A contract can under Kenya law be set aside on a number of grounds;
1. Undue Influence
2. Misrepresentation
3. Illegality
4. Duress
The
Application of these principles to Banking i.e. what a banker should
safeguard against when taking security to avoid being liable.
CIBC Mortgages PLC V. Pitts & Another (1993) Vol. 4 All E.R. 433
This is an illustration as to how a problem can arise when securities are being taken.
A debenture is a floating security tied on assets of a company that will crystallise after certain effects.
The
facts in this case were that a husband and wife jointly owned a
matrimonial home which was valued at £275,000 in 1986. There was an
encumbrance on that property in favour of a building society for
£16700. In 1986 the husband told the wife that he would like to borrow
money on the security of the home and to use the loan to buy shares in
the stock market. The wife was most reluctant but as a result of
pressure, brought upon to bear on her by the husband, she eventually
agreed. Both the husband and wife signed an application for a loan from
the plaintiff in the amount of a £150,000 for a period of twenty
years. And the purpose of the loan was expressed in the application to
be for the purpose of paying off the existing mortgage with the building
society and for the Purchasing of a Holiday Home. The Plaintiff agreed
to advance the £150,000 for 19 years and the husband and wife signed
the Mortgage offer and the legal charge prepared by the Plaintiff’s
solicitors. The wife did not read those documents before signing them
neither did she receive separate advice about the transaction and nobody
suggested that she should in fact seek advice. She did not know the
amount that was being borrowed, the bank then proceeded to disburse the
loan, the existing mortgage with the building society was paid off and
the balance of the amount of the loan was paid into a joint account in
the names of the husband and wife. The husband then utilised that money
to speculate on the stock market and was in fact at some stage at least
in the books able to convert himself into a Millionaire through his
stock dealings. The stock market then crashed in October of 1987 and
the husband was then unable to keep up the Mortgage repayments and the
Plaintiff then applied for an order for possession of the matrimonial
home.
The
wife contested the application for possession of the matrimonial home
on the ground that she had been induced to sign the mortgage by
misrepresentation, duress and undue influence on the part of the
husband. The judge held that the husband had exercised actual undue
influence on the wife to procure her agreement and that the transaction
was manifestly disadvantageous to her. But since the husband had not
acted as an agent of the Plaintiff and the fact that there had been a
joint advance to both the husband and the wife, the wife’s claim
failed. She appealed to the court of appeal and the appeal was
dismissed on the grounds that the transaction was not manifestly
disadvantageous and therefore the wife could not succeed on undue
influence. And furthermore the Plaintiff had neither actual or
constructive notice of any irregularity.
She
then appealed to the House of Lords which held that a claimant who
proved actual undue influence was not under the further burden of
proving that the transaction induced by undue influence was manifestly
disadvantageous but was entitled as of right to have it set aside as
against the person exercising the undue influence since actual undue
influence was a species of fraud and a person who had been induced by
undue influence to carry out a transaction which he did not freely and
knowingly enter into was entitled to have that transaction set aside as
of right. However the House of Lords went to hold, although the wife
had established actual undue influence by the husband, the Plaintiff was
not affected by it because the husband had not in a real sense acted as
its agent in procuring her agreement and that the Plaintiff had no
actual or constructive notice of the undue influence. So far as the
Plaintiff was concerned there was a joint application by both husband
and wife, the loan was advanced to both husband and wife and there was
nothing to indicate that this was anything other than a normal advance
to a husband and wife for their joint benefit and for that reason the
appeal was dismissed.
Look at the Judgement of Wilkinson J. and his discussion of the law in that case.
Under
our statutes the requirements is that the signatures of the chargees
must be witnessed by an advocate and he must say that he has agreed.
The circumstances when the security of a bank may be challenged under Kenya law
- UNDUE INFLUENCE
- DURESS
- UNCONSCIONABLE TRANSACTIONS
- MISREPRESENTATIONS
UNDUE INFLUENCE
The
equitable doctrine of undue influence under Kenya law covers cases in which the
particular relationship of trust and confidence leads the court to
presume that undue influence has been exerted without necessity for
proof. There are those relationships that are based on trust and
confidence where the assumption will be made , i.e. doctor/patient, or
advocate/client.
The
doctrine also extends to cases outside of such relationships in which
the court will uphold the plea of undue influence if satisfied that such
influence has been in fact exerted based on the evidence. These will
be cases of actual undue influence and the basis of the doctrine is the
principle that the court is justified in setting aside a transaction for
undue influence a transaction that is based on the victimisation of one
party by another.
In
the case for presumed undue influence it has to be established that a
relationship of influence exists between the parties and that a
transaction has taken place between those parties which was wrongful in
the sense that the party in the position of influence has obtained an
unfair advantage from the party subject of the influence.
ACTUAL UNDUE INFLUENCE IS A QUESTION OF FACT
Under what circumstances will the Bank be hit with the notice of undue influence. When is the bank affected by undue influence.
Undue
influence exerted by a third party over the giving of security will
generally not have effect on the validity of the security given by a
bank. There are circumstances however when the bank may be affected by
such undue influence
1. Where the Bank has constituted the 3rd Party its agent for purposes of procuring the execution of the security; (Agency)
2. Where the Bank has actual or constructive notice at the time of execution that it has been procured by undue influence. (Notice)
Bank Credit & Commerce (1990) Vol 1 QB 923
Paget
argues that before this decision, there was a tendency on the part of
the courts to utilise and widen the concept of agency for this purpose.
In a typical situation where a bank to which the husband was indebted
sought security in the form of a guarantee from the wife or a legal
charge in the joint names of husband and wife and the bank then left it
to the husband to procure his wife to execute the security but did not
take steps to communicate with the wife, it was then sufficient to
constitute the husband the agent of the bank. This theory is artificial
and the authority is the case of
Barclays Bank v. Obrien
When will the Bank be put on notice?
If
at the time of execution of a security the Bank has actual notice or
constructive notice that the security has been procured through undue
influence and equity is raised that disentitles the bank to rely on that
security, the circumstances constituting notice required to fix the
bank with the liability for another person’s undue influence will depend
on the nature of the undue influence that is alleged. Where actual
undue influence is alleged, it must be shown that notice of the
circumstances alleged to amount to the undue influence were known to the
bank.