guarantors to allow the entirety of their property to be charged as security. Mr James was to be paid $50,000 per year by Mr Ming for his assistance totalling around $400,000 over the term of the loan. Mr Lawrence was not to receive any payment from Mr Ming.

Mr Lawrence initially had concerns about the proposal, but following a meeting with Mr Ming he agreed to act as guarantor. Mr James and Mr Lawrence then met with the lender. They were advised to obtain independent legal advice before deciding whether to provide the guarantee. It was not suggested that they may wish to get separate advice. Mr James did not disclose his commercial interest in the transaction to the lender and said that he was standing as guarantor because he was close friends with Mr Ming Crucially, insofar as the lender was concerned there was no commercial benefit to father or son.

It was a precondition of the loan facility that the lender must receive a letter from a reputable attorney confirming that the terms of the guarantee had...

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