Bank guarantees and undue influence: an Australian perspective

Abstract

Undue influence is concerned with a form of pressure exerted to make a person enter into a contract such as a guarantee. Undue influence is often pleaded in actions relating to guarantees-the most common kind of banking securities-since these frequently involve parties who have close relationships with each other. A contract of guarantee may be set aside if the surety or guarantor is induced to enter into the contract in circumstances in which he or she was prevented from exercising independent judgement. Thus, undue influence connotes the improper use of the dominance acquired by one person over another person for the benefit of the former, so that the acts of the person influenced are not his or her free voluntary acts. The principle of undue influence is not confined to cases where the guarantor did not want to enter into the transaction but was forced to do so. This article deals with a critical analysis of the doctrine of undue influence, its scope and limitations in its application to guarantees, and the implications of these for banks.

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