If you are the spouse or family member of someone seeking a loan with your help, either by securing the loan or offering another collateral, you may have been referred to an independent lawyer from the borrower or lender to give you advice. The reason for this is to mitigate the risk to the lender that you will be unduly influenced by offering your assistance.
As a general rule, the warranty can be canceled by the courts when one party has been induced to enter into a transaction by the undue influence of another party. The abuse of influence may be real or suspected for certain relationships of trust. A court will examine the relationship to determine if there is a presumption of undue influence and will likely come to that conclusion where there is a potential for domination. The potential for dominance can exist when the parties to a transaction are unequal in terms of bargaining power, financial strength, sophistication, or mutual dependence. The best way to rebut the presumption of undue influence is to insist that the parties obtain independent legal advice before providing the collateral or security to the lender.
An example where the need for independent legal advice may arise is when a spouse offers a guarantee to finance the business enterprise of the other spouse. Suppose the family house is in the wife’s name and the bank requires the wife to give a mortgage on the house to secure the loan to the husband. Although a conjugal relationship does not automatically trigger the presumption of undue influence if, in this example, the wife is financially unsophisticated and / or financially dependent on her husband, courts may find that she has been unduly influenced by her husband to grant the mortgage. . Other examples of undue influence may be where the wife was asked to guarantee a loan or to pledge personal property for the loan.
Canadian case law has emphasized the importance for parties to a financial transaction to obtain independent legal advice. In the example above, the consequences for the bank of not ensuring that the wife obtains independent legal advice could mean that the bank’s guarantee is unenforceable against the wife. Where it is likely that a relationship could lead to undue influence, the lender should insist that the party receive independent legal advice, rather than allowing that party to waive their right to independent advice.
However, the courts have ruled that independent legal advice is not the only way to rebut the presumption of undue influence. The Ontario Court of Appeal in Bank of Montreal v. Duguid stated that in the absence of an independent legal opinion, the presumption of undue influence can also be rebutted when the defendant lender can prove that the contract was signed by a free and independent spirit. In this case, the court believed that the wife was aware of the financial transaction and knew the risks of providing the collateral to the bank. Consequently, the guarantee provided by the bank was enforceable.
Lenders generally insist that those who guarantee loans to others obtain independent legal advice before signing the documents. This is done to ensure that collateral is maintained in the event of loan default and that lenders take action to collect from third parties. Independent legal advice is part of the lender’s arsenal to ensure security.