knowledge 5 April 2019 |

Bank’s Decision not to Pursue “Vulnerable Customer” Thwarted by Guarantor

In Allied Irish Banks plc v O'Reilly¹ the bank had brought summary proceedings seeking judgment against the defendants as guarantors for the alleged liabilities of their son, (the “borrower”), to the bank.

The bank had classified the borrower as a “vulnerable customer” for the purposes of the Consumer Protection Code and no proceedings had been brought against him. However, the bank asserted that the borrower’s status had no bearing on the guarantees given by the defendants and the bank’s right to enforce those guarantees.

Arguments by the Guarantors

In response, the defendants said that the borrower suffered from depression and might have been symptomatic when he entered into the loan agreement. The defendants would not have entered into the guarantees had they known this. They said that if the borrower had been symptomatic, the bank could have become aware of that, had it taken reasonable steps. Its failure to do so and its extension of the loan to the borrower where he might have been under a “serious disadvantage due to his mental health” meant that the transaction was an improvident one. It obliged the bank to ensure that the borrower obtained independent legal advice prior to entering into the loan agreement. The bank did not do so and consequently the loan agreement might be void. There was also an issue around the borrower’s capacity to enter into the loan agreement. The defendants argued that if the court found against the bank on any of these matters then, it would be bound to find that the guarantees were similarly void.

On this basis, the defendants argued that the matter should be adjourned to plenary hearing as they had a bona fide defence to the claim. They also sought to join the borrower as a third party to the proceedings in order to ascertain the state of his health when he agreed the loan and to seek an indemnity or contribution from him as a “concurrent wrongdoer” under the Civil Liability Act 1961 if he was found to have had capacity.

Counter-arguments by the Bank

The bank opposed the application saying that:

• there was no right to join a third party in summary proceedings;
• the defendants and the borrower were not “concurrent wrongdoers” under the 1961 Act as they were not responsible to the bank for the “same damage”;
• the terms of the guarantee precluded this course of action; and
• the court should exercise its discretion to refuse to join the third party where it would frustrate the bank's application for summary judgment.

Concurrent Wrongdoers?

The court granted the defendant’s application. Barniville J said that he was satisfied that under the court rules a defendant could join a third party to summary proceedings.

He said that the defendants and the borrower were “concurrent wrongdoers” under the 1961 Act. Where a lender had lent money to a principal debtor whose obligation to repay was guaranteed by a guarantor, the damage suffered by the lender by either party failing to pay was the non-recovery or non-repayment of the loan and was the “same damage”. While the amount that the defendants might be liable for under a limited guarantee might be lower than that due by the borrower, this did not affect the nature of the damage involved. As a result, the defendants could seek a contribution or indemnity from the borrower by joining him as a third party.

Interpreting the Guarantee

The guarantee itself stipulated that:

“…nor shall the Guarantor take any step to enforce any right or claim against the Borrower in respect of any moneys paid by the Guarantor to the Bank hereunder nor shall the Guarantor exercise any rights as surety in competition with the Bank unless and until the whole of the principal moneys and interest shall have first been completely discharged and settled…”

Barniville J was satisfied that the guarantee did not preclude the defendants from joining the borrower to the proceedings at this stage and the bank’s reliance on the relevant clause was premature.

He said that the question of whether this provision ultimately precluded the granting of a contribution or indemnity in favour of the defendants as against the borrower would be decided later on by the trial judge dealing with the third party proceedings. While he did not express a concluded view, he thought that there were a number of good arguments that the defendants might succeed on. He pointed out that the defendants had not paid any money to the bank under the guarantee and this appeared to be an important pre-condition to reliance on the relevant clause given its particular wording. Also, there was a good argument that the defendants were not seeking to “exercise any rights as surety in competition with the Bank” in the third party proceedings seeking an indemnity. Their doing so would be in the bank’s interest rather than “in competition” with it.

Balancing the Right to Join Third Party against Access to Summary Judgment

Barniville J concluded that while there was some force to the bank’s contention that the joinder was likely to adversely affect its application for summary judgment against the defendant guarantors, it was not sufficient to persuade him to exercise his discretion to refuse to join the borrower as a third party. However, he pointed out that the bank was entitled to pursue that application without disruption by reason of the joinder so he placed a stay on the third party proceedings until the outcome of the bank’s application for summary judgment against the guarantors.  If that application was successful, the stay would lapse and the guarantors could then pursue their third party proceedings. However, if the bank’s application for summary judgment was not successful, then that application would move to a plenary hearing, the stay on the third party proceedings would similarly lapse and all matters would be dealt with in the plenary proceedings as directed by the trial judge.

Comment

This judgment is significant for a number of reasons.  First, it clarifies that a third party may, in principle, be joined to summary proceedings.  Secondly, it clarifies that under the Civil Liability Act 1961, a failure to pay by a borrower or a guarantor constitutes the “same damage” and that such borrower and guarantor are “concurrent wrongdoers”.  This ability to join a borrower to proceedings against a guarantor may make life more complicated for lenders, particularly where the lender-protective provision in the guarantee is not widely drafted.  It is worth noting, however, that the court may also exercise its discretion (as it did in this judgment) to stay the third party proceedings until the summary judgment application has been heard. 

This provides a sensible balance between permitting guarantors (subject to any contractual restrictions) to seek the protections available to them from defaulting borrowers in law, while mitigating as much as possible any reduction in the efficiency of the summary proceedings.