Law - Legal obligation

by BHAG SINGH

Do consider the risk of being saddled with obligations and responsibilities before you allow your name to be used in a transaction.

Relatives and friends can end up asking one another for a favour. Sometimes a favour may be sought by a mere acquaintance. The help sought can vary from case to case.

A friend may ask another to be a guarantor for his son’s scholarship. A relative may ask another for permission to use his name to buy a car on hire purchase. A parent may ask for a child’s name to get additional facilities.

Where a person accedes to such a request, he allows his name to be used for the purposes of the transaction.

In the case of a scholarship, he becomes a guarantor. Where a car is to be thus acquired, he becomes the hirer and where facilities are sought, he becomes the borrower.

In close relationships, it is difficult to refuse such requests for help. The person approached may agree to the request out of a sense of obligation. It becomes even more difficult when the other person is a parent or elder sibling.

If the scholarship holder finishes his studies and fulfils his obligations, the person for whom the car is secured promptly makes the instalment payments, or the facility obtained is maintained and serviced, there will be no cause for grievances.

Problems arise when there is a default by the party for whom the favour is done. In the case of a guarantee, when the scholarship holder does not complete his studies or having done so, refuses to honour his obligation to serve, the primary responsibility no doubt rests on him.

However, the donor of the scholarship would usually have contractually reserved the option to recover the amount due from the scholarship holder or guarantor. This being the case, it would not be open in the absence of express specific provision for the guarantor to limit his liability on a proportion basis.

In theory, a guarantor could enjoy some security. He could, after he has paid the amount, seek to be indemnified by the scholarship holder and in the absence of availability of such indemnity, seek contribution from the co-guarantors.

However, it could transpire that both the scholarship holder and the co-guarantor may not be in a position to indemnify or contribute as they do not have the financial means. In such an event, the right to indemnity may turn out to be shallow, if not non-existent.

The situation assumes a different complexity when a hire purchase transaction is entered into to help another acquire an item. Here the lender of the name is actually the principal in the transaction. He is the hirer and becomes directly liable to the party that provided the financing for the item, that is, the owner.

The fact that the hire purchase transaction is entered into for the benefit of a third party is irrelevant in the context of the dealings with the owner of the item in question.

If there is a default in payment of instalments which cannot be remedied, it becomes the hirer’s duty to make the car available to be repossessed. If the car is hidden away to prevent repossession, that itself would constitute an offence on his part.

On the other hand, if the car is repossessed and sold off, this may not be the end of the matter because the amount received may not be enough to settle the balance. The difference will become a debt owing from the hirer.

It is pointless for the hirer of the car to say that it was meant to be used by and paid for by the friend or relative in question, because this is an arrangement that does not concern the owner.

Where a person, in deference to the wishes of a family elder, allows his name to be used to obtain a financial facility, the fact remains that in so far as the transaction is concerned, he is the person who is entering into the contract.

There may in such cases be an element of “undue influence” under section 16(1) of the Contracts Act 1950. This section says that “A contract is said to be induced by undue influence where the relationship subsisting between the parties is such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.”

In this regard, a person is deemed to be in a position to dominate the will of another “where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other”.

However, despite the existence of such a situation, the fact remains that the person who enters into the transaction will be held liable according to its terms. Even if the third party knows about the undue influence, the courts are inclined to take the view that since the influence is coming from a party not privy to the contract, it is not relevant.

So what should a person do when approached to become a guarantor or to allow his name to be used as a party in a transaction? There are a few issues to consider here.

It is important to consider the person involved whom one has been asked to assist, the nature of the transaction as well as the circumstances that make necessary or require such involvement in the transaction.

Another factor to consider would be to know the actual liability in the event of the friend or relative defaulting. Such a person may have the capacity to meet any obligations arising.

However, the uncertainties of life and unforeseen events can change the scenario. Thus it is a matter for the individual involved to consider whether in a worst-case scenario he would be able to discharge the obligations that arise.

Once these aspects have been considered, the risks involved can be appreciated. It would then be open for him to decide.