Signing any legal document must be an exercise of free will and, where such documents are executed under pressure from others, they are often not worth the paper they are written on. That principle lay at the heart of a High Court case in which two brothers asserted that they would never have underwritten $74.6 million in corporate loans had it not been for their father's undue influence.
The case concerned five loans which were advanced for the purpose of refinancing a large-scale family-controlled business that had been built up by the father over many years. Both he and his sons signed personal guarantees in respect of the loans, which were made to single-purpose vehicles (the borrowers).
Numerous non-payment events of default ensued and the borrowers' parent company entered voluntary liquidation overseas. The lenders launched proceedings with a view to enforcing the guarantees but were met with the brothers' arguments that they were not binding upon them in that their signatures on the documents were the product of undue influence brought to bear on them by their father.
The brothers asserted that they had little or no active involvement in the business founded by their father, whom they characterised as an aggressive and domineering man who expected them to do as they were told without question. They claimed that their ability to make free and informed decisions had been overborne by their father, who took advantage of his influence so that they entered into transactions which exposed them to enormous liabilities that far exceeded their assets. They said that they had no knowledge of or control over the risk they were taking.
In ruling on the matter, however, the Court noted that the brothers beneficially owned the parent company and were its only directors. The personal guarantees and other documents they signed were replete with warnings as to the nature of the risk they were taking and urged them in terms to take independent legal advice before committing themselves.
There was clear evidence that their father was in de facto control of the business, but the brothers' arguments that they did not understand the nature of the guarantees they were signing carried no degree of conviction. Both were highly educated men who had taken business degree courses and they had no realistic prospect of establishing that their father had abused his position or unfairly exploited his influence over them. They had not asserted that there was any coercion, pressure, deliberate concealment or misrepresentation on his part.
The lenders' insistence on the guarantees was entirely normal business practice and there was nothing about them that called for an explanation. The Court entered summary judgment against the brothers in the full amount of the lenders' claim. The lenders were also awarded summary judgment against the father, who had put in no defence to the claim.
For advice on personal guarantees contact Leanne Schneider-Rose l.schneider-rose@sydneymitchell.co.uk or Roy Colaba r.colaba@sydneymitchell.co.uk on any contractual matter.
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