Undue Influence and Third Parties Flashcards
In which situation is a bank put on inquiry regarding possible undue influence?
A. Whenever a spouse gives security for the other’s business loan
B. Only if the parties are in a commercial relationship
C. When the surety transaction is suspicious and non-commercial
D. Only if the surety signs without legal advice
C. When the surety transaction is suspicious and non-commercial
Explanation: As confirmed in Etridge, a non-commercial relationship and a transaction not obviously beneficial puts the bank on inquiry.
Which of the following best describes the concept of constructive notice in undue influence cases?
A. Actual knowledge of the influence by the creditor
B. Legal fiction where the court treats the party as if they knew
C. A warning letter from the solicitor to the creditor
D. Written proof that one party was coerced
B. Legal fiction where the court treats the party as if they knew
Explanation: Constructive notice means the party should have known or ought to have taken steps to find out – whether they did or not.
A wife signs a charge over the matrimonial home to support her husband’s business loan. The bank knows they are married but does not ensure she receives legal advice. What is the likely legal consequence?
A. The bank is not responsible unless the wife complains
B. The bank has actual notice of the undue influence
C. The husband, not the bank, will be held liable
D. The transaction may be set aside as the bank was put on inquiry but took no steps
D. The transaction may be set aside as the bank was put on inquiry but took no steps
Explanation: Under O’Brien, the bank is on inquiry and must take reasonable steps like ensuring independent legal advice.
A husband persuades his wife to take out a joint loan, claiming it’s for a holiday home. He instead invests in shares. The bank sees the loan application and believes it’s for a shared purpose. What is the likely outcome?
A. The bank is liable for failing to prevent the influence
B. The loan is automatically unenforceable
C. The wife can sue the solicitor for failing to intervene
D. The bank is not on notice and is protected
D. The bank is not on notice and is protected
Explanation: As in CIBC v Pitt, the bank saw no reason to doubt the loan’s purpose. There were no red flags → no constructive notice.
Which of the following is not one of the steps a bank must take when put on inquiry under Etridge?
A. Meet the weaker party in person
B. Ensure the party receives independent legal advice
C. Provide the solicitor with transaction details
D. Ensure the solicitor confirms the advice was given
A. Meet the weaker party in person
Explanation: The bank does not need to see the spouse personally – it may rely on the solicitor’s confirmation, unless it knows otherwise.
A solicitor gives brief advice without explaining the risk of losing the home. The wife signs under pressure from her husband. What are her rights?
A. She has no remedy
B. She may claim negligence against the solicitor
C. The contract is void and unenforceable
D. She can claim damages from the bank for undue influence
B. She may claim negligence against the solicitor
Explanation: If legal advice is inadequate, the lender is not liable if they relied in good faith. The remedy is against the solicitor.
According to Etridge, what is one of the solicitor’s core duties when advising a surety?
A. Ensure the transaction benefits the weaker party
B. Explain the seriousness and financial risk of the agreement
C. Notify the bank if the spouse is unhappy
D. Draft the loan documents for both parties
B. Explain the seriousness and financial risk of the agreement
Explanation: The solicitor must explain documents, risks, and consequences – particularly the risk of losing the home.
A wife signs a charge after a solicitor explains the risk and confirms her understanding. Later, she claims she still felt pressured. What is the likely result?
A. The bank is liable for constructive notice
B. The solicitor is automatically liable
C. The bank is protected, as reasonable steps were taken
D. The contract is void due to presumed influence
C. The bank is protected, as reasonable steps were taken
Explanation: If the solicitor gives proper advice and confirms it, the bank is safe, even if influence existed behind the scenes.
