Chapter 11 Guidance on questions in the book

Question

Jasper, a millionaire drug addict, has been attending intensive one-to-one drugs counselling with Kringe for the past nine months and has finally managed to kick his habit. Jasper believes that Kringe has transformed his life and so, overwhelmed by gratitude, tells Kringe that he wishes to renounce his fortune and give it all to Kringe. Kringe suggests in response that Jasper should keep some of his fortune for himself, but that he might like to invest £1 million in a private drug rehabilitation clinic that Kringe is setting up and might also consider guaranteeing Kringe’s borrowing for the venture. Jasper readily agrees. Kringe also suggests that Jasper should take legal advice, but Jasper refuses, saying that this would spoil the pure feeling of goodness the gesture has given him, describing it as a ‘bigger high than any drugs’. Jasper pays the money to Kringe and enters into a guarantee with Loot Bank plc of Kringe’s indebtedness. Two years later, Kringe has run off with one of his clients from the private clinic, and is no longer keeping up repayments on the loan to Loot Bank. Jasper, who now bitterly regrets his involvement with Kringe, seeks your advice as to whether he has any claim against Kringe and whether Loot Bank can enforce the guarantee against him.

Answer guidance

Remember that you are asked to advise Jasper, but in two different respects - first, whether he can bring a claim against Kringe to recover money paid to him and set aside any other contracts of investment he has entered into; and secondly, whether he can defend a claim brought by Loot Bank to enforce the guarantee, though both are dependent on establishing the vitiating factor of undue influence between Kringe and Jasper. So consider first whether there is any actual evidence of Kringe exerting improper influence, or whether their relationship of drug addict and drug counsellor attracts the presumption of undue influence. If the latter, you will need to consider the transaction as well, does it ‘call for an explanation’? And if so, has the presumption been rebutted, bearing in mind Jasper’s refusal of Kringe’s suggestion of independent legal advice? If undue influence is established as between Jasper and Kringe, that should allow Jasper his remedy, although Jasper may well have disappeared or not be worth suing. Also, don’t forget that the remedy of rescission can be barred in certain circumstances and (unlike misrepresentation) there is no formal regime for recovering damages for undue influence.

Probably of more practical use to Jasper is your advice about whether he can resist the bank’s attempts to enforce the guarantee, a three-party problem. In order to do this, Jasper must rely on the ‘constructive notice’ regime introduced in the O’Brien case and clarified in Etridge. This presupposes that undue influence has been established, as before, between Jasper and Kringe. If so, consider whether the bank had constructive notice of the possibility of undue influence, based on the transaction as it appeared. Although this regime is most commonly used where the debtor and surety are husband and wife, or at least emotional co-habitees, it is not impossible for the bank to be saddled with notice in other cases. Lord Nicholls in Etridge suggested that banks are potentially on inquiry in ‘every case where the relationship between the surety and the debtor is non-commercial’. Finally, if the bank is put on inquiry, consider whether it took ‘reasonable steps’ to avoid the taint of undue influence. If not, Jasper can resist the enforcement of the guarantee.