Court of Appeal dismisses appeal where bank is not obliged to ensure independent legal advice for parent guarantor.

THE COURT OF APPEAL

Neutral Citation Number: [2017] IECA 119

Record No. 2016/32

Finlay Geoghegan J.

Hogan J.

Hanna J.

A.C.C LOAN MANAGEMENT LIMITED

PLAINTIFF/

RESPONDENT

- AND -

JOHN CONNOLLY AND MAURICE CONNOLLY

DEFENDANTS/

APPELLANTS

JUDGMENT of Mr. Justice Gerard Hogan delivered on the 4th day of April 2017

I

1. Where a parent guarantees a substantial business loan for one of his or her children, is the lending bank obliged to take appropriate

steps to ensure that the surety has received independent legal advice prior to the execution of the guarantee? That is essentially the

question presented by this application for summary judgment on the part of the creditor bank, ACC Loan Management Ltd., who now

sues on foot of the guarantee given by a father in respect of his son’s business debts following default on the part of the debtor.

2. I have had the opportunity of reading in draft the judgment of Ms. Justice Finlay Geoghegan and I gratefully adopt her summary of

the facts. In her judgment Finlay Geoghegan J. has also helpfully set out the basis on which Fullam J. arrived at his conclusions in the

High Court on 12th February 2015. In the light of that summary it is sufficient to say that Fullam J. found no arguable defence in

respect of the first guarantee (which had been executed in 2005) because the surety, Mr. Maurice Connolly, had executed a

document which had been prepared by the solicitors who were acting for his son, Mr. John Connolly, to the effect that he had waived

his opportunity for independent legal advice. Mr. John Connolly was the borrower. So far as the second guarantee (which had been

executed in 2009) was concerned, Fullam J. ruled that an arguable defence had been raised in the absence of any similar declaration

regarding independent legal advice: see ACC Bank plc v. Connolly [2015] IEHC 188.

3. At the outset I should first observe that the second defendant, Mr. Maurice Connolly, has not sworn any affidavit in support of this

defence. This omission has done his case few favours and has greatly complicated the task of both the High Court and this Court.

4. As a further preliminary, I should say that I entirely agree with the conclusions of Finlay Geoghegan J. that the Court should extend

the time for the bringing of an appeal against the decision of the High Court. I also agree with her conclusions regarding the execution

of the deed under seal. I accordingly propose first to proceed to a consideration of the question of whether a surety should be given

an opportunity for independent legal advice both by reference to the authorities (Part II) and to the issue of principle (Part III). I will

then consider in Part IV the impact of two very recent decisions of this Court, de Kretser v. Ulster Bank [2016] IECA 371 and Curran

v. Bank of Ireland [2016] IECA 399 so far as the issues of stare decisis are concerned.

II

The decisions of the House of Lords in O’Brien and Etridge

5. The decisions of the House of Lords in Barclays Bank v. O’Brien [1994] 1 A.C. 180 and Royal Bank of Scotland v. Etridge (No.2)

[2002] 2 A.C. 733 and that of Clarke J. in Ulster Bank Ltd. v. Roche [2012] IEHC 166, [2012] 1 I.R. 765 concerning the duties of

banks vis-à-vis potentially vulnerable sureties who guarantee the business debts of their spouses or partners have all been discussed

at length in the recent decisions of this Court in de Kretser and Curran and, indeed, in the judgment of Finlay Geoghegan J. in this

case which she has just delivered.

6. I have already expressed in summary form my views on this topic in de Kretser and it is probably unnecessary to repeat them here.

It is sufficient perhaps to observe that those comments were, of course, made in the context of the threshold for summary judgment

and whether the wife (who was the surety for her husband’s business loans) had raised an arguable defence. It is true, of course,

that the decisions in O’Brien and Etridge are all predicated upon a claim of undue influence on the part of surety vis-à-vis her

husband. It is also the case that no such claim is made in express terms in this case.

7. It is, however, necessary, I think, to understand the context in which such a claim was made. The claims of undue influence

advanced in the standard modern authorities – the special facts of Roche represent something of an exception to this trend – are

not, however, directly comparable to what one might term the classic Allcard v. Skinner-style instances of undue influence where the

contention is that the plaintiff has been the victim of deceitful or knavish trickery or otherwise overbearing conduct. In Allcard v.

Skinner (1887) 36 Ch.D. 145 the English Court of Appeal found that the plaintiff – who had donated most of her assets to a convent –

had been unduly influenced by reason of what Lindley L.J. described as “insidious forms of spiritual tyranny.”

8. With the exception of Roche (where Clarke J. found that the partner in question who had guaranteed the debt was in an abusive

relationship), none of the recent cases involving a family member acting as surety for the business debts of a spouse, partner or off-

spring have presented Allcard v. Skinner-type issues of undue influence. Rather, the classic example – illustrated by the facts of

O’Brien and many of the individual eight cases heard by the House of Lords in the Etridge litigation – is that of the stay-at-home wife

who is asked to provide a guarantee in respect of the family home as security for the husband’s business loan. When the surety is

called upon to honour the guarantee, the response is to plead undue influence in the sense of reliance upon the husband of whose

business dealings she had but imperfect knowledge.

9. It is in these circumstances that the bank is put on inquiry to ensure that appropriate steps are taken to ensure that the spouse in

question is fully aware of the extent of her obligations qua surety. As the headnote to the report of Etridge puts the matter:

“Where a wife sought to impugn a transaction into which she had entered on the ground of her husband's undue influence their

relationship did not fall within a special category of case where an irrebuttable presumption of trust and confidence arose. If she was

able on the facts of the particular case to establish that she had placed trust and confidence in her husband in the management of

her financial affairs and that the impugned transaction was not explicable in the ordinary way, she could rely on a presumption

which, as an evidential forensic tool, shifted the burden of proof to her opponent and could be rebutted on appropriate evidence by

that party. Since the fortunes of husband and wife were ordinarily bound up together, a guarantee given by the wife with a charge on

her interest in the matrimonial home to secure her husband’s debts was not plainly to her disadvantage so as to be explicable only on

the basis that the transaction had been procured by his undue influence.

Whenever a wife offered to stand surety for the indebtedness of her husband or his business, or a company in which they both had

some shareholding, the lender was put on inquiry and was obliged to take reasonable steps to satisfy itself that she had understood

and freely entered into the transaction…” (emphasis supplied)

10. I consider that the words which I have taken the liberty of highlighting illustrate the potential application of Etridge to the

circumstances of the present case. In this case, there is every reason to suppose that – and, this is, in any event, implicit in the

affidavit sworn by John Connolly – Mr. Maurice Connolly reposed his trust in his son in the management of the latter’s business affairs.

Nor is there anything to suggest that the father stood to gain personally by the giving of a guarantee for such large sums. Here is a

case plain and simple where the father offered to stand surety for the indebtedness of his son for large sums of money and, on at

least one view of Etridge, I find it difficult to see why the bank was not put on inquiry to ensure that the father had understood and

freely entered into the transaction and to take appropriate steps accordingly. As Fullam J. pointed out in his judgment in the High

Court, as it happens, in similar circumstances Birmingham J. suggested (while still a judge of the High Court) that parents who

guaranteed an off-spring’s commercial debts might be in a position to raise an Etridge-style defence: see ACC Bank plc v. McEllin

[2015] IEHC 454, para. 30. While these comments were admittedly obiter – since Birmingham J. had found on the facts of that case

that the parents and the offspring had jointly come together to borrow the money for their commercial purposes – the decision in

McEllin is nonetheless indicative of an interpretation of Etridge upon which Mr. Maurice Connolly can rely, at least for the purposes of

demonstrating the existence of an arguable case.

11. I agree, of course, that, as I have already observed at the outset of this judgment, the fact that Mr. Maurice Connolly has not

sworn any affidavit which formally sets out this defence of undue influence is a hugely complicating factor, despite the fact that he

was given every opportunity to do so in the High Court. One may nevertheless reasonably infer from the available facts that the

circumstances of this case are not altogether distant from that of an Etridge-style case, save that the guarantees here were given

by the parent in support of the son’s business. Putting this another way, if the father had sworn an affidavit which formally deposed

to the fact that he relied on his son and that the loans were for the son’s business and that based on this he claimed undue influence

in the Etridge sense of that term, the case for permitting him to defend on these grounds would, I think, have been irresistible. And

since we know from the other available evidence that these either are or might well be the facts, the prospect of injustice raised by

granting summary judgment by reason simply of the absence of an affidavit from the father is, I fear, just too great. This is why, but

for the considerations of stare decisis addressed in Part IV of this judgment, I would have held that the Etridge defence was, in

principle, at least available to Mr. Maurice Connolly. This is not to say that had the matter gone to plenary hearing that Mr. Maurice

Connolly would necessarily have succeeded. It is, however, to say that on that view of his defence he had, at least, raised an

arguable defence so that the Bank was not entitled to summary judgment against him.

III

Application of equitable principles independently of O’Brien and Etridge

12. Quite independently of the authority of O’Brien, Etridge and Roche, I consider that, in any event, there is at least an arguable

duty cast upon a bank by equitable principles to take steps to ensure that a potentially vulnerable surety is appropriately advised in a

case of this kind. Of course, the context is everything and, for my own part, I would fight shy of prescribing ex ante rules unless the

force of experience demonstrated that such was necessary. Nevertheless, that which might suffice in the case of a guarantee to

cover an ordinary consumer loan (such as for a car or a domestic appliance) should not necessarily be regarded as sufficient where -

as in the present case - the sums guaranteed by the two guarantees were, by any standards, very large. The loans in question

amounted to sums which, if the surety were called upon to honour the full amount, could have life changing implications for him in

terms of the security of his dwelling, his livelihood and any prospects he might otherwise have had in terms of living out his advancing

years in any comfort or degree of financial security.

13. This is certainly true in the present case where the Bank now claims judgment as against the surety in the sums of over €2.37m.

in respect of both loans and where it was awarded summary judgment against the surety in respect of the first guarantee in the sum

of €1.185m. (As I have already noted, in the High Court Fullam J. adjourned the claim in respect of the second guarantee in the

absence of any evidence that the surety had been independently advised). One might further observe that a requirement that a bank

should ensure that such a surety is appropriately advised in such circumstances does not impose significant burdens or create

unnecessary barriers to supply of credit.

14. It may be objected that a requirement of this kind involves the imposition of new rules or requirements for which there is no

legislative sanction. One may readily concede that no modern court could justifiably invent or conjure up a new equitable principle by

reference to the subjective notions of fairness and equity on the part of individual judges. If the law is considered to be

unsatisfactory or inadequate, far-reaching change of this kind is reserved to the Oireachtas by Article 15.2.1 of the Constitution.

Accordingly, as Lord Greene M.R. put it in Re Diplock [1948] Ch. 465, 481-482, if a claim “in equity exists, it must be shown to have

an ancestry, founded in history and the practice and precedents of courts administering equity jurisdiction.”

15. To my mind, however, such a requirement as I have suggested represents simply the application in a modern context of standard

principles of equity for which there is much historical precedent. From Allcard v. Skinner (1887) 36 Ch.D. 145 to Grealish v. Murphy

[1946] I.R. 35 to Lloyds Bank v. Bundy [1974] EWCA Civ 8, [1975] Q.B. 326, , equity has shown itself prepared to come to the aid of

the vulnerable who were not independently legally advised where the transaction is fundamentally improvident. This is true even

where “the deed...was in law a transaction for value”: see Grealish v. Murphy [1946] I.R. 35, 49 per Gavan Duffy J.. If there is no

modern willingness to re-fashion and adapt these principles to modern conditions in the case of vulnerable sureties, it may simply be

that we the judges who are required to tend to the gardens of equity by ensuring that their verdure remains fresh, vibrant and

relevant to the modern world have allowed an ancient path of escape from the gravel paths of the common law to become disused

and overgrown.

16. Yet if equity will not bring that moral element to the common law and ensure that in a modern setting the vulnerable are

adequately protected, the principles of equity will in time come to be seen as just another set of rules, as desiccated, inflexible and

arid as they were in the days of Lord Eldon in the early 19th century. That is why I believe that this Court should be astute to hold

the plaintiff as the privileged holder of a banking licence to the highest standards. This is not in any way to question the bona fides of

the bank, but rather to ensure – as much for the bank’s interest as anyone else – that it takes appropriate precautions in the case of

potentially vulnerable and elderly sureties to ensure that the implications of such a guarantee are fully understood and appreciated.

17. In this regard I have not overlooked the fact that Mr. Maurice Connolly has not sworn any affidavit in support of this defence. As

I have already had occasion to remark elsewhere in this judgment, this omission has done his case few favours, as many critical

details relevant to our consideration of these issues are absent from our knowledge as a result. It is nonetheless not unrealistic to

suppose that when Mr. Maurice Connolly first acted as surety for his son in 2005, he was at least in his 50s at the time the security

was executed. While I would be the last to regard a person in his 50s as “elderly”, the key point here really is that Mr. Maurice

Connolly put what must have been a considerable amount of personal capital at stake by way of two guarantees in support of the

business venture of his son and in respect of which business venture he stood to receive no direct personal benefit. If matters went

wrong, he stood to lose possibly all of that capital which, doubtless, had been accumulated after a lifetime of hard work and effort,

not least his farm at Dunanore, Folksmills, Co. Wexford. It can therefore be argued that in these circumstances the transaction was

fundamentally improvident so far as this guarantor was concerned, so that in the words of Lord Denning in Lloyds Bank v. Bundy, it is

“not right that the strong should be allowed to push the weak to the wall.”

18. One may also fairly infer from the affidavit of his son, Mr. John Connolly, that Mr. Maurice Connolly had no involvement at all in the

proposed development which was the subject of the business loan. As Mr. John Connolly explained, the loan was in respect of a

development venture involving the purchase and licensing of certain lands. It would seem from that affidavit that he was the

unfortunate victim of a fraud in relation to the title to those lands and that he is awaiting the outcome of an action for deceit against

the alleged perpetrators of this fraud before he (i.e., Mr. John Connolly) will be in a position to repay the moneys. Independently of

these civil proceedings, a criminal prosecution is still pending against the two individuals who are alleged to have fabricated the title

documents, an earlier conviction for fraud having been set aside by reason of an irregularity in the documents which were made

available to the jury.

19. In these circumstances, I believe that, but for the considerations of stare decisis which I will next address in Part IV, Mr. Maurice

Connolly has established at least an arguable case that, based on the equitable principles I have already described, the bank was

under a duty to ensure that he was independently advised prior to the execution of these two guarantees. It is true that, as I have

already noted, Mr. John Connolly’s solicitors provided a declaration that Mr. Maurice Connolly had been offered an opportunity of

independent legal advice in respect of the first guarantee in 2005 and that this declaration was then executed by Mr. Maurice

Connolly himself. But since these solicitors also acted for the borrower, Mr. John Connolly, they cannot be regarded as having

provided the opportunity of independent legal advice to Mr. Maurice Connolly: see, e.g., the comments to this effect of Irvine J. in

Darby v. Shanley [2009] IEHC 459. As McGovern J. stated in Danske Bank v. Madden [2009] IEHC 319, the usual meaning to be

attributed to the term “independent legal advice”:

“is that it is advice obtained by the party himself from a lawyer retained by him and not advice coming from the legal

advisor of a third party with whom he is entering into a legal relationship.”

20. Accordingly, were the issue res integra and not covered by recent authority (which I will deal with in Part IV), I would have gone

further than Fullam J. did in respect of the first guarantee in that I would have permitted Mr. Maurice Connolly to defend the claims in

respect of both guarantees and not just simply the second guarantee. In these circumstances I would accordingly have adjourned

the entirety of the Bank’s claim to plenary hearing.

IV

The impact of recent authorities and the doctrine of stare decisis

21. I have thus far proceeded on the basis that the matters at issue are res integra and that the issue is not determined by recent

authority. It is, however, clear that this is not so, at least so far as this Court is concerned, since within the last few weeks this

Court has twice rejected arguments along the lines I have just canvassed.

22. In a judgment delivered on 7th December 2016 in de Kretser, I was the dissentient who argued that a surety had raised an

arguable defence to the effect that the Bank was under an affirmative duty to see that she was independently advised. This

argument was rejected by Birmingham J. who delivered the judgment of the majority and with whom Peart J. agreed.

23. A similar view to that of the majority in de Kretser was taken by Irvine J. (and with whom Ryan P. and Hanna J. concurred) when

she delivered the judgment of this Court in Curran on 21st December 2016. The decision in Curran was a case where a mother

executed a guarantee for some €1m. in respect of her son’s company with whom she had had a minor involvement and where she was

not advised as to the necessity of securing independent legal advice. As Irvine J. stated in her judgment:

“It is only relevant to consider whether it is arguable that the bank was obliged to make inquiries to ascertain whether,

having regard to her connection with the company, she fully understood and was freely entering into the guarantee, if

she could first establish a credible or arguable case on the facts that she executed the guarantee in circumstances of

undue influence. In turn, that required her to set out on affidavit the type of facts, details and circumstances upon which

she would rely at the trial to establish that her will was overborne by her son, Michael Curran, when she executed the

guarantee.”

24. It is clear from this judgment that the bank would be placed on inquiry only where Allcard v. Skinner-type undue influence – or, at

least, something approaching this – had been established by the surety, even in the case of parent/offspring guarantees for large

sums from which the surety stood to gain no personal benefit.

25. In these circumstances, it is plain that the settled view of this Court is to the effect that, at least absent an express claim of

undue influence or a claim of misrepresentation, a bank is under no such affirmative duty to ensure that a surety receives

independent legal advice. Although this Court has not yet since its establishment in October 2014 been required to formulate its own

rules regarding stare decisis, I think that by analogy with the doctrine of precedent applicable in the case of prior decisions of a co-

ordinate court (see, e.g., the comments of Parke J. in Irish Trust Bank v. Central Bank of Ireland [1976-1977] I.L.R.M. 50, 53 where

the practice of one High Court judge following an earlier decision of another High Court judge was discussed), then absent special

circumstances, an individual member of this Court should normally yield to the prevailing consensus as reflected in prior decisions of

this Court which are clearly on point and which, in the words of Finlay C.J. in Finucane v. McMahon [1990] 1 I.R. 165, 207, represent

decisions “reached after the most comprehensive and detailed consideration of all relevant factors.”

26. The decision in Finucane had concerned the proper interpretation of the political offence exception in s. 50 of the Extradition Act

1965 in respect of which there had been a range of divergent judicial views expressed by various Supreme Court judges in the case-

law leading up to Finucane. Even though Finlay C.J. evidently disagreed with the majority view which ultimately emerged from that

case-law and in Finucane itself, he stated that he was henceforth willing to accept the majority view and adopt it as his own by

reason of stare decisis. By analogy, therefore, with the approach adopted by Finlay C.J. in Finucane, I consider that it would be

appropriate that I should accept and adopt this majority view as reflected in de Kretser and Curran “so that the basic principles

underlying it may clearly represent the decision of this Court”: see [1990] 1 I.R. 165, 207.

Conclusions

27. In summary, therefore, while I still respectfully adhere to the views which I have expressed on this topic of the duty of banks

regarding the giving of guarantee by potentially vulnerable sureties in both my dissent in de Kretser and elsewhere in this judgment, it

is important that in a collegiate court such as the Court of Appeal an individual member should ultimately submit to the settled views

of the majority of that Court as reflected by stare decisis. As I consider that this issue has now effectively been determined by the

majority decision in de Kretser and by the unanimous decision in Curran, it is, accordingly, therefore, simply for reasons of stare

decisis that I agree with the decision of Finlay Geoghegan J. that Mr. Maurice Connolly has not raised any arguable defence in respect

of the first guarantee.

28. In these circumstances, it follows that his appeal should accordingly be dismissed.