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UNDUE INFLUENCE UPDATES

27 February 2013

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Presented by: Grace Kwan

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INTRODUCTION

Where the parties to a contract have an antecedent relationship of influence whereby one party is in a superior position to the other, then equity presumes that an y contract between them has been made because the superior has coerced the inferior into contracting by preventing him from exercising his free will.

The onus of proof is on the superior to prove that there was no undue influence; the easiest way to do so is to show that the inferior had independent legal advice .

Matters which seem to be irrelevant include the qua lity of the advice, the fact that the inferior failed to fo llow the advice, and that the solicitor also acts for the le nder.

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The bank was entitled to rely on the fact that the solicitor undertook the task of showing that he was sufficien tly independent for that purpose.

Consequently, where the bank received a warranty fr om the solicitor that he had explained the documents t o the party seeking to avoid a guarantee, the bank could act as if that party had independent legal advice.

Equity will set the contract aside at the request o f the inferior, or will refuse to grant specific performa nce; however, like all equitable relief, specific perfor mance to redress undue influence is discretionary.

Where there is no special relationship between the parties, but one claims to be inferior in that he has not ex ercised free will, the onus will be on the inferior to prov e the superior did dominate his will by forcing him to co ntract.

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Undue influence taints a transaction because it aff ects (a) the victim ’s free will to enter into the transaction and/or ( b) his or her informed consent to the transaction. E lement (a) concerns the victim ’s freedom of choice or freedom of contract. Element (b) relates to his or her true k nowledge and understanding about the transaction. The two v ery often go hand in hand, but need not necessarily do so.

For instance, a child’s free will may have been so overwhelmed by the authority and influence of his f ather that he entered into a transaction, the true nature and consequences of which he could (and did) perfectly understand, to his utter disadvantage. This transac tion may be attacked for the lack of free will notwithst anding his knowledge and understanding.

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TYPES OF UNDUE INFLUENCE

In Barclays Bank v. O’Brien [1993] 4 ALL ER 427 (“ O’Brien”), undue influence was classified into 3 clas ses: -

(1) Actual undue influence (class 1). This is no di fferent from any ordinary case in which he who asserts a particular defence must prove it. So if a victim ca n establish actual undue influence relating to the subject transaction in question, that would suffice . He or she need not establish a general relationship of his or her reposing trust and confidence in the wrongdoer. It could be an one-off incident.

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(2) Undue influence presumed by law (i.e. class 2(A) ). If the relationship between the two falls within one specifically recognized by law, for instance, solic itor and client, or parent (as the wrongdoer) and child (as the victim), the law would presume that in relation to the transaction in question, the one standing in a superior position has exerted undue influence on th e one in a inferior position.

It is up to the alleged wrongdoer to rebut presumpt ion by way of evidence.

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(3) A relationship of trust and confidence (i.e. cla ss 2(B)). According to O’Brien, if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence.However, in Royal Bank of Scotland plc v. Etridge(No.2) [2001] 3 WLR 1021 (“Etridge”), a further requirement was added, namely, the transaction in question has to be manifestly disadvantageous to th e complainant in the sense that it cannot be reasonab ly accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary men act.

In other words, the transaction is not readily expl icable by the relationship of the parties.

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Burden of proof on the wrongdoer

Burden of proof on the victim

Burden of Proof in different kinds of Undue Influen ce

�Presumed undue influence (Class 2B) Etridge test

(with an additional requirement that the transaction is manifestly disadvantageous to the victim, i.e. transaction not readily explicable by the relationship)

�Presumed Undue Influence (Class 2B) O’Brien test

(Relationship of trust and confidence)

�Presumed undue influence (Class 2A)

(Relationships recognised by law e.g. husband/wife, parents/children, solicitor/client)

�Actual undue influence (Class 1)

Example: Parties which have no relationship at all

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If the transaction could be explained by the relationship, then even if the O’Brien test was use d, the presumption could be easily rebutted by the alleged wrongdoer by pointing to the relationship t o justify the transaction.

On the other hand, if the transaction could not be readily explained by the relationship between the t wo, then even if the more stringent Etridge test was employed, the presumption would have been raised.

In other words, the difference between the two test s is really a difference in terms of the burden of proof .

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WHEN IS THE THIRD PARTY (BANK) AFFECTED?

Assuming that undue influence can be established as between the wrongdoer and the victim, under what circumstances will a third party (bank) be affected in relation to a transaction to which the third party was a party. This is the area giving rise to a lot of li tigation.

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There are several categories of situations under wh ich the third party, say a bank, would be affected:

1. Actual knowledge or imputed knowledge of undue influence exercised by the wrongdoer on the victim in relation to the transaction in question, then ordin ary principles of equity would dictate that the bank is affected by the wrongdoing. Likewise, the bank’s imputed knowledge will suffice to affect the bank i n accordance with ordinary principles of equity.

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Therefore, knowledge of the bank’s solicitors acqui red from the very transaction in question would be imputed to the bank and regarded as the bank’s own knowledge.

Similarly, knowledge of the bank’s agent will do. And if the wrongdoer can be regarded as the bank’s agen t in the transaction, the bank will be affected.

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2. The O’Brien approach:

(a) If the relationship between the wrongdoer and th e victim was one of husband and wife or cohabitees, a nd this was known to the bank at the time, the bank wo uld be affected.

(b) In all other cases, if the relationship between the wrongdoer and the victim was one in which the victi m reposed trust and confidence in the wrongdoer in relation to his financial affairs generally, and th e bank was aware of it at the material time, the bank woul d be affected.

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3. The Etridge test:

(a) The House of Lords in Etridge agreed that in the case of a husband and wife or cohabitees, if that relationship was known to the bank at the material time, the bank would be affected.

(b) But the House of Lords went further and extracte d from these cases as well as other cases a general principle which could, on the one hand, explain the more established cases such as husband and wife, solicitor and client, parent and child, and on the other, be applicable to all other cases, namely, the test of commercial/non-commercial relationship.

The test is: if the relationship between the wrongd oer and the victim was, to the knowledge of the bank, “non-commercial”, the bank would be affected.

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Examples of commercial relationship• Business partners• Holding company and subsidiary company• Associated companies• Companies in the same group of companies

Examples of non-commercial relationship• Husband and wife• Father and son• Relatives• Close friends

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TYPES OF NOTICE

1. There are two types of notice: actual notice and constructive notice.

2. In law, constructive notice means the notice whic h a person is deemed to have of a fact when he does not actually know of it but would have learned of it ha d he made the requisite inquiries.

A bank will be treated as having constructive notic e of all that a reasonable prudent bank would have discovered.

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3. As was pointed out in Etridge, traditionally, in this type of situations, where the alleged victim of undue influence entered into a transaction with the so-ca lled third party (bank), the third party would only be affected by the undue influence if it had actual knowledge (including imputed knowledge) of the undue influence.

4. But the House of Lords in Etridge accepted tha t in this regard, the law had been extended by O’Brien, so th at constructive notice on the part of the bank of undu e influence was sufficient to affect the bank. This is patently clear from the judgment in O’Brien itself which repeatedly referred to the doctrine of constructive notice as providing the solution to th e issue of when the bank will be deemed to have notic e of the relevant relationship facing the House of Lo rds in that case.

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ILLUSTRATIONS

(1) A bank is put on inquiry whenever a wife offers to stand surety for her husband’s debts. No further p roof is required.

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(2) The bank is also put on inquiry in cases where t he wife becomes surety for the debts of a company whose sha res are held by her and her husband, even when the wife is a director or secretary of the company.

The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the per sons who actually have the conduct of the company’s business .

The fact that the wife is the major shareholder and director of the company does not necessarily mean that she is t he one who is in control of the company and who is the ben eficial owner of the company.

For example, over 50% of the shares of Country Gard en Holdings Company Limited ( 碧桂園控股有限公司碧桂園控股有限公司碧桂園控股有限公司碧桂園控股有限公司) have been issued to the daughter while the company is in fact substantially controlled by the father.

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STEPS THAT THE BANK SHOULD TAKE

Where a bank has been put on inquiry, it needs do n o more than take reasonable steps to satisfy itself that t he practical implications of the proposed transaction have been brought home to the wife, in a meaningful way, so that she enters into the transaction with her eyes open so far as its basic elements are concerned.

The bank is not required to discharge that obligati on by means of a personal meeting with the wife, provided that a suitable alternative is available.

Ordinarily, it will be reasonable for the bank to r ely upon confirmation from a solicitor, acting for the wife, that he has advised her appropriately.

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The position will be different if the bank knows th at the solicitor has not duly advised the wife or the bank knows facts from which it ought to have realised that she has not received appropriate advice. In such circumstances , the bank proceeds at its own risk.

In the ordinary case, however, deficiencies in the advice are a matter between the wife and the solicitor, an d the bank is entitled to proceed in the belief that a so licitor advising the wife has done so properly.

In giving such advice, the solicitor is acting not as the bank’s agent but solely for the wife.

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RESPONSIBLITIES OF THE SOLICITOR ACTING FOR THE WIFE/SURETY

(1) The scope of the responsibilities of the solicit or acting for the wife is dictated by a retainer which stems from the bank’s concern to receive confirmation from him that he has brought home to the wife the risk invol ved in the proposed transaction.

As a first step, he will need to explain to the wif e the purpose for which he has become involved at all.

He should explain that, if it ever becomes necessar y, the bank will rely upon his involvement to counter any suggestion that the wife has been overborne by her husband or that she has not properly understood the implications of the transaction.

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The solicitor will need to obtain confirmation from the wife that she wishes him to act for her in the matt er and to advise her on the legal and practical implicatio ns of the proposed transaction.

When such an instruction is forthcoming, the conten t of the advice required from the solicitor will, inevit ably, depend on the facts of the individual case.

For example, the liabilities of the wife under a no rmal loan case are substantially different from her liab ilities under an accumulator case.

The advice will also be different if it is a limite d guarantee case as opposed to an unlimited guarantee case.

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Typically, the advice that a solicitor can be expec ted to give should cover the following matters as a core minimu m: -

(a) He will need to explain the nature of the docume nts and the practical consequences they will have for the wife if she signs them.

(b) He will need to point out the seriousness of the risks involved.The wife should be told the following:

� the purpose of the proposed new facility;� its amount;� the principal terms; � the bank may increase the amount of the facility, o r change

its terms, or grant a new facility, without referen ce to her; and

� the amount of her liability under the document.

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(c) The solicitor should discuss with the wife:� the wife’s financial means, including her understan ding of the

value of the property being charged; and � whether the wife or her husband have any other asse ts out of

which repayment can be made if the husband’s busine ss fails.

(d) The solicitor will need to state clearly that th e wife has a choice whether to enter into the transaction or not or whe ther to sign an limited guarantee or unlimited guarantee or not etc .

(e) The solicitor should check whether the wife wish es to proceed. She should be asked whether she is content that the solicitor should write to the bank confirming that he has exp lained to herthe nature of the documents and the practical impli cations they may have for her, or whether, for instance, she wou ld prefer himto negotiate with the bank on the terms of the tran saction.

Matters for negotiation may include the sequence in which the various securities will be called upon or a specifi c or lower limit to her liabilities.

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The solicitor should not give any confirmation to t he bank without the wife’s authority.

The solicitor’s discussion with the wife should tak e place at a face-to-face meeting, in the absence of the husband, and should be couched in suitably non-technical language.

He should obtain from the bank any information he needs. If the bank fails for any reason to provide the information requested, the solicitor should decline to provide the confirmation sought by the bank.

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(2) As a general rule, however, it is not for a soli citor to veto the transaction by declining to confirm to the bank that he has explained the documents to the wife and the ris ks she is taking upon herself.

If the solicitor considers the transaction not to b e in the wife’s best interests, he should give her reasoned advice to that effect.

However, the decision on whether to proceed is the client’s, not the solicitor’s and a wife is not to be precluded from entering into a financially unwise transaction if, for her own reasons, she wishes to do so.

There may, of course, be exceptional circumstances where it is glaringly obvious that the wife is being grie vously wronged. In such a case, the solicitor should decl ine to act further.

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(3) The solicitor advising the wife may also act for her husband or the bank, provided that he is satisfied that that is in the wife’s best interests and will not g ive rise to any conflicts of duty or interest.

If he decides to accept instructions from the wife, his assumption of legal and professional responsibiliti es to her ought, in the normal course of things, to provi de sufficient assurance that he will give the requisit e advice fully, carefully and conscientiously.

If at any stage the solicitor becomes concerned tha t there is a real risk that other interests or duties may i nhibit his advice to the wife, he must cease to act for her.

In that case, he must write to the bank to report t he situation and to state the reason why he cannot act for the wife.

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ADVICE TO THE BANK

(1) With regard to future transactions, a bank shoul d take the following steps once it has been put on inquiry and is looking for protection to the fact that the wife will be advised independently by a solicitor: -

(a) It should communicate directly with the wife, in forming her that for its own protection it will require wri tten confirmation from a solicitor acting for her, to th e effect that the solicitor has fully explained to he r the nature of the documents and the practical implicati ons they will have for her.She should be told that the purpose of that requirement is that thereafter she should not be ab le to dispute that she is legally bound by the documents once she has signed them.

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She should be asked to nominate a solicitor whom sh e is willing to instruct to advise her, separately fr om her husband, and act for her in giving the bank the necessary confirmation.

She should be informed that, if she wishes, the solicitor may be the same solicitor who is acting f or her husband in the transaction.

If a solicitor is already acting for the husband an d the wife, she should be asked whether she would prefer a different solicitor to act for her regarding the ba nk’s requirement for confirmation from a solicitor.

The bank should not proceed with the transaction un til it has received an appropriate response directly fr om the wife.

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(b) If the bank is unwilling to undertake the task o f explaining the husband’s financial affairs to the wife, it mus t provide the solicitor for the wife with the financial infor mation he needs for that purpose.

The information required will depend on the facts o f the case. Ordinarily, it will include information on:� the purpose for which the proposed new facility has

been requested, � the current amount of the husband’s indebtedness, � the amount of his current overdraft facility, and � the amount and terms of any new facility.

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If the bank’s request for security arises from a wr itten application by the husband for a facility, a copy o f the application should be sent to the solicitor.

The bank will, of course, need to obtain the consen t of its customer to that circulation of confidential inform ation. If that consent is not forthcoming, the transaction will not be able to proceed.

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(c) Where, exceptionally, the bank believes or suspe cts that the wife has been misled by her husband or is not entering into the transaction of her own free will, it must inform the wife’s solicitor of the facts givin g rise to its belief or suspicion.

(d) The bank should in every case obtain from the wi fe’s solicitor a written confirmation to the effect that he has explained to her the nature of the documents and th e practical implications they may have for the wife.

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(2) In future, banks should regulate their affairs o n the basis that they are put on inquiry in every case wh ere the relationship between the surety and the debtor is non-commercial.

The creditor must always take reasonable steps to bring home to the individual surety the risks that he is running by standing as surety. That constitutes a modest burden for banks and other lenders, being no more than is reasonably to be expected of a credito r who is taking a guarantee from an individual.

If the bank or other creditor does not take those s teps, it will be deemed to have notice of any claim the s urety may have that the transaction was procured by undue influence or misrepresentation on the part of the debtor.

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HONG KONG CASES AFTER ETRIDGELi Sau Ying v. Bank of China (Hong Kong) Limited FAC V 9/2004

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Appellant

Mr Li

Bank

Mr Ip

Sunny Tech LtdFriends

1996 Mortgage

Business partners

Substantial shareholder and director

Financing

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HONG KONG CASES AFTER ETRIDGE

Li Sau Ying v. Bank of China (Hong Kong) Limited FA CV 9/2004

Facts1. This is the first Court of Final Appeal case on u ndue

influence after Etridge. This case has been consid ered and applied in later cases and remains as good law.

2. The appellant granted a mortgage of a property sh e owned (“the Property”) to the respondent (“the bank”) in 1996. The 1996 mortgage was for securing the indebtedness of Sunny Tech Ltd. (“Sunny”) owed to the bank. The appellan t did not have any interest in Sunny. A Mr. Ip substantially owned and controlled Sunny. The grant of the 1996 mortgage b y the appellant was suggested by a Mr. Li, an appellant’s friend. Mr. Li appears to have been a business partner of M r. Ip.

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3. The appellant is seeking to set aside the 1996 mo rtgage on the ground of undue influence.

4. The 1996 mortgage had replaced previous mortgages of the Property which the appellant had granted at the suggestion of Mr. Li.

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NCB Mortgage$3.2m

1994 MortgagesYu Tai: $5m

Sinohill: $1.5mUsed to redeem NCB Mortgage, discharge the $1m debt to Mr Li and cash loan of $2m to Mr Li

Luk Fai Mortgage$6.5m

1996 Mortgage$6.5m

redeem

redeem

redeem

Mortgages executed by the appellant at the suggesti on of Mr. Li

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Background

1. The nature of the relationship between the appell ant and Mr. Li is highly relevant . They are not relat ed. They met each other at a social club and had become friends. There is no suggestion that they are sexu ally related.

2. After the first encounter, Mr. Li had impressed t he appellant. The appellant described him as “wealthy , generous, kind, dutiful to his mother and resourcef ul in business”.

3. It was proved that in 1994 the appellant had repo sed trust and confidence in Mr. Li.

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4. Mr. Li owed the appellant over $1 million by the end of 1994.

5. As suggested by Mr. Li, the appellant charged the Property to Nanyang Commercial Bank (“NCB”) to secure a mortgage loan of about $3.2 million to the appellan t.

6. In 1994, as proposed by Mr. Li, the appellant exe cuted two mortgages, one in favour of Yu Tau Hing Co. Ltd (“Yu Tai”) and the other Sinohill for securing a total sum of $ 6.5 million.

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7. The appellant utilized this amount to redeem the NCB mortgage and to discharge the $1 million debt owed by Mr. Li to Perfect Target. Out of the balance of the m ortgage loan, the appellant lend a cash loan to Mr. Li of $ 2 million.

8. Mr. Li and the appellant agreed that after these dealings, Mr. Li owed the appellant $3,301,960.27. Mr. Li pr omised that he would be able to repay the loan in six mont hs.

9. In 1995, as advised by Mr. Li, the appellant exec uted a mortgage in favour of Luk Fai Investment Ltd (“Luk Fai ”) to secure a loan of $6.5 million which was used to red eem the 1994 mortgages.

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10. The 1996 mortgage replaced the Luk Fai mortgage o n 4 th

September 1996. Mr. Li and the appellant went to t he office of the bank’s solicitors together to sign th e mortgage documents. The case was handled by an experienced conveyancing clerk, Ms. Winnie Chan. M s. Chan explained the contents of the mortgage to the appellant and went through the mortgage with her.

11. After hearing Ms. Chan’s evidence, the Deputy Ju dge was “favourably impressed” by it and held that the ba nk had proved that the salient terms of the 1996 mortg age had been explained to the appellant.”

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12. It is uncertain as to exactly what indebtedness the 1996 mortgage was intended to secure. The main argument of the appellant was “that the circumstances attending the grant by the appellant of the 1996 mortgage ought t o have made the [B]ank suspect that she was being taken advantage of and ought to have led the [B]ank to tak e steps to ensure that in granting the mortgage she knew wh at she was doing and wanted to do it.”

13. The Court of Final Appeal pointed out that it is important to emphasis that the Luk Fai mortgage was to secure th e mortgage loan of $6.5 million advanced by Luk Fai t o the appellant. The Court of Final Appeal took the view that it is not necessary for the bank to look behind the Luk F ai mortgage or ask the reason why the appellant had ne eded the $6.5 million from Luk Fai or the way the appell ant had utilized the mortgage loan from Luk Fai.

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14. In fact, from the evidence of this case, the ban k had no knowledge about the 1994 mortgages, or about Mr. Li or about the relationship between Mr. Li and the appel lant.

15. In 1996, an all-monies mortgage had been execute d by the appellant as mortgagor and Sunny as principal party . However, there is a note signed by both the appella nt and Sunny that the general banking facilities granted t o Sunny was limited to $6.5 million.

16. After the 1996 mortgage has been executed, the b ank made available a mortgage loan of $6.5 million which was used to redeem the Luk Fai mortgage.

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Undue Influence

1. The Court of Final Appeal took the view that the lower courts had over-complicated the issue of undue infl uence.

2. The relationship between Mr. Li and the appellant was not a Class 2A case, i.e. it does not fall within the wel l established categories of relationship “where the relationship as such would lead the court to presum e that undue influence had been exerted unless evidence wa s adduced proving the contrary (see Slade LJ in Bank of Credit and Commerce International v. Aboody [1990] 1 QB 923 at 953).

Both of the lower courts were concerned whether thi s was a Class 2B case.

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According to O’Brien: " ... In a Class 2(B) case th erefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impug ned transaction merely by proof that the complainant re posed trust and confidence in the wrongdoer without havin g to prove that the wrongdoer exerted actual undue influ ence or otherwise abused such trust and confidence in relat ion to the particular transaction impugned."

3. However, the House of Lords in Etridge criticized and disapproved the use of the expression “presumed und ue influence” and in particular, its use in connection with Class 2B cases.

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4. Lord Hobhouse said that the Class 2A and Class 2B categorisation had been “the source of much of the confusion which has ensued" and that "the language of presumption is likely to confuse rather than assist ”.

• The Court of Final Appeal pointed out that: -“30. The strong message from Etridge therefore is tha t, particularly in Class 2B cases, concentration on a so-called presumption of undue influence is likely to detract from the real issue, namely, whether the evidence justifies a conclusion that the impugned transaction was procur ed by undue influence.”

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6. It is clear from the evidence that the mortgage l oan granted under the 1994 mortgages was paid to the appellant through Fairwealth. What is important is that it i s the appellant but not Mr. Li who was the effective borr ower. Hence, the appellant was not able to set aside the 1994 mortgages without first repaying the mortgage loan of $6.5 million.

7. The Luk Fai mortgage enabled the appellant to rede em the 1994 mortgages. The Court of Final Appeal held tha t it was irrelevant to determine whether the Luk Fai mortgage was procured by undue influence. It is because even if it was, the appellant could not rescind it without repaying the advance Luk Fai made to her. In any event, the shif t of the mortgagee from Yu Tai and Sinohill to Luk Fai has no signs of being a shift that represented an unconscionable abuse by Mr. Li of the trust and confidence reposed by th e appellant in him.

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8. Similarly, no undue influence was found by the Cour t of Final Appeal regarding the 1996 mortgage. The reas ons being:-

� The 1996 mortgage was accompanied by an express limitation of the facility to $6.5 million.

� The whole of the mortgage loan was applied to discharge the Luk Fai mortgage.

� The rate of interest under the 1996 mortgage was le ss than that payable under the Luk Fai mortgage.

Hence, even though Mr. Li may have influence on the appellant in entering into the 1996 mortgage, such influence could not be regarded as undue.

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9. It was opined by the Court of Final Appeal that t he concentration of the lower courts in determining wh ether there are trust and confidence reposed by the appel lant to Mr. Li sufficient to give rise to a Class 2B presum ption of undue influence has distracted attention from the r eal issue which is whether in advising or persuading th e appellant to shift from Luk Fai mortgage to the 1996 mortgage, Mr. Li was unconscionably abusing the tru st and confidence the appellant had reposed in him.

10. By viewing the circumstances pertaining to the 1 996 mortgage as a whole and by comparing the position o f the appellant under the Luk Fai mortgage and the 1996 mortgage, the Court of Final Appeal held that Mr. L i had not unconscionably abused the trust and confidence and that the 1996 mortgage was not procured by undue influence.

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The steps the bank should have taken

1. The Court of Final Appeal referred to the speech of Lord Nicholls in Etridge on the steps a mortgagee should take to minimize the risk of the wife entering into the tra nsaction as a result of undue influence by the husband: -“The furthest a bank can be expected to do is to ta ke reasonable steps to satisfy itself that the wife ha s had brought home to her, in a meaningful way, the pract ical implications of the proposed transaction. This does not wholly eliminate the risk of undue influence or misrepresentation. But it does mean that a wife ent ers into a transaction with her eyes open so far as the basic elements of the transaction are concerned."

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2. The Court of Final Appeal held that the Deputy Ju dge had misdirected himself on what steps the bank should t ake. The Deputy Judge said: -"The burden is on the Bank to establish that it bro ught home to the Plaintiff the risks she would be runnin g if she granted the proposed mortgage.”and“… I do not think that merely explaining the salient t erms of the mortgage was enough to bring home to the Plaint iff the risks she was running. The risk was that the people behind Sunny would make additional borrowings behind her b ack for which she would be liable and for which her pro perty would be charged. A mere explanation of the terms d oes not necessarily bring home the risks which flow fro m those terms."

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3. The Court of Final Appeal pointed out that these passages not just require the bank to take “reasonable steps ” to bring the appellant to an understanding of the implicatio ns of the 1996 mortgage but also require the bank to succeed in doing so.

4. According to Etridge, the standard required of a bank placed “on inquiry” is to take “reasonable steps”. What amount to “reasonable steps” will depend on facts of each case.

5. In this case, the Deputy Judge had held that Ms. Chan had explained to the appellant the salient terms of the 1996 mortgage. As Ms. Chan done so on behalf of the ban k and thus Ms. Chan’s conduct constituted reasonable step s to satisfy the bank that the appellant understood the implications of the 1996 mortgage.

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6. It was said in Etridge that a mortgagee would be “ put on enquiry whenever the relationship between the suret y and the debtor was “non-commercial”.

However, the Court of Final Appeal took the view th at: -“It is certainly not necessary for a proposed mortg agee to make inquiries about the relationship between its p rincipal debtor and the proposed surety/mortgagor before dec iding on the steps it should take to satisfy itself that the surety understands the transaction he or she is entering i nto. Nothing Lord Nicholls said in Etridge suggests the c ontrary. And for a bank/mortgagee to make inquiries of that character would in most cases be an unwarrantable impertinence.”

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7. Finally the Court of Final Appeal held that there w as nothing in the evidence to put the bank “on enquiry” whether the entering into the 1996 mortgage by the appellant wa s procured by some impropriety and so dismissed the a ppeal.

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Cases in which Li Sau Ying has been considered or ap plied

Wing Hang Bank Ltd v Crystal Jet International Ltd HCMP5014/1999, CACV255/2002

1. The plaintiff granted banking facilities to the s econd defendant (“Facility”), which was secured, inter al ia, by unlimited guarantees from Winnie Ko and ML Ko. Winni e Ko and ML Ko were the directors of the second defenda nt i.e. the borrower. Winnie Ko and ML Ko were sisters.

2. Winnie Ko raised the defence of undue influence exe rted by ML Ko.

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3. Deputy J Saunders found that there was no relatio nship between the borrower and the guarantor that would p ut the plaintiff on enquiry. Although both Winnie Ko and ML Kowere sisters, they were also directors and sharehol ders of the second defendant (borrower). As such it was pla inly in their interests that the Facility were secured. In such circumstances it could not be said that on its face the transaction was not to Winnie Ko’s financial advanta ge. There was nothing in the relationship of sisters, w ho were both working directors of a company, to put the ban k on enquiry that one director of the company might have exercised any particular influence over the other. Trial judge’s decision was affirmed in the Court of Appea l.

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Hang Seng Bank Limited v Leung Shui Chung & Anor CACV 43/2010

1. The first defendant (“Madam Leung”) was the owner of a property which she mortgaged to the plaintiff bank to secure the indebtedness of the second defendant, a company owned by Mr Chui and his wife. Mr Chui was the tenant of the property. Madam Leung had become frien ds with Mr Chui and trusted him to the extent that she did not see any need for a written tenancy agreement.

2. Madam Leung’s case was that she was not liable un der the mortgage because the bank failed in its duty to tak e reasonable steps to ensure that the mortgage and it s implications had been properly explained to her.

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3. The Court of Appeal in this case elaborated the p rinciples in Li Sau Ying that the bank need not actually succeed in bringing the surety to an understanding of the mort gage because that went beyond the duty to take “reasonab le steps” to bring the mortgagor to an understanding of the implications of the mortgage.

4. The Senior Counsel for Madam Leung relying on the observations in Etridge, submitted that the duty to take “reasonable steps” required the bank to provide rele vant “financial information” to the surety and in the pre sent case no such information had been provided.

5. The Court of Appeal observed that the bank made i t clear in the notice accompanying the mortgage that the bank was willing to provide the mortgagor Madam Leung with c opies of any facility letters issued by the bank and in t he warning notice that the mortgagor should obtain the borrowe r’s financial information. The Bank in this regard had taken reasonable steps.

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Bank of China (Hong Kong) Limited v Leung Wah & AnorHCMP 1634/2009, CACV 107/2010

1. The plaintiff required the defendants (husband an d wife) to execute a legal charge on their flat in favour of t he plaintiff to secure repayment of an overdraft obtained by the defendants’ son.

2. On the relationship of influence, the trial judge found that the defendants were not subject to the dominance of the son. On the defendants’ evidence no doubt there was a loving relationship between them and the son but th e judge did not consider such relationship to be one where the defendants had placed trust and confidence in the s on in relation to the management of their financial affai rs. The judge found no evidence of undue influence by the s on to the defendants, for example misrepresentation, exce ssive pressure or other kinds of wrongdoing.

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The son had only expressed optimism in his business plan and thought he needed no more than the sum that he could repay. Such optimism was taken on board by the defendants but turned out to be misplaced, but that was still not undue influence.

3. Trial judge’s decision was affirmed in the Court of Appeal.

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Bank of China (Hong Kong) Limited v Leung Wai ManHCMP 641/2006 (Chinese judgment)

1. The plaintiff required the defendants (husband an d wife) to execute a legal charge on their flat in favour of t he plaintiff to secure repayment of an overdraft obtained by the borrower, which was a company owned by a Mr. Shek. The wife raised the defence of undue influence exerted b y the husband.

2. Chu J was of the view that the evidence of the wi fe showed the husband had a degree of influence on her since she allowed the husband to take care of the financial d ecisions of the family. However such was not equivalent to undue influence. There was no evidence showing the husban d had abused the wife’s trust and confidence on him o r do anything to mislead or bully the wife in order to f orce her to sign on the mortgage.

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Bank of China (Hong Kong) Limited v China Hong Kong TextileCompany Limited HCMP 438/2008, CACV 276/2010

1. The plaintiff as mortgagee sought to enforce a le gal charge in respect of a property owned by the second defend ant in favour of the plaintiff in respect of the facilitie s granted to the first defendant.

2. The second defendant is the mother of the shareho lders and directors of the first defendant. The second de fendant was about 65 years old when she executed the mortga ge documents. She affirmed that she received little ed ucation and could only speak Minnan dialect. She affirmed th at she was not clear as to what the solicitor’s staff said to her when she was signing the documents.

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3. The dispute as to what happened at the solicitor’ s office was only relevant to the manner of inquiry conducte d by those who represented the plaintiff but had nothing to do with the abuse of trust and confidence by the child ren of the second defendant.

4. Failure on the part of the plaintiff to conduct d ue inquiry only fixed it with constructive notice. However ther e had to be some equitable wrong done to the second defendan t before she could rely on the constructive notice of the plaintiff.

5. Thus the primary question was whether the second defendant had advanced enough evidence to support a triable issue as to abuse of trust and confidence by her children.

6. The Court of Appeal did not find any evidence of improper conducts on the parts of the sons in procuring the execution of the legal charge by the second defenda nt.

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Conclusion

1. As can be seen from the cases discussed, it is no t easy to make a successful claim based on undue influence.

2. As it was held in Li Sau Ying and confirmed in subsequent cases, the standard required of a bank placed on enquiry is to take reasonable steps to br ing the surety to an understanding of the implications of the transaction. The bank is not required to succe ed in doing so. The bank is not required to inquire a bout the relationship between the surety and the borrowe r to decide what reasonable steps should be taken.

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3. What constitutes “reasonable steps” will depend on facts of each case.

If the bank’s solicitors have explained the salient terms of the transaction to the surety, since the bank’s solicitors is an agent of the bank, the act of the bank’s solicitors will suffice as reasonable steps.

However, the easiest way is to obtain a written confirmation from the solicitors acting for the sur ety confirming that the surety had been given independe nt legal advice.

4. Lastly, as advised by the Court of Final Appeal i n Li Sau Ying, when the court is faced with the question of whether undue influence exists, concentration shoul d be put on the real issue i.e. whether the evidence as a whole justifies a conclusion that the impugned transaction had been procured by undue influence.

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