When and why is independent legal advice (“ILA”) required? This can seem a bit of a mystery to the individuals who are being required to obtain this by a lender.
A lender, when put on enquiry as to the possibility of undue influence or misrepresentation to an individual by a third party will usually insist they take ILA.
For example, where a spouse offers to stand as guarantor for the debts of their partner or their company, perhaps a loan is being made from the “bank of Mum and Dad” to assist with a house purchase where there is a bank mortgage, or there is a loan to and arrangement by a spouse or civil partner to assign their rights in any financial provision and costs order to enable them to obtain proper advice and representation within family proceedings when they otherwise wouldn’t have the financial means to pay legal fees (a Sears Tooth Agreement).
During the financial crisis of the early 1990s, many people who had given guarantees found themselves sued by banks to make good on their financial promises. We at Mundays defended a number of individuals in those circumstances where it was quite clear our clients had signed up to their obligations without legal advice and had been blissfully unaware of the full implications, including the loss of their family homes. There were many similar cases at that time. In one, Barclays Bank Limited v O’Brien, the Supreme Court, (then the House of Lords), established the principle that a bank or lender will be fixed with constructive notice of presumed undue influence in certain circumstances, such as those outlined above. In those situations, the lender would be unable to enforce its security unless before taking that security, it had made sure the individual involved had not been subject to undue influence. The one clear route to do that is to ensure that the individual had taken ILA in accordance with the guide rule set out in the Supreme Court case of Etridge.
The lender will require ILA to protect its own position. It is worth noting that the lender is not requiring ILA because of concerns for you – but primarily a concern to protect their loan.
When a solicitor gives a certificate to a bank that ILA has been given, the bank might have a right of action against the solicitor if the solicitor has not given the advice properly. A solicitor cannot simply sign a certificate to say that ILA has been given therefore unless it has indeed been provided in accordance with the guidelines in the Etridge case, even where the person who has to be given the ILA believes they understand everything.
The Etridge rules required ILA meetings to be face to face, not over the phone, and be without the presence of anybody else in the transaction involved. In the current coronavirus pandemic, the rules are being adapted to address health and safety concerns. Lenders are agreeing to advice by video link providing additional measures are in place along the same lines as a face to face meetings. The solicitor must still ensure the individual fully understands their obligations, both those obvious in the immediate documentation they are signing, but also incorporated in what are usually references to other documents, depending upon the nature of the transaction.
. It will be interesting to see whether the rules remain relaxed or revert to requiring face to face meetings after the Covid-19 crisis passes.
Regardless of whether the ILA is being provided via a video link or face to face, it is not the role of the solicitor to analyse the commercial viability of the transaction. Whether or not a client has an appetite for that risk is clearly their personal decision.
There must be sufficient discussion for the solicitor to be sure that the client receiving the ILA understands their legal obligations and, most importantly, what happens if things go wrong.
Although the process of having an independent legal adviser may seem lengthy and cumbersome, the Supreme Court has devised it as a protection for individuals. Sometimes even those who do not view themselves as vulnerable discover because of the ILA process that they had not appreciated the implications of signing, upon them or their families.
Whilst the bank will request it for its own protection, it is therefore a useful step to protect the individual, as the Supreme Court intended.
It should be seen as a positive tool to prompt a review of what protection may need to be put in place before or at the same time as the arrangements that are being contemplated. For example, life assurance or key man insurance. Is there a need to ensure wills, Powers of Attorney and any corporate documentation are in line with the potential outcomes and would allow the situation to be managed in the event of death or incapacity?
ILA advice sessions allow the consideration and mitigation of potentially negative outcomes as an insurance while planning for the success or positive expectations that are usually the motivating factor triggering the ILA need in the first place.
For more information, please contact Michael Brierley, Partner in our Contentious Probate team or Fiona McAllister, Partner in our Corporate & Commercial team.
The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP.