In a departure from the previous leading Irish case, the High Court has ruled that a guarantee may not be relied upon by a bank in circumstances where the bank is deemed to have knowledge (that is, constructive knowledge), that the guarantee was entered into as a result of the exercise of undue influence by a third party not directly connected with the bank.

Guarantees were given by the two directors of a company, being Louis Roche and Sorcha Buttimer, to Ulster Bank in order to guarantee the liabilities of that company.  Ms. Buttimer had a personal relationship with Mr. Roche and was a director of the company, but was not a shareholder and had no material involvement in the business of the Company.  Ultimately, both guarantees were called in by the Bank and proceedings issued to recover the monies secured on foot of the guarantees.  Ms. Buttimer sought to have her guarantee set aside claiming that she had been unduly influenced by Mr. Roche in giving it.

The Judge ruled on the facts of the case that Ms. Buttimer was under the undue influence of Mr. Roche at the time of giving the guarantee to the Bank.  The question then arose as to the extent to which a bank may find itself unable to rely on a banking contract where it can be shown that the relevant contract was entered into as a result of the exercise of undue influence by a third party not directly connected with that bank.

The Judge ruled that the Bank had constructive notice of the undue influence of Mr. Roche on Ms. Buttimer as it had been placed on inquiry due to the following facts:

• The Bank was aware that Mr. Roche and Ms. Buttimer were in a personal relationship
• Ms. Buttimer was not a shareholder of the company
• The Bank was not aware of any active involvement of Ms. Buttimer in the company
• All of the discussions between the company and the Bank were conducted solely by Mr. Roche

In circumstances where a bank is placed on inquiry, it must take measures to ensure that the proposed guarantor is openly and freely agreeing to provide the requested security.  The Judge held that Ms. Buttimer was entitled to rely on the undue influence which Mr. Buttimer exercised over her by virtue of the failure of the Bank to take any steps to seek to ensure that she was acting freely in circumstances where the Bank had been placed on inquiry.  Accordingly, Ms. Buttimer’s guarantee could not be relied upon by the Bank.

Contributed by Eibhlín O’Donnell.

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