Undue influence: the risks for personal guarantees and third party security
Under English law a personal guarantee or a security instrument can be set aside if the surety proves that he or she was “unduly influenced” by the debtor to provide the guarantee or the security and that the lender was “put on inquiry” as to the existence of such undue influence but failed to take all reasonable steps to determine its existence. Therefore, undue influence could result in an individual being able to avoid its liability under the said contracts and, thus, care needs to be taken by a financier when a personal guarantee or third party security is obtained as part of the security package. However, to do so one needs to clarify when a lender is considered to have been “put on inquiry” as to the existence of undue influence and which are the “reasonable steps” a financier needs to take to satisfy itself whether the guarantor or security provider has been unduly influenced or not. The leading case on the matter is Royal Bank of Scotland plc v Etridge (No.2) and others¹ which
