Question

Ann lives in a large house which was left to her by her parents. She also has a valuable collection of jewellery which was left to her by her mother. In 2015, when she was 18 years old, Ann married Paul who was 30. Ann allows Paul to make most of the decisions of the household, and most of the time they live together happily. At times however, Paul shows he has a fiery temper. Therefore, in 2016, when Paul asked Ann to sell him a half share of the house for $200,000, Ann feared what Paul’s reaction would be if she refused. She reluctantly agreed, even though the house was worth at least $800,000. The sale for $200,000 took place and Paul’s name was entered onto the Land Register as a joint owner of the house.

Two years later Paul’s sole trader business was running into difficulties and he owed substantial sums of money to many of his suppliers. He asked the bank for a loan of $1,000,000 to help him out. The bank manager, who is an old friend of Paul’s, agreed but required security for the loan. The value of the family home was not sufficient - the bank required additional security. Paul told the manager that Ann’s jewellery is worth around $200,000 and said he would ask Ann to come into the bank and sign guarantees over the house and her jewellery.

Paul told Ann he would lose his business unless she agreed to join with him in guaranteeing a loan from the bank using the house and the jewellery as security.

Ann reluctantly went to the bank with Paul. Ann is very attached to her mother’s jewellery and was particularly worried about using it as a security. However, the manager told her that there was little danger of her losing her jewellery or the family home, as “Paul is a great business-man and will soon be back on top”. The manager also said that she could consult her own solicitor “if she really thinks it is necessary”. Ann felt constrained by Paul’s presence and replied: “No thank you, I am happy to trust Paul.”

In early 2019, a year after the loan was made, Paul’s business has collapsed with debts of $900,000, and the bank is seeking to enforce the security by taking possession of the house and Ann’s jewellery.

REQUIRED

Ann now claims she was subject to duress by Paul when she agreed to the transfer of a half-share in the house to him. Apply the relevant law to the facts and advise Ann of her likelihood of success with this claim.

Ann claims her signed guarantee to the bank should be set aside on grounds of imputed undue influence. Apply the relevant law to the facts and advise Ann of her likelihood of success with this claim.

Answer 1

Issue: Ann was intimidated by the persona of her husband Paul. As a result, she not only sold 50% of her property to him for half the market value, Because Paul's business ran into financial trouble, Ann was cajoled into giving a guarantee for a loan for a business loan of $ 1,000,000 taken by Paul, security by her family home and her jewellery.

Law: There are two issues here. One of the essential elements of a valid contract is free consent. If it can be proved that consent was caused by coercion, undue influence, misrepresentation or fraud, the contract is voidable at the option of the aggrieved party. But the action to rescind the contract should be taken before it is discharged by performance.

Was Ann's consent to the sale of half the property and to the subsequent guarantee to the bank free ? Apparently not, as it was caused by undue influence, as Paul, being allowed to make the major decisions pertaining to the household, was in a dominant position as far as Ann was concerned, and she acceded to be demands in order to avoid his fiery temper. Also, undue influence can apply when the parties stand in a fiduciary relationship.

Next issue, is the guarantee to the bank by Ann valid? Yea, it is valid, but the surety has the right to revoke the guarantee before it is invoked. Ann could have taken action to have the guarantee set aside on the grounds of undue influence before the guarantee was invoked. Once there is default by the principal debtor, and the guarantee is invoked by the creditor, the surety cannot avoid it on grounds of lack of free consent.

Application. If Ann had wanted her guarantee to be set side, she should have revoked her guarantee before default on the loan by Paul by giving notice to the bank.

Conclusion: In the given case, it would not be possible for Ann to have the guarantee set aside on the grounds of undue influence. It is too late, as the default by Paul has already happened, and the bank has already moved to taken possession of her house and her jewellery.