Undue influence - House of Lords restates the law and gives guidance to banks and solicitors

Royal Bank of Scotland v Etridge (No 2), 11 October, 2001 (House of Lords).

This is an important case for banks, borrowers, solicitors and any individual giving security for a third party's debts.

The House of Lords has held that the O'Brien principle extends to all guarantees by individuals where the relationship between the guarantor and the principal debtor is not commercial.

This is a major development and means that in every situation where a bank is taking a guarantee from an individual, the bank should be alert to the question whether or not the relationship between the individual and the debtor is non-commercial. If the relationship is non-commercial, the bank is 'put on inquiry' as to possible undue influence.

The bank must then take steps to be sure that the transaction has been properly and fully explained to the guarantor and that the guarantor has received appropriate advice. Failure to do so could mean that the bank is unable to enforce the guarantee.

The House of Lords has issued specific guidance for banks and solicitors to follow to avoid security being vitiated.

There are links from this update to practice notes on undue influence and on the House of Lords' guidance to banks and solicitors.

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