9 December, 2016
In Sudha Natrajan v The Bank of East Asia Ltd [2016] SGCA 66, the Court of Appeal (the “Court”) took the opportunity to discuss the duties of a bank whenever dealing with a vulnerable guarantor, and the issue of undue influence on a guarantor giving a guarantee. It considered that the bank’s failure to adhere to the Etridge Du ties was reprehensible.
This note discusses the Court’s dictum in relation to banking practice and undue influence. Facts The case involves a claim by Sudha Natrajan (the “Guarantor”) who testified that she did not sign a Deed of Assignment (the “Deed”), under which she and her husband were co-signatories and The Bank of East Asia (the “Bank”) a beneficiary. The Guarantor’s husband, a major shareholder and principal director of Tecnomic Processors Pte Ltd (the “Company”) went into financial difficulties and agreed with the Bank that he and the Guarantor would jointly and severally covenant to pay the Bank all sums owed by the Company. In particular, their marital home was provided as collateral for these sums. Before the Bank accepted signed copies of the Deed, the Company had been wound up.
The Guarantor denied acknowledging the Deed and signing it, suggesting that her signature had been forged. The Judgment On the balance of probabilities, the Court concluded the evidence did not materially support the finding that the Guarantor had signed the Deed. Having ruled in favour of the Guarantor on the evidence presented, the Court proceeded to discuss the rest of the Guarantor’s arguments relating to banking conduct and the law of undue influence. Etridge Duties A bank wishing to uphold a transaction, involving a spouse, that was sufficiently questionable as to put the bank on inquiry, was obliged to take certain steps to ensure that the spouse had made an informed decision of his/her own volition. It therefore falls on the bank to take reasonable steps to satisfy that the spouse had fully understood the practical implications of the proposed transaction.
The steps to be taken by the bank are laid out by the House of Lords in the English case of Royal Bank of Scotland v Etridge [2001] UKHL 44 (“Etridge”):
(1) The bank should check directly with the wife the name of the solicitor she wishes to act for her;
(2) The bank should communicate directly with the wife informing her that it would require written confirmation from a solicitor, engaged for her, that the solicitor had fully explained to her the nature of the documents and their practical implications;
(3) The wife should be informed that once the requirement above is fulfilled, she should not dispute that she is legally bound by the documents once she has signed them thereafter; and
(4) The wife should be asked to nominate a solicitor, separate from her husband’s, whom she is willing to instruct to advise her and act for her in giving the necessary confirmation to the bank. If the bank is not willing to undertake the task of explanation itself, the bank must furnish the solicitor with relevant financial information required to advise the wife.
Based on the evidence, the Court found that the Bank had failed to comply with the steps set out above and in not doing had failed to adhere to the Etridge Duties.
The Court also held that the Bank had not complied with Clause 6 of The Association of Banks in Singapore’s Code of Consumer Banking Practice (the “Code”). Clause 6 of the Code reads:
“Being a Guarantor Being a guarantor is a serious commitment which could have significant consequences for you. Some questions you should consider when asked to be a guarantor can be found in Appendix III. Note that: i. The bank to which you will be giving the guarantee has to advise you in writing of the quantum and nature of your liabilities in advance; ii. You should seek independent legal advice before you agree to be a guarantor.”
In this instance, the Court observed that
(i) no written advice was dispensed by the Bank to the Guarantor in respect of her liabilities under the Deed;
(ii) the Guarantor was not informed to obtain independent legal advice before signing the Deed; and
(iii) the Bank’s officials made no effort in even meeting the Guarantor; the Bank’s conduct in this matter thereby falling well short of the industry norms as prescribed by the Code.
Analysis The guidelines in Etridge and Clause 6 of the Code are not unfamiliar to banks.
The importance of a bank taking reasonable steps to satisfy itself that a guarantor had indeed brought home to him/her the practical implications of a proposed transaction before such transaction would be validated has always resonated in proper client dealings. Such steps are not confined to cases involving uneducated guarantors.
In this case, the Guarantor was well educated and not wholly unfamiliar with commercial matters but the Court deemed the Deed to be a fairly complex financial instrument that imposed onerous obligations on the Guarantor without any personal benefit to her.
Conclusion This case underscores the need for banks to be cognizant of the risks of undue influence when taking guarantees from vulnerable guarantors. Banks are well advised to pay heed and comply with their basic duties of care set out in the Etridge Duties and Clause 6 of the Code.
