Banco Exterior Internacional SA v Thomas

In a third-party guarantee and security transaction, the lender’s central duty is to ensure that the surety understands the nature and effect of the documents. Independent legal advice and informed understanding can rebut the presumption of undue influence. The lender has no general obligation to investigate the surety’s finances, relationship or motives. Later advice against the transaction does not create constructive notice of undue influence where the surety, after receiving that advice, unequivocally chooses to proceed. The security is therefore enforceable, subject to its agreed limit.

The Bank appealed from a decision of the Mayor’s and City of London Court concerning a guarantee and legal charge given by Mrs Dempsey to secure Mr Mulchay’s borrowing. The trial judge found undue influence but held that the Bank lacked notice when the documents were signed. He considered that later communications from Mrs Dempsey’s solicitor gave the Bank notice and limited enforcement, awarding £30,000 from the sale proceeds. The Bank challenged those conclusions. The executors challenged the finding that there was no earlier constructive notice and the £30,000 award. The central issues were whether undue influence had been established and whether the Bank had actual or constructive notice of it.

The Vice-Chancellor delivered the leading judgment. Lord Justice Roch agreed, reserving the question whether the principles in Barclays Bank Ltd v O’Brien [1994] 1 AC 180 apply where the debtor is not a party to the transaction between the surety and lender. Lord Justice Potter also agreed. The appeal was unanimously allowed.

1. Nature of the claim. Where the debtor is not a party to the guarantee or security transaction, the relevant question is whether the lender had actual or constructive notice that the surety entered into the transaction with the lender under undue influence. It is unnecessary to analyse the matter as an equity against the debtor.
2. Presumption of undue influence. The presumption is rebuttable. Independent legal advice explaining the nature and effect of the transaction, together with the surety’s understanding of that advice, is classic rebutting evidence. A decision to proceed despite advice against the wisdom of the transaction does not make the presumption irrebuttable or establish that the surety lacked a free and informed will. The authorities Allcard v Skinner (1887) 36 Ch. 145 and Zamet v Hyman [1961] 1 W.L.R 1442 supported that approach.
3. Constructive notice. The Bank’s obligation was to ensure that Mrs Dempsey understood what she was doing. It had no general duty to investigate her personal relationship with Mr Mulchay, her financial affairs or her motives for providing security. The independent solicitor’s confirmation that she understood the documents ended any question of constructive notice of a vitiating element at execution.
4. Later communications. The later solicitor’s strong advice against the transaction did not notify the Bank of undue influence or continuing impropriety. Mrs Dempsey had received the advice and unequivocally decided to proceed. The Bank was not required to prevent her from doing so or to refuse further advances.
5. Relief. The guarantee and legal charge were prima facie effective when lodged with the Bank duly signed. Their agreed limitation was £75,000. The Bank was entitled to that sum, with interest from 4 January 1988, out of the net sale proceeds. The order was to be agreed, with liberty to restore if agreement could not be reached.

• Court of Appeal: the appeal was allowed. The Bank was entitled to enforce the guarantee and legal charge and recover £75,000 plus interest from the sale proceeds. The judgment is reported at [1996] EWCA Civ 676.
• Mayor’s and City of London Court: Recorder Ross Martyn found undue influence, but held that the Bank lacked notice when the documents were signed. He treated later events as giving notice and limited the Bank’s recovery to £30,000.