LORD JUSTICE SCOTT: This appeal from the judgment of His Honour Judge Harder Q.C. raises yet again a problem that has been before the Court of Appeal on a number of occasions over the past ten years or so. The problem arises where a debtor is required by a creditor to provide security for his indebtedness; the debtor and creditor agree that the security will be provided by some third party; the relationship between the debtor and the third party, typically husband and wife, makes it likely that the third party's assistance will be forthcoming; the debtor procures the third party's consent by some material misrepresentation or by exerting undue pressure or influence of some kind; the third party signs the necessary security documents without any independent advice and without any explanation from the creditor of the true effect of the documents; the third party subsequently, as a defence to the creditor's attempt to enforce the security documents contends that he or she was induced to sign by the debtor's material misrepresentation, or did not properly understand the import of the documents, or that his or her consent was not a true consent having regard to influence or pressure exerted by the debtor. The question for the courts in these cases is whether the third party can escape from the effect of the documents that he or she has signed. In most cases the relationship between debtor and third party is that of husband and wife. In some, however, it is that of adult child and elderly parent. In none of the cases has the relationship between the debtor and the third party been such that, in law, undue influence is to be presumed until rebutted.
Some of the cases to which I have referred suggest that the answer to the problem depends on whether or not the debtor can be regarded as having been appointed by the creditor to act as agent of the creditor in procuring the consent of the third party to the proposed security transaction.
This approach has, to my mind, lent an air of unreality to some of the arguments addressed to the court. In a typical case in which a husband, seeking a bank advance for his business purposes, is told by his bank manager that security in the form of a charge over the jointly owned matrimonial home must be provided, it would astonish both the husband and the bank manager to be told that the husband had been appointed by the bank as its agent to obtain the wife's consent to the proposed charge. It may be that a court of equity will regard the bank as affected by equities arising out of the manner in which the husband persuades his wife to agree to the proposed transaction. And it may be that the extent to which the bank has left it to the husband to procure the wife's consent and to explain the transaction to her will be a critical feature of the case. But to describe the issue as one which depends on whether or not the bank must be taken to have appointed the husband as its agent to deal with the wife and to procure her consent serves, in my opinion, to mask the basis upon which in certain cases creditors have failed to enforce their security against the third parties and upon which in other cases they have succeeded.
I think it convenient in this judgment first to set out the salient facts of the case, as found by the judge, and then to consider the authorities from which must be extracted the principles of law and equity to be applied to the facts.
The facts
Mr. and Mrs. O'Brien were married in 1963. For the past 16 years or so their matrimonial home has been 151, Farnham Lane, Slough. They had purchased the property in December 1974 in their joint names with the aid of a building society mortgage. By 1987 the amount outstanding on the building society mortgage was £25,000 or thereabouts.
Mr. O'Brien is a chartered accountant who, in 1987, was in practice as a sole practitioner. He had also an interest in a company, Heathrow Fabrications Ltd., and was the company's auditor. He was not a director. He was, however, negotiating with the other shareholders to take an increased stake in the company.
The manager of Barclays Bank, Slough was a Mr. Roger Tucker. He and Mr. O'Brien were acquainted with one another and on first name terms. The company, when Mr. O'Brien first became associated with it, had banked at the Watford branch of Barclays Bank. Mr. O'Brien was instrumental in the account being transferred to Slough. In February 1987 Mr. Tucker was transferred to and became manager of a branch of Barclays Bank at Woolwich. The company's account was, accordingly, in April 1987 transferred to the Woolwich branch so as to continue to be supervised by Mr. Tucker.
The company had agreed an overdraft facility with the bank that by December 1986 had been raised to £40,000. The company frequently exceeded its agreed overdraft limit and, in December 1986, the debt balance on its account stood at about £57,000. In the first three months of 1987 a number of the company's cheques were dishonoured on presentation.
In April 1987 discussions took place between Mr. Tucker and Mr. O'Brien in which Mr. O'Brien was endeavouring to obtain an increase in the overdraft facilities available to the company. Mr. Tucker agreed to allow an overdraft facility of £60,000 for one month. His note of 2nd April 1987 records that:
"... I have agreed to mark an overdraft facility of £60,000 for one month, as O'Brien is presently in the course of remortgaging his house to raise the £60,000. If there is any problem with this (wife may be the problem) his son has raised £40,000 which if necessary will be in substitution of the £60,000".
This note shows that Mr. O'Brien was offering the house as security but that the Bank was aware that Mrs. O'Brien might not agree to the proposal.
The agreed £60,000 overdraft was utilised by the company but the additional security was not forthcoming. Discussions between Mr. Tucker and Mr. O'Brien continued. By 15th June 1987 the company's overdraft had risen to over £98,000. Cheques were once again being bounced.
In this state of affairs an important meeting took place between Mr. Tucker and Mr. O'Brien on 22nd June 1987. Mr. O'Brien wanted an increased overdraft facility for the company. Mr. Tucker wanted additional security. It was eventually agreed that the company would be allowed an overdraft facility of £135,000, reducing to £120,000 after three weeks. As security it was agreed that Mr. O'Brien would guarantee the payment by the company of its indebtedness and that his liability under the guarantee would be secured by a second charge over the house which was believed to have an equity of about £100,000. In addition Mr. and Mrs. O'Brien's son, who also worked in the company, was to provide certain security, but nothing turns on his involvement and I need not go into the details.
Mr. Tucker gave instructions for the necessary security documents to be prepared. These included a guarantee to be signed by Mr. O'Brien and a legal charge of the house to be signed by both Mr. and Mrs. O'Brien. When the documents were ready, Mr. Tucker sent them to the Burnham branch (Burnham was a sub-branch of Slough) to await signature by Mr. and Mrs. O'Brien. Together with the documents he sent an important memorandum to the Burnham sub-branch. The memorandum said this:
"re: Mr. and Mrs. N.E. O'Brien 2nd Charge 151 Farnham Lane, Slough, Berkshire
Our above named customers will be calling at your sub branch Burnham on Wednesday 1st July 1987 to sign the enclosed documentation. We would be obliged if you could witness our customers' signatures where appropriate and ensure that they are fully aware of the documentation signed. The second charge over the property is to be held in support of Mr. O'Brien's balance of account guarantee liability to Heathrow Fabrications Limited who bank with us. The company is currently afforded an overdraft facility of £107,000 and we are in the process of agreeing to increase this facility in the near future to £135,000. Thus our customers should be advised of the current level of facilities granted and that soon the maximum facilities to be granted to the company will be £135,000 and we will be looking to the guarantee for this sum which in turn is supported by the charge over the above property. Please ensure that our customers are fully aware of the nature of the documentation to be signed and advise that if they are in any doubt they should contact their solicitors before signing.
Enclosed are the following forms which should be completed as follows:-
305U Original
To be signed by Mr. O'Brien and witnessed by yourselves, Mr. & Mrs. O'Brien to acknowledge receipt of copies at foot of page.
305U with side letter on reverse
Side letter to be signed to ensure that there is no doubt that charge is to be in support of the guarantee liability. Mr. & Mrs. O'Brien to sign at foot and across join at top.
305U copies
Copy guarantees for customers' records".
Mr. O'Brien was informed that the documents were ready for signing. On 1st July he attended Burnham sub-branch. The guarantee, the legal charge and the side letter were produced for his signature by a clerk. The clerk did not follow the instructions given by Mr. Tucker's memorandum. She simply produced the documents, Mr. O'Brien signed and she witnessed his signature. On the next day, 2nd July, Mr. O'Brien brought his wife to the sub-branch. The documents, already signed by Mr. O'Brien, were produced by the same clerk. Again the clerk failed to follow Mr. Tucker's instructions. Mrs. O'Brien signed the legal charge and the side letter. The clerk witnessed her signature. No explanation of the documents or of their effect was given to Mrs. O'Brien. She did not read the documents before signing.
The guarantee signed by Mr. O'Brien was a guarantee, unlimited in amount, of the liabilities of the company to the bank. The legal charge, signed by both Mr. and Mrs. O'Brien, contained a charge of 151, Farnham Lane to secure the payment of any liabilities of Mr. O'Brien to the bank. The guarantee and the legal charge were dated 3rd July 1987. The side letter, also signed by both Mr. and Mrs. O'Brien, was not dated and reads as follows:
"We hereby agree acknowledge and confirm as follows:-
(1) That we have each received from you a copy of the Guarantee dated 3rd July 1987 (a copy of which is attached hereto) under which Nicholas Edward O'Brien guarantees the payment and discharge of all monies and liabilities now or hereafter due owing or incurred by Heathrow Fabrications Limited to you.
(2) That the liability of the said Nicholas Edward O'Brien to you pursuant to the said Guarantee is and will be secured by the Legal Charge dated 3rd July 1987 over the property described above made between (1) Nicholas Edward O'Brien (2) Nicholas Edward O'Brien and Bridget Mary
O'Brien and (3) Barclays Bank PLC.
(3) That you recommended that we should obtain independent legal advice before signing this letter.
Yours faithfully".
A copy of the guarantee was not given to either Mr. O'Brien or Mrs. O'Brien. No one recommended to Mrs. O'Brien that she should obtain legal advice. She did not read the side-letter before signing it. She did, of course, have an opportunity of doing so.
The judge found that "no steps were taken [by the clerk] to ensure that either of the defendants was aware of the nature or effect of the documents they were signing, and no suggestion was made to them that independent legal advice ought to be sought" (page 21 of the transcript of the judgment).
On the strength of these security documents the bank allowed the company's overdraft, which was standing at about £107,000 when the documents were signed, to increase to £135,000. But the company's indebtedness continued to grow and soon exceeded the £135,000 figure. By October 1987 the indebtedness was over £154,000 and in November formal demand was served on Mr. O'Brien calling for payment pursuant to the guarantee.
There was an issue between the bank and Mr. O'Brien as to Mr. O'Brien's understanding of the documents he had signed. In particular, Mr. O'Brien alleged that the effect of the guarantee had been misrepresented to him by Mr. Tucker. The learned judge, however, accepted Mr. Tucker as "a man of integrity and a truthful and reliable witness". He had no hesitation, he said, in accepting the evidence of Mr. Tucker wherever it conflicted with that of Mr. O'Brien. Accordingly Mr. O'Brien's liability under the guarantee was established by the judgment below. He has not appealed.
Mr. Tucker did not, however, himself deal with Mrs. O'Brien. She was not a customer of Barclays Bank. Her knowledge of the proposed legal charge, the reasons for it and the desirability of her signing it came exclusively from her husband. It is important, however, to notice that Mrs. O'Brien does not fit the now rather outmoded pattern of the down-trodden, uneducated wife, subservient to her husband and his wishes and unable to understand financial matters or to take practical business-like decisions. Mrs. O'Brien had, in her youth, passed GCE and secretarial examinations. She had worked as a secretary before, at the age of 19 years, marrying Mr. O'Brien. In 1987 she was in her early 40s. Between 1980 and 1981 she had worked in Dunstable as an office manager. For some years Mr. O'Brien worked in Saudi Arabia and, in his absence, Mrs. O'Brien had to manage the household finances. On the evidence before the learned judge, Mrs. O'Brien cannot in my opinion, be described as a lady in a particularly vulnerable position vis-a-vis her husband.
The circumstances in which Mrs. O'Brien was persuaded by her husband to sign the legal charge are set out in some detail in the learned judge's judgment. Mrs. O'Brien made, broadly, two complaints. First, she contended that her husband put her under undue pressure to sign and that she finally succumbed to the pressure. Second, she contended that her husband misrepresented to her the effect of the legal charge. She knew she was signing a mortgage of the matrimonial home but she believed, from what Mr. O'Brien had told her, that the security was limited to £60,000 and would last only three weeks.
On the misrepresentation issue, the judge found the facts in favour of Mrs. O'Brien.
He said this:
"Nevertheless, I have come to the conclusion, after much hesitation, that Mr. O'Brien did falsely represent to her that the charge was limited to secure £60,000 and that it would be released in a short time, when the £60,000 had been raised by remortgage. Further, I conclude that whatever other arguments may have found favour with her, that false representation was at least material in inducing Mrs. O'Brien to execute the charge". (Page 39 of the transcript).
The learned judge's findings of fact on the undue pressure issue are, I think, less clear cut. Mrs. O'Brien was, she said, first told by her husband about the proposed legal charge in May or June 1987. The learned judge records her evidence about the circumstances in which she was persuaded to sign this passage:
"At the same time she knew that there were outstanding mortgages on the house amounting to at least £36,000 and she was reluctant to put the family home at risk by borrowing more money which would virtually leave them without an equity. She considered it a great risk, and that others were involved in the company who ought to share the risk. Her husband, however, became extremely insistent and started following her and insisting that she must sign the papers. He told her it was only for three weeks, by which time the mortgage would be through. He said the company had an overdraft, but it was doing well and Roger Tucker just needed some security to show his superiors and to hold for three weeks.
On 2nd July 1987 her husband had stopped the car in front of her and insisted that she should sign, but she refused. The next day, she was in church at Farnham Road, doing flower arrangements for a wedding. She knew that he would cause a scene on her when he came in if she did not go out to talk to him. She went outside with him. Her husband then became extremely emotional and said that if she did not sign, the whole company would go bankrupt and their son John would lose his home as well. She described her husband as going quite white and in tears.
Mrs. O'Brien said that she believed what her husband told her about the company doing well and having good potential, but she was concerned for her son and felt that it was only for three weeks, and if it would do the trick, she would sign. Accordingly, she went with her husband to the bank. She went with a young lady, ... to a small office where the documents were laid out for signing. She did not read them, they had been folded back where appropriate to show the places to be signed. Miss Connors pointed out to her where she was to sign. She was given no explanation and was not recommended to take legal advice". (Pages 32 and 33 of the transcript).
The learned judge did not, in terms, say whether or not he regarded this evidence as establishing undue influence as it is normally understood. I think he probably did not so regard it for, at page 38G of the transcript, he said:
"She [i.e. Mrs. O'Brien] is independent minded and strong minded enough for her will not to be readily overcome by her husband".
He also said, after referring to National Westminster Bank v. Morgan [1985] AC 686, that:
"It is by no means clear to me that the transaction was manifestly to Mrs. O'Brien's disadvantage".
However, the principal reason why the learned judge found in favour of the bank and against Mrs. O'Brien was that:
"... There is, in my judgment, no evidence from which I am entitled to conclude that in deceiving his wife as to the effect of the documents, the first defendant was acting on behalf of the bank. It follows that the bank cannot be held responsible for his misrepresentation". (Page 42 of the transcript).
He also, however, cast doubt on the causative effect of the misrepresentation. He said:
"... I cannot say that if Mrs O'Brien had known the full and true effect of her commitment under the charge, she would instantly and inevitably have refused to execute it".
and a few lines later:
"... it does not follow that she would not have signed the charge if those representations had not been made". (Page 44 of the transcript).
These conclusions have been challenged on this appeal. In addition, Mr. Buckhaven, who has appeared for Mrs. O'Brien, has contended that, on the evidence to which I have referred, the judge ought to have found undue influence established.
Mr. Buckhaven's primary submission, however, was that since the bank left it to Mr. O'Brien to persuade Mrs. O'Brien to agree to sign the legal charge, the bank is, on authority, affected by the improprieties committed by Mr. O'Brien in his efforts of persuasion. Mr. Goodenday, for the bank, on the other hand, submitted that, on authority the bank would only be affected by Mr. O'Brien's improprieties if Mr. O'Brien had been acting as the bank's agent when committing them. Mr. Goodenday supported the judge's conclusion that, on the facts of this case, the appointment by the bank of Mr. O'Brien as its agent could not be inferred. These submissions make it necessary to examine the authorities in order to try and identify the principle which they establish.
The authorities
I can begin, I think, with Turnbull v. Duval [1902] A.C. 329, in which the judgment of the Privy Council was given by Lord Lindley. In this case a married woman, Mrs. Duval, gave security over her property, limited to fl,000, to secure her husband's business debts to Turnbull & Co. Turnbull & Co.'s agent in Jamaica was a Mr. Campbell who was, also, trustee of Mrs. Duval's father's will, under which she was a beneficiary. So there was a fiduciary relationship between Campbell and Mrs. Duval. Campbell and Duval arranged that Campbell would prepare a document giving Turnbull & Co. security over Mrs. Duval's property and that Duval would get his wife to sign it. The evidence established that, per Lord Lindley, at page 433:
"... She knew nothing of the document she was to sign until it was brought to her by her husband. She had no advice about it; she did not read it; it was not explained to her. she signed it because her husband pressed her to do so and told her he was being pressed by Campbell and because she believed that if she would sign it ... it would enable her husband to settle the beer contract".
At page 434 Lord Lindley said this:
"... it is quite impossible to uphold the security given by Mrs. Duval. It is open to the double objection of having been obtained by a trustee from his cestui que trust by pressure through her husband and without independent advice, and of having been obtained by a husband from his wife by pressure and concealment of material facts. Whether the security could be upheld if the only ground for impeaching it was that Mrs. Duval had no independent advice has not really to be determined. Their Lordships are not prepared to say it could not. But there is an additional and even stronger reason for impeaching it. It is, in their Lordships' opinion, quite clear that Mrs. Duval was pressed by her husband to sign and did sign the document, which was very different from what she supposed it to be, and a document of the true nature of which she had no conception. It is impossible to hold that Campbell or Turnbull and Co. are unaffected by such pressure and ignorance. They left everything to Duval, and must abide the consequences".
This passage from Turnbull v. Duval is important because it is the foundation stone on which the "agency" approach adopted by the recent cases has been built. It may be noticed, however, that nowhere does Lord Lindley refer to agency. The proposition that in procuring his wife's signature to the document Duval was acting as agent of Turnbull and Co. would, in my opinion, have been unreal and artificial. It may be noticed also, first, that no actual misrepresentation seems to have been made by Duval to his wife, notwithstanding that he had concealed from her material facts and, second, that the pressure he exerted on her to persuade her to sign does not seem to have been excessively overbearing or to have been accompanied by the threats or false promises or intimidation that are sometimes the hall marks of undue influence. And there was not, it seems, any finding that Duval's pressure on his wife to sign constituted undue influence.
In these circumstances, the identification of the equitable principle or principles being applied by their Lordships in Turnbull v. Duval seems to me somewhat elusive. The passage from Lord Lindley's judgment that I have cited has been relied on in a number of subsequent cases but, before coming to them, I should refer to an earlier case, Bainbrigge v. Browne [1881] 18 ChD 188. This case concerned a disposition by three adult children in favour of their father and his mortgagees. It was, said Fry J., "plain that the plaintiffs, at the time they executed the deed, had not been entirely emancipated from their father's control". He went on to say that
"although ... there is no direct evidence ... proving undue pressure ... a state of circumstances existed from which the court will infer pressure and undue influence". (Page 196).
He then posed the critical question: "... against whom does this inference of undue influence operate?" and answered in these terms:
"Clearly it operates against the person who is able to exercise the influence (in this case it was the father) and ... it would operate against every person who claimed under him with notice of the equity thereby created or with the notice of the circumstances from which the court infers the equity. But it would operate against no others". (Page 197).
And at page 199, applying the principle that he had formulated, Fry J. held that
"... the plaintiffs have not brought home to [the mortgagees] knowledge of the circumstances from which the equity involved arises, and as against them, therefore, the action must be dismissed".
Chaplin & Co. Ltd. v. Brammall [1908] 1 KB 233 was a case in which the plaintiffs agreed to supply goods to Brammall on credit terms provided his wife would guarantee payment. They sent Brammall a form of guarantee in order for him to obtain his wife's signature. He obtained her signature but did not explain the document to her and she signed it without understanding it. There was no suggestion there had been any misrepresentation and no allegation of undue influence. The plaintiff's action against Mrs. Brammall to enforce the guarantee failed and the Court of Appeal dismissed the plaintiff's appeal. Vaughan Williams L.J.'s judgment, with which the other members of the court agreed, said that:
"Ridley J. has come to the conclusion that in fact no sufficient explanation of it was given to her and that she did not understand it. It is unfortunate that the plaintiffs did not take care to see that the defendant had independent advice in the matter. But the result is that the plaintiffs ... fail to show that the document was properly explained to her".
Vaughan Williams L.J. said that the case "falls exactly within the words of Lord Lindley in the case of Turnbull v. Duval" and commented:
"So here, the plaintiffs left everything to the husband ... and they must take the consequences of his having obtained it without explaining to her or her understanding what she was signing".
He then distinguished Bainbriqqe v. Browne on the ground of "the case not being one where there was a necessary presumption that ... influence existed".
The equitable principle applied in Turnbull v. Duval and Chaplin v. Brammall seems to be that if a wife signs a security document at her debtor husband's request, the creditor will be unable to enforce the security unless either the debtor or the creditor has taken positive steps to try and ensure that the wife understands the import of the security documents or unless she has obtained independent advice. The two cases contrast oddly with Bainbriqqe v. Browne, where no such requirement was imposed on the father's mortgagees and, since there was no undue influence or misrepresentation by the debtor, cannot, in my opinion, be explained by treating the debtor as the creditor's agent.
In Howes v. Bishop [1909] 2 KB 390 the creditor obtained iudgment against a debtor and it was then agreed that the debtor and his wife would give a joint and several promissory note for the amount of the judgment. The wife signed the note. The jury found that she understood what she was doing but that her signature had been procured by her husband's influence. The jury did not, however, find undue influence. The wife had no independent advice. The Court of Appeal held that the wife was bound.
Lord Alverstone C.J. said at page 395:
"I must not be understood to be laying down a rule that in no case where a wife acts on her husband's instructions and under his influence is it necessary to show that she has received independent advice ... but, in my opinion, there cannot be a rule of universal application that the rules of the Courts of Equity as to confidential relationships necessarily apply to the relation of husband and wife".
Farwell L.J. referred to Turnbull v. Duval but distinguished it:
"That was not a simple case of a husband obtaining a document from his wife, it was also a case where the document had been obtained by a trustee from his cestui que trust by means of pressure and the concealment of material facts".
Talbot v. von Boris [1911] 1 KB 854, too, involved a wife who signed a promissory note as security for the repayment of sums advanced to her husband. She was sued on the note. Her defence was that she had been influenced to sign by duress on the part of her husband. But in the absence of any evidence that the plaintiff knew of the duress, the defence failed. Farwell L.J. regarded the point as decided by Howes v. Bishop.
The next case was Bank of Montreal v. Stuart [1911] AC 120, an appeal to the Privy Council from the Supreme Court of Canada, in this case a wife had been persuaded to charge her property as security for the payment of her husband's debts to the bank.
Lord Macnaughton described the background thus at page 136:
"... Mrs. Stuart, who was a confirmed invalid, acted in passive obedience to her husband's directions. She had no will of her own. Nor had she any means of forming an independent judgment even if she had desired to do so. ... At the same time it is right to say that in her evidence ... she repudiates the notion that any influence was exerted or any pressure put upon her or that her husband made any misrepresentations to her".
An important part in the arrangements for the security to be given had been played by a Mr. Bruce, a solicitor acting for the bank who had also, at one time, acted for the husband. In the circumstances of the case, Lord Macnaughton regarded Mr. Bruce as having come under a duty to the wife and at page 137 the said this:
"... It seems to their Lordships that in this case there is enough, according to the recognised doctrine of Courts of Equity, to entitle Mrs. Stuart to relief. Unfair advantage of Mrs. Stuart's confidence in her husband was taken by Mr. Stuart and also it must be added by Mr. Bruce".
At page 138 he commented "the bank left everything to Mr. Bruce and the bank must be answerable for what he did" and, at page 139, that:
"His [i.e. Mr. Bruce's] course was plain. He ought to have endeavoured to advise the wife and to place her position and the consequences of what she was doing fully and plainly before her. Probably, if not certainly, she would have rejected his intervention. And then he ought to have gone to her husband and insisted on the wife being separately advised ..."
The value of Bank of Montreal v. Stuart as an authority is somewhat reduced by the ambiguity of Mr. Bruce's position. He was not the wife's solicitor and yet, in the view of the Privy Council, he had come under a duty to safeguard her interests. The case does, however, demonstrate that, notwithstanding the absence of any actual undue influence and any actual misrepresentation, equities arose between the wife and her husband and, through Mr. Bruce, the wife and the bank that prevented the bank from enforcing against the wife the security she had given.
A somewhat similar approach was adopted by Russell J. (as he then was) in Shears & Sons Ltd. v. Jones [1922] 128 L.T. 218. In this case a creditor of the husband threatened the institution of bankruptcy proceedings but agreed to desist if the debtor's wife provided certain security for the debt. The wife signed the requisite security document. Later, however, she resisted the creditor's attempts to enforce the security on the ground, first, that the document was void as being an unregistered bill of sale and, secondly, that she had been procured to sign by her husband's undue influence and had had no independent advice. She succeeded on the bill of sale point but Russell J. went on to consider her second line of defence. He said (page 221):
"The question I have to decide is, first, did Mrs. Jones substantially understand the document? Secondly, is the fact that there was no separate independent advice fatal to the plaintiff's claim?"
He referred to Howes v. Bishop, Chaplin v. Brammall, and Turnbull v. Duval and said (at page 221):
"In my view the duty was cast on the plaintiffs to see that the wife had separate and independent advice before they took from her the benefit, and ... in view of the absence of independent advice the document cannot stand".
Russell J. then said that "Mrs. Jones did sufficiently understand the general nature of the document" but repeated that "the absence of independent advice is fatal to the claim".
This decision, coupled with Montreal Bank v. Stuart. appears to apply an equitable principle that, in circumstances of influence or likely influence of the debtor husband over the surety wife, it is not enough for the creditor to show that the surety understood the import of the security document; the surety must, in addition, have independent legal advice. It is understandable that facts such as those in Bank of Montreal v. Stuart may seem to justify this stringent requirement, but less easy to understand why the facts of Shears and Sons Ltd. v. Jones should have done so. Nor is it easy to see on what basis a stricter protection for the wife should have been demanded by the facts in Shears and Sons Ltd. v. Jones than was demanded by the facts in Howes v. Bishop or Talbot v. von Boris.
The cases to which I have so far referred do not, in my opinion, establish any principle that depends on concepts of agency. In some of the cases the creditor was unable to enforce the security against the wife notwithstanding that no positive impropriety, such as undue influence or misrepresentation, had been committed by the husband. A coherent explanation of the cases must be placed on some other basis than agency.
The next English authority to which I must refer is Avon Finance Co. Ltd. v. Bridger [1985] 2 All E.R. 281. This case is the first of the modern Court of Appeal authorities to which I referred at the beginning of this judgment. Before considering them, however, it is convenient to try and identify the equitable principles that the earlier cases had established.
A comprehensive analysis of the cases and of the relevant equitable principles is to be found in the judgment of Dixon J. (as he then was) in Yerkey v. Jones [1940] 63 C.L.R. 649. The facts are important. The husband, Jones, contracted a debt of £3,300 to the plaintiff creditor. It was a term of the contract between them that Jones would procure his wife to grant a mortgage over her separate property to secure £1,000 of the debt. The mortgage was prepared by the creditor's solicitors and Jones persuaded his wife to sign. The mortgage made Mrs. Jones personally liable, as guarantor, to pay the fl,000. Mrs. Jones did not understand that it had that effect, notwithstanding that the creditor's solicitor went through the mortgage with her and explained it to her before she signed. She received no independent advice. The trial judge held that on grounds of undue influence, misrepresentation and unilateral mistake Mrs. Jones was entitled to equitable relief against her personal covenant in the mortgage. The creditor appealed to the High Court of Australia. The appeal was allowed. Judgments were given by each of the five members of the court but I hope I will be forgiven for concentrating on that of Dixon J. The depth of the research and the penetrating nature of his analysis of the relevant equitable principles are, I think, sufficient justification. I should say also that I take some comfort from noticing that the judgments were reserved for five months.
Dixon J. embarked upon an examination of the principles underlying the decisions to which I have referred. He noted that the relationship of husband and wife was not one in which any presumption arose of undue influence but, after citing a passage from Storey's Equity Jurisprudence (1835),
"... Courts of Equity examine every transaction between husband and wife with an anxious watchfulness and caution, and dread of undue influence",
commented, at page 675, that:
"While the relation of a husband to his wife is not one of influence, and no presumption exists of undue influence, it has never been divested completely of what may be called equitable presumptions of an invalidating tendency".
The appositeness of this remark is particularly demonstrated by Chaplin v. Brammall [1908] 1 KB 233 (see Vaughan Williams L.J.'s comment during argument at page 235).
Dixon J. then said this:
"In the first place, there is the doctrine, which may now perhaps be regarded as a rule of evidence, that if a voluntary disposition in favour of the husband is impeached, the burden of establishing that it was not improperly or unfairly procured may be placed upon him by proof of circumstances raising any doubt or suspicion. In the second place, the position of strangers who deal through the husband with the wife in a transaction operating to the husband's advantage may, by that fact alone, be affected by any equity which as between the husband and wife might arise from his conduct. In the third place, it is still or may be a condition of the validity of a voluntary dealing by the wife for the advantage of her husband that she really obtained an adequate understanding of the actual nature and consequences of the transaction.
It will be seen that all three of these matters must have a special importance when the transaction in question is one of suretyship and the wife without any recompense, except the advantage of her husband, saddles herself or her separate property with a liability for his debt or debts".
After discussing the relevant cases, both English and Australian, Dixon J. said this:
"... the basal reason for binding the creditor with equities arising from the conduct of the husband is that in substance if not technically, the wife is a volunteer conferring an important advantage upon her husband who in virtue of his position has an opportunity of abusing the confidence she may be expected to place in him and the creditor relies upon the person in that position to obtain her agreement to become his surety. Misrepresentation as well as undue influence is a means of abusing the confidence that may be expected to arise out of the relation.
In the second case, that where the wife agrees to become surety at the instance of her husband though she does not understand the effect of the document or the nature of the transaction, her failure to do so may be the result of the husband's actually misleading her, but in any case it would hardly ever occur without some impropriety on his part even if that impropriety consisted only in his neglect to inform her of the exact nature of that to which she is willing, blindly, ignorantly or mistakenly to assent. But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance.
If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she failed to grasp some material part of the document, or, indeed, the significance of what she was doing, cannot, I think, in itself give her an equity to set aside, notwithstanding that at an earlier stage the creditor relied upon her husband to obtain her consent to enter into the obligation surety. The creditor may have done enough by superintending himself the execution of the document and by attempting to assure himself by means of question or explanation that she knows to what she is committing herself. The sufficiency of this must depend on circumstances, as, for example, the ramifications and complexities of the transaction, the amount of deception practised by the husband upon his wife and the intelligence and business understanding of the woman. But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable grounds to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound by any equity which otherwise might arise from the husband's conduct and his wife's actual failure to understand the transaction: ... If undue influence in the full sense is not made out but the element of pressure, surprise, misrepresentation or some or one of them combined with or cause a misunderstanding or failure to understand the documents or transaction, the final question must be whether the grounds upon which the creditor believed that the document was fairly obtained and executed by a woman sufficiently understanding its purport and effect were such that it would be inequitable to fix the creditor with the consequences of the husband's improper or unfair dealing with his wife", (pages 684 and 685).
The approach which Dixon J. suggested does not depend upon the debtor husband being treated as agent of the creditor. It proposes a much more flexible basis of decision than the so-called "agency" approach.
The cases to which I have so far referred have all, bar one, been cases in which a wife has given security or become a surety for her husband's obligations. Third party security may be given, however, in a wide variety of cases in some of which the relationship between the surety and the debtor will be of a business character rather than matrimonial. Indeed a surety is often a professional acting for reward, e.g. a bank or insurance company giving a bond. If, in these eases, the creditor leaves it to the debtor to procure the third party to provide the security, it is, in my opinion, almost inconceivable that the approach referred to by Dixon J. would be adopted so as to enable the surety to repudiate liability. Take, for example, a case in which an employer is considering entering into a contract with a contractor for substantial building work but requires the contractor's obligations to be supported by a bank or insurance company bond. The contractor negotiates with an insurance company which agrees, for a fee paid by the contractor, to provide the bond. The employer accepts the bond and signs the building contract. The contractor defaults, the employer claims on the bond and it transpires that the insurance company entered into the bond on the faith of misrepresentations made, without the employer's knowledge, by the contractor. The circumstance that the employer had left it to the contractor to provide the requisite third party security would not, without more, prevent the employer from enforcing the security. Of course, if the employer had knowledge of the contractor's improprieties, or if the employer had itself made any misrepresentation, the position would be otherwise. But, in general, it would be for the third party surety to satisfy itself whether or not it should enter into the bond and to satisfy itself about the accuracy of representations made by the debtor.
In Seaton v. Heath [1899] 1 QB 782, Romer L.J. discussed the relationship between creditor and surety in this way:
"In general the creditor does not himself go to the surety, or represent, or explain to the surety, the risk to be run. The surety often takes the position from motives of friendship to the debtor, and generally not as a result of any direct bargaining between him and the creditor, or in consideration of any remuneration passing to him from the creditor. The risk undertaken is generally known to the surety and the circumstances generally point to the view that as between the creditor and surety it was contemplated and intended that the surety should take upon himself to ascertain exactly what risk he was taking upon himself".
In the cases Romer L.J. was describing, an analysis that would permit the surety to avoid the contract with the creditor because of undue pressure brought to bear by the debtor, or some misrepresentation by the debtor as to the extent of the risk, or some other impropriety of the debtor, all unknown to the creditor, would be inconsistent with the commercial purpose of the contract. The debtor is not, in general, the agent of the creditor whether or not the creditor leaves it to the debtor to procure the third party security. The position would be a fortiori in the case of a professional surety which had charged the debtor a fee for the security given to the creditor (see generally Rowlott on Principal and Surety, 4th ed. at page 120 et. seq. and 127 et. seq.).
There is, to my mind, no doubt at all but that the Turnbull v. Duval line of cases demonstrate a treatment of wives who have given security to support their husband's debts more tender than that which would have been applied to other third party sureties. Under the general law a surety is expected to satisfy himself or herself of the extent of the risk proposed to be undertaken. Contracts of suretyship are not uberrimae fidei. Misrepresentation or undue influence for which the debtor is responsible will not, unless the creditor had knowledge of what had happened, or unless the creditor was, via agency or some like route, a party to what had happened, prejudice the enforceability by the creditor of the security given by the surety (see Bainbriqqe v. Browne, Mutual Finance Ltd. v. Wetton & Sons Ltd. [1937] 2 K.B. 389 and Bank of Credit & Commerce International v. Aboody [1990] 1 Q.B. 923. But this was not the approach where security had been given by wives in support of their husbands. In neither Turnbull v. Duval nor Chaplin v. Brammall was there misrepresentation or undue influence. But in each case the wife lacked a full understanding of the security transaction into which she had entered and had had no independent advice. The reason in both cases why the security given was unenforceable was that (a) the security was given by the wife of the debtor (b) the creditor knew of the relationship (c) the creditor had done nothing to ensure that the wife understood the transaction (d) the wife did not properly understand the transaction and (e) she had had no independent advice. In those circumstances, equity did not permit the security to be enforced against the wife.
In Howes v. Bishop the wife had had no independent advice but she did, as the jury found, understand what she was doing. It is consistent with Lord Alverstone C.J.'s remarks at page 395 (cited above) that if she had not done so, i.e., if the transaction had not been properly explained to her, the security would not have been enforceable. In Talbot v. von Boris the question of the wife's understanding of the promissory note was not addressed and there is no reason to think that she did not understand it.
The ratio in Bank of Montreal v. Stuart was that "unfair advantage of Mrs. Stuart's confidence in her hsuband was taken by Mr. Stuart and ... by Mr. Bruce". Mr. Bruce, it will be recalled, was the solicitor acting for the bank. In Bank of Montreal v. Stuart and Sheers and Sons v. Jones the security given by the wife was held unenforceable in the absence of independent advice. In the latter case this was notwithstanding a finding that the wife "did sufficiently understand the general nature of the document".
In none of these cases is there any reference to agency. In any event, cases in which neither misrepresentation nor undue influence play any part cannot, in my opinion, be explained by reference to the debtor husband's status as agent for the creditor. Agency is irrelevant unless there has been some default on the part of the agent which can be attributed to the principal.
In Yerkey v. Jones Dixon J. expressed the opinion, supported by a carefully researched argument, that the tenderness to wives exhibited by the cases was attributable to two factors. First, although the Married Women's Property Acts had given wives power to dispose of their separate property, nonetheless the courts viewed with suspicion gratuitous transactions by wives for the benefit of their husbands. Dixon J. observed at page 674:
"It seems that the assimilation of dispositions by the wife in favour of her husband to transactions between strangers was not so complete. It was not supposed that they dealt at arms' length".
He then cited the passage from Storey's Eguity Jurisprudence and made the comment to which I have already referred. Secondly, there is the principle, espoused by Lord Romilly in Hoqhton v. Hoqhton [1852] 15 Beav. 275, that "where one person obtains, by voluntary donation, a large pecuniary benefit from another, the person taking the benefit is bound to show that the donor knew and understood what he was doing", (per Dixon J. at page 679). This wide principle was, as Dixon J. shows, not accepted as sound law but nonetheless "contributed to the ... view that unless it appears that the wife clearly understood the effect of an instrument conferring a voluntary benefit on her husband it may be invalidated". (Page 680).
Whether Dixon J.'s analysis is right or wrong, the authorities certainly demonstrate that, as Cussen J. put it in Bank of Victoria v. Mueller [1925] V.L.R. 642 at 651, the "doctrine as to the necessity for fully understanding the transaction is extended to transactions ... such as guarantees given to a creditor by a wife for the benefit of her husband, particularly if there is a heavy past indebtedness to be secured. In such cases the relation of husband and wife and the past indebtedness may put the creditor in such a position that, if he does not take care to fully explain the transactions, he may find himself defeated by proof that the wife did not fully understand it", (cited by Dixon J. at page 680).
I would adopt this summation. In my judgment it explains the authorities that precede Avon Finance v. Bridger. They do not depend upon endowing the husband with the status of agent for the creditor. They demonstrate equitable intervention in favour of married women where the conditions to which I have earlier referred are found to be present. Married women who provide security for their husband's debts are treated as a special protected class of sureties.
I must now, however, examine the modern Court of Appeal cases.
Avon Finance Co. Ltd. v. Bridger [1985] 2 All E.R. 281 was a case in which a son had procured his elderly parents to charge their house with the repayment to a finance company of a loan to him of £3,500. In persuading them to sign, the son misrepresented the effect of the charge. They received no independent advice. They did not read the charge before signing it. The son failed to repay the loan and the finance company sought to enforce the charge. It failed. Lord Denning M.R. summed up the facts by saying "Here this son brought undue pressure on his parents for the benefit of the plaintiffs and for himself of course because he wanted the loan. They left it all to him. They said that he was to prepare the execution of the deed. He brought undue pressure to bear on his parents by giving them an entirely misleading account of the documents", (page 286).
Brandon L.J. at page 287 set out the matters which seemed to him "to give rise to an equity in favour of the defendants". The first was that the finance company had chosen to "appoint the son ... to procure this contract from his parents". The second was that the son "could be expected to have some influence over his elderly parents and that is something of which the plaintiffs... should have been aware". The third was the absence of any independent advice. Brightman L.J. agreed with the reasoning of Brandon L.J.
The cases particularly relied on by Brandon and Brightman L.JJ. were Turnbull v. Duval and Chaplin v. Brammall. Save for the different relationship, parents and son in place of husband and wife, the approach of all three members of the court was, in my opinion, entirely consistent with the approach demonstrated in the earlier authorities. The principles established for the protection of married women providing security for their husband's debts were extended to parents providing security for an adult child's debts.
In Kings North Trust Ltd. v. Bell [1986] 1 W.L.R. 119 a husband and wife agreed to charge their jointly owned matrimonial home to secure an advance made to the husband for the purposes of his business. The responsibility of procuring the execution of the charge by the wife was left to the husband. He misrepresented to her the purpose of the advance. She received no independent advice. The Court of Appeal held that in these circumstances the security could not be enforced against the wife. The leading judgment was given by Dillon L.J. who described as "clear law" the proposition that:
"... If a creditor or potential creditor of a husband desires to obtain, by way of security for the husband's indebtedness, a guarantee from his wife, then the creditor can be in no better position than the husband himself, and the creditor cannot enforce the guarantee or the security against the wife if it is established that the execution of the document by the wife was procured by undue influence of the husband and the wife had no independent advice".
This statement of law is, I observe, entirely consistent with the approach suggested by Dixon J. It is also to be observed that the proposition as stated by Dillon L.J. would not be applicable in the law of suretyship generally and is an implicit recognition of the special protection given by equity to married women who provide security in support of their husband's debts.
Coldunell Ltd. v. Gallon [1986] Q.B. 1184, was not a case of a wife providing security for her husband's debts. It, like Avon Finance v. Bridger, involved a son taking advantage of elderly parents. The plaintiff moneylenders offered a loan to the son on the security of his parents' property. The plaintiff's solicitors sent the security documents to the parents with an accompanying letter advising them to take independent advice. But the son intercepted the letter and persuaded them to sign. They had no independent advice and, although some explanation was given to the mother, no one explained to the father the onerous effect of the documents they were being asked to sign. The defendants' attempt to avoid the security failed. The defence, apart from a point on the Consumer Credit Act 1974 that I need not examine, was that the transaction had been procured by undue influence on the part of the son and that the plaintiff was affected by that undue influence. The trial judge found undue influence to have been established. The Court of Appeal held that the evidence entitled the trial judge to so find. But, it was held, the plaintiff was not affected by the undue influence. In reaching this conclusion the court accepted the submissions of counsel for the appellant that
"the authorities which demonstrate the voidability of such transactions against third parties are all based on the concept of the person exercising the influence having acted as the agent of the third party in procuring the transaction" (Oliver L.J. at page 1196).
After considering the authorities, Oliver L.J. said that
"... to grant equitable relief to the defendants in respect of the son's acts alone without [the plaintiffs'] authority or knowledge is to go further than any decided case has yet gone".
I am not sure how this observation can be reconciled with Avon Finance v. Bridger but, in any event, it can, in my opinion, be accurate only if the husband/wife cases are treated as being in a separate category. Oliver L.J. went on to make this comment:
"It may well be that ... the only absolutely sure way of ensuring that a guarantee or charge from a third party is valid is to insist on that party being independently advised. But the fact is no lender can ever be absolutely sure that a guarantor is not being subject to pressure from the principal debtor, and to require him to do more than properly and fairly point out to the guarantor the desirability of obtaining independent advice, and to require the documents to be executed in the presence of a solicitor, is to put upon commercial lenders a burden which would severely handicap the carrying out of what is, after all, an extremely common transaction of everyday occurrence for banks and other commercial lenders".
It is important to notice that in Coldunell v. Gallon there was no evidence that the plaintiffs knew, or should have known, that the parents were vulnerable to influence by the son. Oliver L.J., speaking of the plaintiff's officer who had dealt with the matter, said at page 1200:
"He could of course, from the son's own appearance, have deduced that the father must be in at least his late sixties or seventies and he could of course have called in to talk to the father personally when he drove round to look at the property. But was he under any duty to do more than he did merely because he knew the money was intended ultimately to be lent by the father to the son? It was not put to him .. that he authorised the son to act as his agent in procuring the execution of the documents".
Purchas L.J. explicitly made the question of agency the critical point of the case. He said, at page 1206:
"In order to be made liable as principal for the acts of an agent the principal must at least consent to or adopt his appointment. There is no evidence ... to support such a contention".
and later:
"... the unilateral assumption of the conduct of matters by the son must be distinguished from the son acting as agent for plaintiffs in the procuring of the signatures of the parents to the deeds".
Coldunell v. Gallon was the first of the modern cases to analyse the previous authorities in terms of "agency". But unless elderly parents can be regarded as being, in the eyes of equity, significantly less worthy of protection than married women, it is difficult to reconcile the "agency" approach adopted in Coldunell with what Dillon L.J. described as the "clear law" in Kings North Trust. Brandon L.J. in Avon Finance v. Bridqer referred to the three matters that, in his view, gave "rise to an equity in favour of the defendants". He did not rest his decision on agency. If he had done so, the second and third of the three matters would have been irrelevant.
The next Court of Appeal authority is Midland Bank v. perry [1987] Financial L.R. 237, another husband/wife case, the husband negotiated from the bank an overdraft facility for his company. The bank wanted security in the form of a charge over the jointly owned matrimonial home. The husband procured his wife to execute the charge by pressure that, the trial judge held, constituted undue influence. The wife said in evidence that she knew the charge was a security but did not realise it affected her own share in the house. The trial judge held that the bank manager, in whose presence the wife executed the charge, did not adequately explain its effect to her.
A feature of the case is that the trial judge held the bank liable to the wife in damages for its failure to explain the effect of the charge to her. The bank did not appeal against this finding. The trial judge refused, however, to set aside the charge, "it not having been established that the bank or its officers exercised any undue influence over Mrs. Perry". The wife, Mrs. Perry, appealed.
The negligence finding is, I think, important. A creditor does not, in general, owe any duty to a proposed surety to explain to the surety the effect of the proposed suretyship transaction or the effect of any security proposed to be given. It is, of course, possible that some contractual or other special relationship between the surety and the creditor may impose a duty of explanation on the creditor. The circumstances which imposed on Midland Bank the duty of which it was held to be in breach are not apparent from the report. But the possibility of such a duty arising sounds a warning for creditors. Prima facie, a creditor does not owe a duty to a proposed surety to explain the security documents. But the voluntary assumption by the creditor of the role of adviser may impose on the creditor a duty to give proper and adequate advice with the risk of liability in damages in the event of a breach. If, in order for the creditor to obtain an unimpeachable security, the law requires the surety to be given an explanation of the effect of the security documents, the creditor is placed in an invidious position. On the one hand, if no explanation is given, the creditor will be at risk that the surety's misunderstanding, or the debtor's misrepresentation will render the security unenforceable in equity. On the other hand, if an explanation is given, the creditor may be taken to have assumed a duty of care and to be at risk of liability in damages if the explanation is subsequently held to be inadequate. It cannot, in my opinion, be right to place creditors on a Morton's fork of that character.
To return to the ground of appeal in Midland Bank plc v. Perry, the wife's contention was that her husband, in obtaining her consent to the giving of the security, was acting as agent for the bank. Fox L.J. rejected this contention:
"It does not appear to me that there is any ground for contending that the bank appointed Mr. Colin Perry, in any capacity, to procure the signature of Mrs. Perry. ... I think it is necessary to consider what is the nature of the authority contended for. It cannot have been ostensible authority. There is no evidence that the bank held out Mr. Colin Perry as its agent for any purpose.
The authority, if it existed, must therefore have been actual authority. I can see no evidence of that", (page 243).
Fox L.J. referred to Avon Finance v. Bridger, Kings North Trust Trust Ltd. v. Bell and Coldunell Ltd. v. Gallon as "agency cases". Lloyd L.J. agreed that there was "no evidence of agency on the facts of the present case" but went on to consider whether the case might not fall within the second of the two classes of case identified by Dixon J. in Yerkey v. Jones. The wife's counsel submitted that if the wife
"was not aware of the nature of the document which she signed, then the bank would be unable to enforce the charge against her, irrespective of agency, unless ... the bank manager took adequate steps to explain the document".
Lloyd L.J. rejected this submission. He cited the passage in which Dixon J. had said:
"'... the amount of reliance place by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance'".
and concluded:
"... Even if she was unaware of what she was signing, and the bank did not take adequate steps to explain the effect of her signature, nevertheless she cannot succeed without proof of agency".
I would, respectfully, dissent from this analysis of Dixon J.'s judgment, nothing in which lends, in my opinion, any support to the notion that the principles which he formulated depend upon proof of agency. Nonetheless, Perry v. Midland Bank contains a clear ratio that, in the absence of proof of agency, a creditor can enforce security given by the wife of the debtor notwithstanding that the security has been procured by the undue influence of the debtor over the surety and whether or not the surety has a proper understanding of the transaction. I find great difficulty in reconciling that proposition with the proposition described by Dillon L.J. in xinqs North Trust as "clear law" or with the line of cases from Turnbull v. Duval to Shears & Sons v. Jones. In my opinion, Midland Bank plc v. Perry is inconsistent with the previous authorities.
The next case is Midland Bank v. Shepherd [1988] 3 All E.R. 17. This case did not involve any charge over property but involved a wife becoming jointly liable with her husband on a loan which he obtained from the bank for business purposes. The husband had made the arrangements for the opening of the joint account to which, subsequently, the loan was debited. He procured his wife to sign the mandate for the joint account without explaining to her, and without her understanding, that she might become personally liable for a future overdraft on the joint account. The wife resisted the bank's claim for summary judgment for the amount outstanding on the account by relying on the cases from Turnbull v. Duval down to Kings North Trustv. Bell. Neill L.J. rejected the allegation that the wife's agreement to the opening of the account had been procured by undue influence on the part of her husband, but dealt with "the suggestion that the bank are disentitled to enforce the mandate because they sent or gave the document to Mr. Shepherd and did not themselves obtain the defendant's signature" by holding that "even if Mr. Shepherd had exercised some dominating influence over her, there is no evidence to show that the bank knew that he would or might bring such influence to bear, or that they used Mr. Shepherd in order that he should exert pressure on his wife ...". The reasoning is similar to that in Howes v. Bishop and Talbot v. von Boris in which, too, there was no charge over property of the wife.
In Bank of Baroda v. Shah [1988] 3 All E.R. 24, the defendants, a husband and wife, charged their property to secure the repayment to the bank of the indebtedness of a company, S. Limited. They were procured to enter into the charge as a result of misrepresentations and undue influence exerted by one of the directors of S. Ltd. S. Ltd.'s solicitors had purported to act for the defendants in the transaction but, unknown to the bank, had had no authority from the defendants to do so. It was held by the Court of Appeal that the bank was not affected by the improprieties committed towards the defendants by the director and solicitors of S. Ltd., and that the charge was enforceable. Dillon L.J. said at page 29 that "It is impossible, in the light of Coldunell v. Gallon for this court to hold that there was an obligation on the bank or its solicitors to ensure that the defendants had entirely independent legal advice before the defendants executed the legal charge...".
In Bank of Baroda v. Shah the relationship between S. Ltd., the debtor, and the husband and wife, the sureties, was not such as to bring the case within any recognised protected class. It was not a husband/wife case. If Avon Finance v. Bridger is regarded as extending the protected class, there was in Shah no relationship of influence or likely influence over the sureties by those connected with the debtor company of which the bank had any knowledge. The case was, in short, an ordinary case in which third party security had been procured by a debtor. The creditor had no knowledge of what had passed between debtor and sereties. Dillon L.J.'s judgment contains an express endorsement of Coldunell v. Gallon. It is possible to regard this endorsement as indicating Dillon L.J.'s view that Coldunell, too, was an ordinary third party security case. Nothing in Bank of Baroda v. Shah is necessarily inconsistent with the protected status of married women sureties that the earlier authorities had established.
Next comes Barclays Bank plc v. Kennedy, an unreported case in which judgment was given in the Court of Appeal on 10th November 1988. Here the husband had given a guarantee to the bank in support of advances by the bank to a third party. The husband's liability to the bank under the guarantee was secured by a charge of the matrimonial home executed by the husband and the wife. The guarantee and the charge were executed at the bank in the presence of the bank manager. The wife contended that her execution of the charge had been procured by undue influence on the part of her husband, acting as agent of the bank. Purchas L.J., after analysing the evidence, held that
"... all had been agreed between the husband and [the manager] on the Friday, and ... [the manager] left it to the husband to persuade the wife to come to the bank on the Monday to execute the charge and sign the guarantee", (page 15 of the Transcript).
He commented that:
"... the concentration on actual or ostensible authority being 'given to the husband to act on behalf of the bank' may not be a reliable way of applying the test now well established by authority, albeit — that the real question is whether the bank were content to leave it to the husband to obtain the wife's signature upon the charge", (page 15).
After discussing the several authorities, Purchas L.J. cited from the judgment of Dillon L.J. in the Bank of Baroda case, namely
"The situation in which a surety is required to give a guarantee or charge property to secure the liability of a debtor to a creditor is on the authorities a fruitful area for the exercise of undue influence, particularly by the debtor over the surety to obtain the guarantee or charge the debtor needs to satisfy the creditor. Whether the creditor is affected by such an exercise of undue influence must depend on the facts".
and then commented
"Clearly [the manager] acting for the bank, left it to the husband to obtain the presence of the wife at the bank to execute or sign the charge".
It is clear from the judgment of Purchas L.J. that, if undue influence or misrepresentation on the part of the husband had been established, he would have held the charge to be unenforceable by the bank. This was notwithstanding that he had not found the relationship between the bank and the husband to be one of principal and agent. The approach adopted in this case is difficult to reconcile with that adopted in Midland Bank v. Perry but was in line with the earlier authorities down to and including Kings North Trust Trust Ltd. v. Bell. Finally, I should refer to Bank of Credit & Commerce International v. Aboody [1990] 1 Q.B. 923. In this case the court was concerned with the question whether the transactions between the bank and the wife should be set aside on the ground of undue influence exerted over the wife by the husband. It was held that although the ingredients of undue influence by the husband were established the transactions were not to the manifest disadvantage of the wife and so, for that reason, should not be set aside. But Slade L.J., who gave the judgment of the court, addressed also the question whether, in any event, the bank would have been affected by the undue influence of the husband. He said at page 971 that
"There are two distinct grounds on which the bank could be affected by Mr. Aboody's action: (i) agency; and (ii) notice".
Under the rubric "Agency" he said this:
"Some confusion may have been caused by the use of the word 'agent'. We are not concerned with the question whether the bank is vicariously responsible for the acts of Mr. Aboody. The issue is whether the bank can be in any better position than Mr. Aboody if, when Mr. Aboody
was acting on its behalf, Mr. Aboody exerted ... undue influence ... it would be inconsistent with the equitable nature of the relief for the bank not to be affected by the undue influence exerted by its agent when the transaction would not exist but for the wrongful acts of its agent. As a matter of principle, the bank in such circumstances should not be entitled to rely on the transaction ...".
Slade L.J. then cited the "clear law" passage from the judgment of Dillon L.J. in the Kings North Trust case and continued:
"... this approach is in accord with the approach of the general law of principal and agent in relation to fraudulent misrepresentations made by an agent in carrying out the specific instructions of the principal".
He went on to say this:
"Examples of liability on the basis of agency in similar circumstances are to be found in the case of Turnbull v. Duval [1902] AC 429 and Chaplin & Co. Ltd. v. Brammall [1908] 1 KB 233. Whether in any particular case the person who exerts the undue influence is the agent (in this sense) of the principal creditor must be a question of fact. For an example of a recent case where agency was not established, see Coldunell v. Gallon [1986] Q.B. 1184.
Miss Williamson, for the bank, submitted that agency only was insufficient to found liability; there must also be notice on the part of the creditor that undue influence would or might have been exercised. We know of no basis in principle for this submission and we reject it".
Slade L.J. then turned to "Notice" and said that:
"If a creditor has actual or constructive notice (at the time of the execution of the charge or guarantee in question) that the guarantee or charge on which it relies has been procured by the exercise of undue influence, it cannot enforce the transaction; an equity is raised against the creditor irrespective of any question of agency. ...
What notice will be requisite will depend on the nature of the undue influence alleged. Thus in a Class 1 case (actual undue influence), the creditor must have notice of the circumstances alleged to constitute the actual exercise of the undue influence; in a Class 2 case it must have notice of the circumstances from which the presumption of undue influence is alleged to arise".
The present law
The post Avon Finance v. Bridger cases are not easy to reconcile with one another. They were all, bar Coldunell v. Gallon and Bank of Baroda v. Shah, cases of wives becoming sureties or giving security for their husband's debts. In pings North Trust v. Bell and Barclays Bank v. Kennedy the creditor was held disentitled to enforce the security. The vitiating feature was undue influence or misrepresentation on the part of the debtor unknown to the creditor. In neither case was there any explicit finding that the debtor was acting as agent for the creditor. In both cases a finding of "agency" would, to my mind, have been highly artificial. In both cases the creditor had left it to the debtor husband to deal with the surety, his wife, and had done nothing to satisfy itself that she understood what she was doing or to protect her from abuse by the debtor of the influence and reliance that would be likely to be present. The two cases are, in my opinion, in line with the earlier authorities. So too is Avon Finance v. Bridger, save that it extended a principle previously confined to the husband/wife cases to a case of parents giving security for the debts of their son.
Coldunell v. Gallon is somewhat of a halfway house. In expressing the view that the son's acts alone would not, without the creditor's knowledge or authority, prejudice the enforceability of the security, Oliver L.J. was expressing the general principle applicable to cases in which the relationship between the third party surety and the debtor is a matter of irrelevance to the creditor. But in a later remark Oliver L.J. said that the law should not "require [the lender] to do more than fairly point out to the guarantor the desirability of obtaining independent advice". This requirement is not present in the law of suretyship generally. It may be, therefore, that Oliver L.J. was recognising that there are classes of sureties for whom special protection should be given, that the case fell within the class, but that, on the facts, the creditor had done enough to prevent any equitable intervention in aid of the surety.
Midland Bank plc v. Perry, Bank of Baroda v. Shah and Bank of Credits Commerce International v. Aboody were cases in which, in effect, the same rules were applied as would have been applicable regardless of any special relationship between surety and debtor. In Bank of Baroda v. Shah there was no relationship between sureties and debtor, at least none known to the creditor, that would have justified any special protection. In Bank of Credit & Commerce International v. Aboody, the point was, strictly, immaterial because the court had, on other grounds, found against the surety. But Perry is, in my opinion, inconsistent with the pre Avon Finance v. Bridger line of authorities and, also, with Barclays Bank v. Kennedy. It does not recognise wives who provide security for their husband's debts as requiring from courts of equity any different approach from that applicable to sureties generally. Absent notice or agency whereby a creditor may be affected by the debtor husband's improprieties towards his wife, the surety, the creditor is not concerned with what has passed between debtor and surety and need not concern itself with whether or not the surety understands the transaction, notwithstanding the relationship between the surety and the debtor and the creditor's knowledge of it.
Midland Bank v. Shepherd, too, does not treat wives who become sureties for their husband's debts any differently from other sureties. But neither had Howes v. Bishop or Talbot v. von Boris done so. None of these cases, however, involved any charge over property.
These authorities seem to me to leave the developing law, if not at the crossroads, at least at the junction of two diverging roads. One road would treat the special protection previously provided by equity for married women who provide security for their husband's debts as now of only historical interest. The analysis provided by Slade L.J. in Bank of Credit & Commerce International v. Aboody would be comprehensive. Third party security taken by creditors would be impeachable on account of misrepresentation or undue influence by the debtor only if the creditor had knowledge of the relevant facts or if the debtor had been acting as the agent of the creditor. A true agency would be necessary, not a spurious finding of agency in order to enable apparent justice to be done in hard cases. The creditor would not be concerned with the question whether or not the surety had an adequate understanding of the transaction. The surety would have to look after himself or herself, as most sureties have always had to do. The foundations of this road would have been laid by Coldunell v. Gallon, Midland Bank plc v. Perry, Bank of Baroda v. Shah and Bank of Credit & Commerce International v. Aboody.
Travellers along the other road would recognise that, for the historical reasons identified by Dixon J., equity has in the past treated married women differently and more tenderly than other third parties who provide security for the debts of others. They would notice that Avon Finance v. Bridqer had added to the protected class a case in which vulnerable elderly parents had agreed to provide security for the debts of their adult son. And they would, I think, conclude that, if a protected class is to continue to be recognised, the class ought, logically, to include all cases in which the relationship between the surety and the debtor is one in which influence by the debtor over the surety and reliance by the surety on the debtor are natural and probable features of the relationship. In cases falling within this protected class, security given by the surety would, in certain circumstances, be unenforceable notwithstanding that the creditor might have had no knowledge of and not have been responsible for the vitiating feature of the transaction. Turnbull v. Duval, Chaplin v. Brammall, Avon Finance v.. Bridqer, Kings North Trust Ltd. v. Bell, and Barclays Bank v. Kennedy all, in my opinion, provide support for this road.
In cases falling within this protracted class, equity would hold the security given by the surety to be unenforceable by the creditor if:
(i) the relationship between the debtor and the surety and the consequent likelihood of influence and reliance was known to the creditor; and
(ii) the surety's consent to the transaction was procured by undue influence or material misrepresentation on the part of the debtor or the surety lacked an adequate understanding of the nature and effect of the transaction; and
(iii) the creditor, whether by leaving it to the debtor to deal with the surety or otherwise, had failed to take reasonable steps to try and ensure that the surety entered into the transaction with an adequate understanding of the nature and effect of the transaction and that the surety's consent to the transaction was a true and informed one.
These requirements emerge, in my opinion, from the authorities to which I have referred.
The choice between the two roads cannot, in my opinion, be made simply by reference to binding authority. Binding authority can be found to justify either. The choice should, I think, be a matter of policy. Ought the law to treat married women who provide security for their husband's debts, and others in an analogous position, as requiring special protection? The position of married women today, both generally and vis-a-vis their husbands, is very different from what it was when the equitable principles underlying Turnbull v. Duvall and Chaplin v. Brammall were being formulated. It is arguable that married women no longer need the protection afforded to them by cases like these. Many women, it is true, do not. But the tendency in households for business decisions to be left to the husband and for the wife, whether or not she is a joint owner of the matrimonial home and whether or not she has a separate job, to have the main domestic responsibilities still persists. And in the culturally and ethnically mixed community in which we live, the degree of emancipation of women is uneven. The likelihood of influence by a husband over his wife and of reliance by a wife on her husband to make the business decisions for the family was the justification in the first place for the tenderness of equity towards married women who gave their property as security for their husband's debts. In my opinion, that justification is still present. I, for my part, would take the second of the two roads. I would treat the old authorities pre Avon Finance v. Bridger as still good law.
There is an additional reason for doing so. None of the modern cases has, in terms, overruled these authorities. None has explicitly stated that married women who provide security for their husband's debts are in no different position from other sureties. It is unsatisfactory that a long and established line of authority should be treated as overruled sub silentio.
Each case within the protected class must, in the end, depend on its own facts. But I would regard a clear written recommendation to the surety to take independent advice before signing the security document as advisable in most cases. I would regard it as inadvisable for the security document to be sent to the surety for signature unless accompanied by a recommendation to that effect. I would regard it as particularly inappropriate for the creditor simply to entrust the security document to the debtor with a view to the debtor obtaining the surety's signature. If the surety is invited to sign the security document in the creditor's offices, the creditor should, before the document is signed, explain its nature and effect to the surety. The background to all of this is knowledge on the part of the creditor that security is being taken from the surety for the benefit of the debtor and that the surety is a person who is likely to be influenced by and to have some degree of reliance on the debtor. In these circumstances the creditor should be seeking to ensure that unfair advantage is not taken of the surety. If, however, a creditor has taken reasonable steps, such as advising the surety to take independent advice, or, if the surety declines to do so, offering a fair explanation of the security document before the surety signs it, I can see no reason why equity should intervene.
It goes without saying that if the debtor has employed undue influence or misrepresentation in order to persuade the surety to enter into the transaction and the creditor has knowledge that this has happened, the security will be unenforceable. It will be unenforceable also if the facts justify a finding that the debtor has been appointed the creditor's agent. The debtor's misfeasance will then be the creditor's misfeasance. But this, I think, will, in the class of case I am considering, be very rare. Banks, building societies and finance houses do not appoint their debtors as their agents for the purpose of procuring additional security. They may, and often do, inform their debtors that loan facilities will be available if certain security can be provided. They may, and often do, leave it to the debtors to see if they can procure the additional security. But, in my opinion, that is no basis for an inference of agency.
Cases like Howes v. Bishop, Talbot v. von Boris, and Midland Bank v. Shepherd, in which wives became contractually bound in support of their husband's debts but did not provide any security over their property, stand a little aloof from the principles I have been discussing. Cases like Turnbull v. Duval, Bank of Montreal v. Stuart, Kings North Trust v. Bell and Barclays Bank v. Kennedy all relate to charges given by wives over their own property. The present case, too, is such a case. The historical reasons underlying the emergence of these principles, as explained by Dixon J., may explain why cases, in which there had been no disposition of property by the surety wife but merely the acceptance by her of a contractual obligation to pay her husband's debts, did not attract the same approach as the cases in which security over property had been given. Chaplin v. Brammall is, however, an exception. It is not necessary for us in the present case to decide whether this distinction is a legitimate one and I do not think we should assume to do so. Promissory notes are bills of exchange to which special rules are applicable. Contractual liability on a joint account on which an overdraft is to be allowed need not attract the same attention as the grant of a charge over property. I do not think we should decide, in the present case, more than we need. In any event, Howes v. Bishop, Talbot v. von Boris and Midland Bank v. Shepherd are binding on us and, if the cases in which security over property has been given are set to one side, there are no counter authorities which weaken their authority, save, perhaps, Chaplin v. Brammall.
There is one final comment I would make. In a case of the class I have been considering, the creditor will often, I think, find itself in a position of having to explain the security transaction to the proposed surety if an unimpeachable security is to be obtained. The creditor should not, in my opinion, be taken in so doing to have assumed a duty of care. If the surety is a customer or if the creditor assumes the role of advisor, it may be that the creditor will be found to have owed a contractual or tortious duty of care to the surety. Midland Bank plc v. Perry is an example. But if there is no more than that the creditor, in an attempt to satisfy itself that the surety properly understands the proposed transaction and that the transaction will not subsequently be impeachable, offers an explanation of the transaction and of the security document, I do not think that the creditor should be taken to have assumed a tortious duty of care. If the explanation was inadequate, the security might not be enforceable but it would not follow that liability in damages would attach. As I have already observed, equity ought not to place creditors in the dilemma of having to choose between, on the one hand, risking the security being unenforceable, and, on the other hand, undertaking a duty of care.
The present case
I now apply to the present case the principles that I have spent overlong in trying to identify.
The learned judge declined to find that Mr. O'Brien had been appointed as agent of the bank. I agree. No doubt the bank left it to Mr. O'Brien to procure his wife to agree to enter into the security transaction. But I, like the judge, decline to regard that as justifying an inference that Mr. O'Brien was appointed the bank's agent. The instructions which Mr. Tucker gave to the Burnham sub-branch made it clear that the bank was retaining for itself the responsibility of explaining to Mrs. O'Brien the effect and nature of the documents she was to sign. She was, also, to be advised to take independent advice. These instructions are not consistent with an intention on the part of the bank to appoint Mr. O'Brien as its agent to explain the transaction to her. Nor do I think that Mr. O'Brien thought for a moment that he was acting as the bank's agent.
As the judge found, Mr. O'Brien misrepresented to his wife the effect of the charge. He told her that it was limited to secure £60,000 and would be released in a short time. Neither was true. But he did not, in my judgment, do these things, all done to procure his wife to agree to sign, as the bank's agent. As to the causation point, the judge found that Mr. O'Brien's misrepresentation was "material". That can only mean that he found it, on the balance of probabilities, to have had a causative effect. I do not think his remarks later in his -judgment detract from this finding.
The judge did not find that undue influence had been established. His main point, applying National Westminster Bank v. Morgan [1985] AC 686, was that the transaction was not manifestly to Mrs. O'Brien's disadvantage. This may be so. But for my part I would reject the undue influence case on the ground that the influence brought to bear by Mr. O'Brien was not, in the context of a normal husband/wife relationship and bearing in mind Mrs. O'Brien's character and capabilities, sufficiently undue. Mr. O'Brien was, Mrs. O'Brien said, extremely insistent that she should sign. He made an emotional scene on the day she signed and told her that if she did not sign, the company would be bankrupt and her son John would lose his home. These were heavy family pressures but not particularly unusual nor sufficient, in my opinion, to overset and bear down the will of Mrs. O'Brien. She signed because she was persuaded that it was the right thing to do, not because her husband's pressure deprived her consent of reality.
In any event, the bank had no knowledge of the circumstances that, in the event, persuaded Mrs. O'Brien to sign. Even if the pressure had constituted undue influence, it would not, in my judgment, have affected the bank.
If the first of the two roads had been the right one to take, that would be an end of the matter. The appeal would be dismissed. But that is not, in my judgment, the end of the matter. The bank knew, of course, that Mrs. O'Brien was Mr. O'Brien's wife. She was being asked to provide security for the debts of the company in order, as the bank knew, to advance her husband's business interests. The bank knew that Mr. O'Brien was likely to have some influence on her and that she was likely to place some reliance on him and his business judgment. In the event, due to Mr. O'Brien's misrepresentation, Mrs. O'Brien did not have an adequate understanding of the effect of the charge. She thought it was limited to securing £60,000 and would only continue in force for a few weeks. In these circumstances it is necessary to ask whether the bank took reasonable steps to try and ensure that she had an adequate comprehension of the effect of the charge. The answer to this question must, in my opinion, be that the bank did not. If the instructions given by Mr. Tucker to the Burnham sub-branch had been carried out, my answer would have been otherwise. The side letter advised her to take independent advice. But the clerk did not do anything to see that she read the letter and she did not read it. No explanation of the effect of the charge or of the sum intended to be thereby secured was offered to her. She was not invited to read the charge. The pages of the charge were folded back leaving open the page on which she was to sign. Not only did she not read the charge but the folding back of the pages would have tended to discourage her from doing so. The bank knew, through the clerk, that she signed the charge without reading it.
Although it was not what Mr. Tucker had intended, the bank did, in the event, leave it entirely to Mr. O'Brien to explain the transaction to his wife and to procure her consent to it. In the event she misunderstood the effect of the transaction. Her misunderstanding derived from her husband's misrepresentation. He was not the bank's agent. But the equitable principles established by the authorities require, in my judgment, that the creditors who take from married women security for their husband's debts take reasonable steps to see that they understand the transactions they are entering into. This the bank failed to do. Dixon J. in Yerkey v. Jones said that
"the final question [was] whether the grounds on which the creditor believed the document was fairly obtained and executed by a woman sufficiently understanding its purport and effect were such that it would be inequitable to fix the creditor with the consequences of the husband's improper and unfair dealing with his wife".
The answer to that question in the present case is, in my judgment, "No".
In view of Mrs. O'Brien's misunderstanding of the transaction the transaction was not, in my judgment, enforceable against her, save to the extent of £60,000. Events which took place in the course of the proceedings below resulted in the bank recovering, on account of its charge, £60,000. As against Mrs. O'Brien, therefore, the security must be treated as satisfied.
I would allow this appeal.
LORD JUSTICE BUTLER-SLOSS: I agree.
LORD JUSTICE PURCHAS: I also agree that this appeal should be allowed. In view of the apparently conflicting views expressed by this court in other cases, in two of which I was personally involved, I would like to add some words of my own. The historical context of the appeal has already been set out in the judgment of Scott L.J. and need not be repeated here. Furthermore, the relevant authorities have been fully set out and reviewed by Scott L.J. whose exegesis I gratefully adopt.
Where in the authorities difficulty has arisen this has often been the result of the introduction of an issue whether the creditor appointed the debtor as its agent to obtain the signature of the surety to the charge upon which the creditor sought to rely.
However, whether the appointment was said to be express or by necessarily holding the debtor out with ostensible authority such an appointment must in practice be a very rare event. Obviously where an agency contractual or ostensible has been created and the agent behaves improperly, whether by exercising undue influence upon or by making false representations to the surety, then the creditor will be held vicariously responsible for and affected by the acts of the agent committed in the execution of the agency. This does not call for the introduction of any equitable doctrine.
The distinction between the meaning of the word "agent" in the common law sense of "special agent" and its meaning in what for the want of a better expression I will call its "equitable sense" was not expressly pointed until the judgment of the court was delivered by Slade L.J. in Bank of Commerce and Credit International v. Aboody [1990] 1 Q.B. 923. The distinction was not critical in Coldunell v. Gallon [1986] Q.B. 1184 where there was no question of "agency" of any kind; nor was it in Barclays Bank v. Kennedy (C.A. Transcripts 10th November 1988) where there was an express request by the creditor to the husband to obtain the signature from his wife as "a matter of formality".
In Bank of Commerce and Credit International v. Aboody the bank would have been affected, not by the conduct of the husband but by the failure of an independent solicitor whose services they had obtained. It was only in Midland Bank plc v. Perry that the court seems to have lost sight of the distinction.
I will now turn to consider in a little more detail what I hope may fairly be described as the "post Kings North Trust Ltd. agency diversion". The first case is, of course, coldunell v. Gallon. The significant feature of this case was that the creditor's solicitors had specifically written independently to the elderly parents, enclosing the forms of charge with a letter addressed to each, advising them to seek independent legal advice before signing. The creditor was entitled to assume that the advice contained in the letters would be received by each of them. The wrongful act of the son in intercepting these letters (which could not have been anticipated by the creditor) was held not to affect the creditor so as to prevent it from enforcing the charge. The fact that the elderly parents acted reasonably and did nothing wrong and yet entered into an agreement, the ramifications of which they did not appreciate, did not affect the creditor so as to afford equitable relief to the parents. Equity in this jurisdiction acts upon the conscience of the creditor. In coming to the conclusion whether it would be unconscionable for the creditor to enforce the charge against the surety, all the circumstances involving the relationships between the creditor, the debtor and the surety will be taken into account. In the case of Coldunell v. Gallon, as with the other recent authorities, I believe that the results, if not all the specific ratios decidendi, can be reconciled if this equitable principle is observed, and the artificial concept of agency is abandoned in all cases save those where contractual or ostensible agency is clearly established. Nor do I consider that the principle is advanced by identifying specific categories such as husband and wife or elderly parents and adult children; the principle applies whenever a creditor knows or ought to have known that the relationship between debtor and the surety gives rise to a real risk that the surety may not contract freely and with a full appreciation of the nature of the obligation being assumed. Depending upon the existing context surrounding the relationship between the debtor and the surety, the question to be asked is whether the conduct of the creditor has fallen short in any respect which would amount to unconscionable disregard for the predictable vulnerability of the surety to the misfeasance or influence of the debtor. A common example of this is where the creditor "leaves it to the debtor" to get the surety's signature to the guarantee. "Leaves it to the debtor" is an expression that occurs frequently in the authorities. The expression covers a wide field of positions involving the creditor and the debtor which can arise during the negotiations of a loan guarantee and the associated execution by the surety of a charge upon property and which falls far short of the creation of a formal agency.
In Coldunell v. Gallon the appeal was heard by a two judge court consisting of Oliver L.J. (as he then was) and myself. Each of us in our judgments complained that the case was unsuitable for a two judge court and expressed the difficulties which we had experienced in arriving at our conclusions (see Oliver L.J. at page 1202E and myself at page 1211G). There was a substantial issue of fact as to whether or not the elderly parents, who were to be the principal debtors, had received the letters written by the creditor advising them to take independent legal advice. The court, however, with misgivings expressed in the judgment of Oliver L.J. at 1194D, felt unable to differ from the judge's findings that the letters were never received (see page 1194B). There was also a serious dispute as to whether the judge was entitled to reach his findings that the father did not have independent advice or that he was subject to undue influence from the son. These again are not matters which it is necessary to consider on this appeal.
In his judgment at page 1199F, after considering the judgment of Dillon L.J. in Kings North Trust Ltd. v. Bell [1986] 1 W.L.R. 119, Oliver L.J. said:-
"The case may be said to be a good example of the stringency with which the courts scrutinise transactions of guarantee entered into at the instance of a debtor who is likely to be in a position to exert influence of the surety and in circumstances in which the surety can derive no conceivable benefit from the transaction. But Mr. de Lacy submits that both it and the previous cases which it applied are clearly distinguishable from the instant case because they all rested upon the critical circumstances that the lender or creditor in each case left it to the principal debtor to obtain, in such a way as he thought fit, the execution of the document. There was, therefore, in each case, material from which it was possible to infer that the principal debtor acted as the agent of the creditor in obtaining the security. Here, by contrast, the father was himself to be the principal debtor and the transaction, so far as the plaintiffs were concerned, was to be completed by their solicitors. Those solicitors, in their turn, caused or thought that they had caused the documents to be dispatched direct to the father and the mother with a covering letter specifically directing attention to the desirability of obtaining independent legal advice. They cannot, it is submitted - and certainly the plaintiffs themselves cannot - be held responsible if, after the documents are returned to them executed in the presence of a solicitor, it subsequently transpires that the addressee has chosen to ignore the counsel that he was given".
Mr. de Lacy's submission was the basis of the reasoning upon which the court in Coldunell Ltd. v. Gallon distinguished that case from the case of Kings North Trust Ltd. v. Bell. I do not read the judgment of Oliver L.J. where it uses in relation to the previous authorities the words "the principal debtor acted the agent of the creditor in obtaining a security" to relate any formal contractual agency or agency by ostensible authority but was rather another way of saying "they left it to the debtor to obtain the execution of the necessary documents". In Coldunell v. Gallon the creditors had acted responsibly in that they had taken steps to ensure that the elderly parents received independent legal advice and, as appears from the closing sentence of the extract of Oliver L.J.'s judgment just cited, they were entitled when they received in return documents apparently executed in the presence of such a solicitor to accept those documents and act upon them. Turning to my own judgment, at page 1203F I recited the primary facts found by the judge and posed the following issue:
"The central issue raised on this aspect of the appeal is whether there is any evidence upon which the judge could find that the plaintiffs behaved in a manner in relation to the conduct of the son as to make them liable to suffer financial loss resulting from the equitable relief sought by the defendants. In this regard I am happy to accept the phrase 'left it to the son to obtain the signatures of his parents'".
I was looking to a broader concept than that of agency when considering the responsibility of the creditors in "leaving the matter to the son to obtain the signatures of the parents". Turning now to page 1205, having reviewed the evidence concerning the dispatch of the two letters by the solicitor for the creditor, Mr. Twycross, my judgment continued:-
"Assuming for the moment that Mr. Twycross was genuine in drafting his letters in these terms, then the mere writing of the letters denies the suggestion that Mr. Twycross 'left the obtaining of the signatures to the documents to the son'. if, on the other hand, he was not genuine in writing the letters and had connived at or conduced to the fraudulent behaviour of the son, or was even aware of it and consented to it, then he would not under any logical analysis have written the letters in these terms. Taking the case at its highest against the plaintiffs I assume for the purposes of considering this point that either Mr. Twycross or his secretary took the opportunity of the presence of the son in the office to hand the letters in their envelopes to him for the purpose of delivery to the parents. As Oliver L.J. has pointed out, another possibility is that the son intercepted the envelopes at the home of his parents and removed the letters before handing the charge and form of consent to his father and mother. Mr. Twycross was not asked in cross-examination about these possibilities. In any event the handing of the letters to the son could amount to no more than using him as a messenger. In my judgment, in view of the careful warning contained in the letters, the appointment of the son as a messenger assuming for the moment that it occurred, falls far short of the involvement required to visit upon the plaintiffs the unconscionable conduct of the son".
My reference in the next ensuing paragraph to the general principles of responsibility of the principal for the acts of the agent was to set the context of the consideration that in that particular case the solicitors for the creditor were equally deceived by the dishonest conduct of the son as were his own parents. There is no evidence that they could have anticipated that the son would intercept the letters under cover of which the legal charge and other documents were forwarded. If and insofar as Coldunell Ltd. v. Gallon is to be read as an authority requiring that the position of principal and agent must be created either expressly or by ostensible authority between the creditor and the debtor, as a necessary ingredient to affect the principal with the malefactions of the debtor, the decision in Coldunell did not require such a conclusion. From the extracts to which I have ventured to refer it is clear that equity would have been unlikely to have considered that there was any duty upon Coldunell Ltd. and their solicitors to do more than they in fact did in the circumstances of that case.
In Midland Bank plc v. Perry (C.A. Transcripts 21st May 1987) the court had to consider circumstances which differed from those in the present case and in the case of Coldunell in that a responsible official of the creditor bank took it upon himself to discharge any duty that might exist in the circumstances by personally dealing with the wife when she executed the documents under attack. In the court below she had also alleged that her husband was acting not only on his own behalf but as agent for the bank in obtaining her consent, that the bank was negligent and that there had been material misrepresentation, although the latter allegation was not pursued. Mr. Williams, the bank manager, said in evidence "before the charge was signed I would have to be satisfied that she knew what she was saying". He said that he thought that the wife entered into the charge of her own free will but that he would probably not have mentioned the question of undue influence to her at the time she executed the charge. Certainly he did not advise the wife that she should seek independent advice.
The judge made a number of findings:-
1. He accepted that the execution of the charge was procured by the undue influence of the husband.
2. That the bank manager, Mr. Williams, was unaware of the circumstances existing between the wife and the husband leading up to the execution of the charge.
3. That Williams was no party to the undue influence.
4. That the relationship of banker and customer which existed between Williams and the wife was properly observed and that Williams did not step outside this relationship.
5. That he failed to explain the transaction properly to the wife and in particular did not make it clear to her that the charge attached to her beneficial interest in the property (the home) as well as her husband's.
6. In the circumstances under 4 above Williams was negligent in his dealings with Mrs. Perry.
The bank did not appeal against the finding of negligence nor from the finding of undue influence. Neither of these findings affect the bank's position under the equitable remedy sought by the wife to relieve herself of the charge. As I understand the position, the duty in negligence arose purely from the fact that the wife was also a customer of the bank. The judgment of Fox L.J. described the appeal on the central point as being
"... to some extent, academic. If Mrs. Perry suffers any financial loss in consequence of her execution of the charge, she will recover it under the judgment for damages for negligence".
The case presented by the wife with which the court considered itself to be dealing, was one based on agency (see per Fox L.J. at page 9H):-
"Mrs. Perry contends that Mr. Colin Perry, in his dealings with her in relation to the execution of the charge, was acting as agent for the bank in obtaining Mrs. Perry's consent to the giving of the security. It is said, therefore, that Mr. Perry having exercised undue influence to procure Mrs. Perry's execution of the document, the bank is in no better position than he is himself as against Mrs. Perry".
And at page 10E:-
"... First, I think it is necessary to consider what is the nature of the authority contended for. It cannot have been ostensible authority. There is no evidence that the bank held out Mr. Colin Perry as its agent for any purpose.
The authority, if it existed, must therefore have been actual authority. I can see no evidence of that. The bank's card record of the meeting with Mr. Colin Perry on March 9th, 1983 states, after referring to a possible mortgage facility of up to £5,000, continues:
'... and we have told him that we would be pleased to consider this but would require security, probably in the form of a second mortgage over his house. He will talk to his wife about this and let us know the outcome'.
That is not authority from the bank to do anything -except to tell Mrs. Perry that the bank would be pleased to consider a loan of £5,000 on the security of the house.
In cross-examination Mr. Williams, according to the judge's note, said:
'I asked him to make certain she would be agreeable in principle'.
That does not indicate agency. It indicates only a wish for firm information as to consent in principle".
Later in his judgment Fox L.J. turned to the question of knowledge in the creditor of undue influence and referred to the case of Bainbriqqe v. Browne (1881) 18 Ch.Div. 188 at page 196 and the classic statement of the law by Fry J.:-
"'Then the next point which arises is this, against whom does this inference of undue influence operate? Clearly it operates against the person who is able to exercise the influence (in this case it was the father) and, in my judgment, it would operate against every volunteer who claimed under him, and also against every person who claimed under him with notice of the equity thereby created, or with notice of the circumstances from which the court infers the equity. But, in my judgment, it would operate against no others; it would not operate against a person who is not shewn to have taken with such notice of the circumstances under which the deed was executed'".
Fox L.J. then referred to the Australian case of Yerkey & Another v. Jones 63 C.L.R. 649, citing from the judgment of Dixon J. at page 684:
"'But it is clearly necessary to distinguish between, on the one hand, cases in which a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband's surety by the assertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. In the former case the fact that the creditor, on the occasion, for example, of the actual execution of the instrument, deals directly with the wife and explains the effect of the document to her will not protect him. Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice'".
Commenting that he did not read this extract from the judgment of Dixon J. as displacing the general principle stated by Fry j., Fox L. J. referred to an earlier passage from the judgment of Dixon J.:-
"'The difficulty, if not danger ... of attempting to state the conditions which must be fulfilled before a given kind of conduct or of unfairness amounts to an invalidating cause is greatly increased by the introduction of the consideration that the equity must be such as ought to prevail against the claims of the creditor as a possible innocent third party'".
It would appear, therefore, that Fox L.J. decided the appeal in Midland Bank plc v. Perry on the basis that the wife was aware of the nature of the document she was signing. There had been no plea of "non est factum". Secondly, he decided the case on the basis that the bank were innocent of any knowledge that there might have been undue influence exercised by the husband upon the wife. I have some hesitation about accepting the second leg of the ratio decidendi in the circumstances but that is certainly the way in which Fox L.J. appears to have made his decision.
Turning to the judgment of Lloyd L.J. who agreed that the appeal should be dismissed for the reasons given by Fox L.J., Lloyd L.J. turned to consider the case of Yerkey v. Jones and the submission made by Mr. Hamer, counsel for the wife. This submission was based on the assertion that the bank had employed the husband "as agent to procure his wife's signature to the document or at least her agreement to the transaction in principle". Dealing with Mr. Hamer's submission that these circumstances affected the bank with the undue influence exercised by the husband, Lloyd L.J. continued:-
"... Like my Lord, I can find no evidence of agency on the facts of the present case. The assistant recorder was right to find, as he did, that the allegations of agency set out in paragraph 5 of the re-amended defence had not been made out".
A little later, reverting to the judgment of Dixon J., Lloyd L.j. described two distinct states of affair namely:-
(a) where the wife is alive, to what she is signing and is procured to sign by the undue influence of her husband; and
(b) where the wife is not aware of what she is signing and the only ground for impeaching the document is her want of understanding.
He continued at page 15G:-
"... In both cases it is an essential first step for the wife to be able to show that the husband was acting as agent for the creditor in procuring her signature. This is clear from a passage in Dixon J.'s judgment where he is dealing with the second class of case:
'But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance'.
If this be the right view of Dixon J.'s judgment at pages 683-685, then it is clear that it does not help Mrs. Perry in the present case. Even if she was unaware of what she was signing, and the bank did not take adequate steps to explain the effect of her signature, nevertheless she cannot succeed without proof of agency".
With respect to Lloyd L.J., when the creditor is content to leave it to the debtor to obtain the surety's signature in circumstances in which it should have been aware that undue influence might come into play, it is not necessary to establish that the debtor was acting as agent for the bank. This is the theme of the "second matter" in the judgment of Dixon J. (see page 678) and is a distinction pointed out by Slade L.J. in Bank of Credit & Commerce International v. Aboody. an authority to which I must subsequently return.
Turning now to the case of Barclays Bank plc v. Kennedy (C.A. Transcripts 10th November 1988) the facts were quite different from those in Midland Bank plc v. Perry. The visit to the bank by the wife after undue influence had been exercised upon her by the husband was purely a matter of formality of signing the document which had been retained at the bank and which was done without any kind of advice in the presence of a junior member of the staff. The circumstances might well be described as
"the bank leaving it to the husband to obtain the presence of the wife at the bank for the purposes of signing the documents"
The decision centred mainly upon the particular circumstances leading to the relationship between the bank and the debtor. The officer acting for the bank was called Bunn. There was no dispute that Bunn throughout acted with the authority of the bank. There was a body of evidence that established that at the material time there was more than a normal commercial incentive influencing the actions of Bunn. This appears from the following extracts from the judgment (per Purchas L.J. at page 3D-G):
"... It is clear that the bank were involved in the various activities of McLaughlin, who seems to have introduced to the bank the various people involved, as well as effecting the introduction of the husband to Dempsey and others with whom he was involved at a later stage. Dempsey, on the introduction of McLaughlin, had opened a personal account in his own name, and a business account in the name of 'Muirshield trading as MacDonald Dempsey and Co.'. Perhaps unwisely, as judged by subsequent events, the bank permitted overdrafts on both these accounts without apparently taking any form of guarantee or security from Dempsey".
The financial survival of Dempsey was important to the husband. McLaughlin introduced "a consortium" which was intended to provide a rescue operation. Neither the husband, Mr. Kennedy, nor his wife were customers of the bank; but the husband was known to Bunn as someone authorised to act for Dempsey. After a great deal of pressure exerted upon him by Dempsey and others, the husband agreed to guarantee the indebtedness on the Dempsey accounts for a limited period said to be "only about four days", and to secure this by a charge on his house in favour of the bank. There was no doubt that Bunn was fully acquainted with these negotiations. The matter came to a head at a meeting at the bank's premises between the husband and Bunn on Friday, 23rd July 1982 (see page 10C-D):
"It is convenient to consider first whether the judge was correct in holding that the husband, whatever else he may have done, was not acting as agent for the bank for the purposes of procuring the signature of the wife to the charge. If Mr. Brilliant fails on this point, he readily concedes that that is the end of his appeal. The critical question is: what happened between Bunn and the husband at their meeting of 23rd July which took place at the bank's premises?"
The significant features of this meeting were:
(1) The bank's anxiety "to disembarrass themselves of this unsecured overdraft" (i.e. the overdraft on the Dempsey accounts).
(2) According to Bunn the husband executed a mortgage on his house supporting a guarantee of the overdraft, saying that the property was in his sole name: but that the wife and children were occupiers.
(3) Again, according to Bunn's evidence
"it was arranged that Mrs. Kennedy would come in on the Monday to execute this charge too. Nothing was said to indicate she had a proprietaryy interest in the house. She was going in the charge form as an occupier. I witnessed Kennedy's signature on the Friday. I was not present on the Monday when Mrs. Kennedy signed".
Subsequently in cross-examination, Bunn added:-
"Nobody from the bank approached Mrs. Kennedy direct. Mrs. Kennedy's attendance at the bank to sign the charge was a formality".
The trial judge found against the wife on her contention that the husband acted as the bank's agent to obtain her attendance to sign the charge; but made no finding whether the husband had exerted undue influence upon her. Her case had been that the husband had deliberately refrained from discussing the matter of the charge with her during the whole weekend. He had waited until the last moment on the Monday afternoon at 3 p.m. to tell her to go to the bank. The judge's description of her evidence was:-
"She said that on Monday the 26th July 1982 she was asked by her husband to go to the bank at 3 p.m. She had not been expecting him. She said she was asked to go to the bank to sign away the house. He said that the police would be called to investigate Dempsey and he would be out of a job. She was frightened of the police being involved because of what happened in 1977. She was told that the charge was going to be for four days and Ganley was going to save the business. She was not happy about this. She did not have much time and believed it would have saved his job. She would not have done it if it was to last for more than four days. She said, 'I went to the bank and signed the charge. Nobody else on the staff said anything'".
The judge said that the arrangement reached between Bunn and the husband was that the latter "would go home and discuss the matter with his wife over the weekend". This approach was simply not supported by the evidence. This error clearly influenced the Court of Appeal on this issue (see page 14E):
"In approaching the wife's defence I have regretfully come to the conclusion that the judge has overlooked two critical points of distinction between her case and that of the husband. Of great importance was the real incentive to Bunn not only to dis-embarrass himself of a thoroughly unsatisfactory debtor by getting a guarantee secured by a charge on a registered property, but also of producing a satisfactory answer to the awkward interest being shown by those at LHO. The fact that Bunn had both the guarantee and the charge drawn up and executed both by the husband and himself on Friday, 23rd July, and his evidence that the wife's attendance on the Monday was, so far as he was concerned, a mere formality, shows that all that remained was to get the wife's signature in accordance with bank policy. In describing the position in the terms:
'... the bank told Kennedy to go home and discuss the matter with his wife over the weekend',
I am forced to the conclusion that the judge must either have overlooked the evidence to which I have just referred, or to have failed to appreciate its significance. The inference which is really overwhelming is that all had been agreed between the husband and Bunn on the Friday, and that Bunn left it to the husband to persuade the wife to come to the bank on the Monday to execute the charge and sign the guarantee. This is consistent with the evidence of the husband in cross-examination: 'Mr. Bunn told me he would need my wife to sign the charge too'".
Although the wife's case as presented below had depended upon establishing agency, the court expressed the view that this might not have been the correct test (see page 15F):
"... Again, the concentration on actual or ostensible authority being 'given to the husband to act on behalf of the bank' may not be a reliable way of applying the test now well established by authority, albeit since this judgment was delivered, that the real question is whether the bank were content to leave it to the husband to obtain the wife's signature upon the charge. This view is confirmed, not only by the evidence of Mr. Bunn himself, namely that the wife's signature on the Monday was a formality, but also the evidence accepted by the judge of what transpired on the Monday, namely, that there was no discussion between Cowen, the husband and the wife, who was merely presented the document for her signature. I have not overlooked the account given by the wife, which was not accepted by the judge, that Cowen said that the charge did not concern her. I do not think that this remark carried the matter any further in the context of agency and undue influence". (Cowen was a clerk in the office of the bank).
In the event the Court of Appeal came to the conclusion that it was not possible to support the judge's findings based on the absence of agency but equally were unable, on the judge's findings, to come to a conclusion on the issue of undue influence. With reluctance, the court ordered a new trial.
As Scott L.J. has already pointed out in Bank of Baroda v. Shah and Another [1988] All E.R. 24 the misrepresentation which caused the husband and wife to execute the legal charge was committed by a director of the debtor company. In such circumstances the court per Dillon L.J. following Coldunell v. Gallon held that there was no duty upon the bank to ensure that the husband and wife obtained independent legal advice.
In the case of Bank of Credit & Commerce International v. Aboody_ the court was concerned with three guarantees entered into by a husband and wife to cover the indebtedness of a family company of which both were shareholders and directors; and with three charges on the wife's house executed by her in favour of the bank securing the same indebtedness. The judgment of the court was delivered by Slade L.J. The appeal was decided on the comparatively short point that although undue influence had been exercised by the husband upon the wife, it had not been shown that the transactions were to the manifest disadvantage of the wife; in which circumstances the court held that the wife could not be relieved from the effect of the charges on her home. However, since other issues had been fully argued the court continued to deliver a comprehensive judgment of persuasive authority, some aspects of which have an important bearing on the issues raised in this appeal.
Of particular relevance is the position of the creditor bank in the particular circumstances of that case. The husband and his brother ran a company engaged in the importation of textiles, Aboody Brothers. When his brother retired from business, the husband took over the company, changed its name to Eraten Ltd. and arranged for his wife to become secretary and co-director of the company. It was clear that the wife was never in a position fully to understand the legal implication of documents. Those which her husband offered to her for signature she signed without question; those offered by others she would ask for the document to be explained. The bank, contrary to the wishes of the husband, arranged for the presence of an independent solicitor, a Mr. Hallworth, to advise Mrs. Aboody and to certify in writing, that she fully understood the implication of the charges she was to sign:
"On arrival at the bank's premises, on 7th February 1980, Mrs. Aboody was conducted by a clerk from the bank, Mr. Webster, to the office of Mr. Hallworth, the solicitor from Foysters, who was intended to advise her. Mr. Hallworth took Mrs. Aboody into a private room to speak to her privately, while Mr. Aboody waited in an adjacent room. Mr. Hallworth had read through the terms of the charge before the interview. The judge accepted that he at least attempted to put to her that it was an extremely onerous document and made her liable down to the last penny if Eraten failed. Mr. Hallworth's evidence was that he did not want her to enter into the transaction, but she said she wanted to go ahead with it. He asked her why, and she said it was in the interests of the company. She seemed resolved to sign the document. He then made one or two suggestions for limiting her liability, but got the impression that she was indifferent to his suggestions as though she thought it would be a waste of time to put them forward. However, while he was still attempting to give his advice to Mrs. Aboody, her husband had burst into the room uninvited and in a high state of excitement. He interrupted Mr. Hallworth with the words, 'Why the hell don't you get on with what you are paid to do and witness her signature?' There followed a scene which so distressed Mrs. Aboody that she was reduced to tears. Both men were shouting. Mr. Hallworth was considerably shaken by the scene and finally said, 'All right. Let her sign'. She did so. There was a certificate typed on the bottom of the last page of the document of legal charge which had been drafted by the bank's solicitors for the benefit of the bank. It should have read:
"I hereby confirm that prior to the execution of this document I fully explained the contents and effect thereof to [blank space] who seemed to me, and informed me that she perfectly understood the same'.
Mr. Hallworth did not enter Mrs. Aboody's name in the blank space and simply signed the certificate. The judge did not accept the suggestion that Mr. Hallworth saw Mrs. Aboody alone after her husband's interruption. He attached considerable importance to Mr. Hallworth's attendance note. Alongside two of his suggestions he had written 'Husband would accept neither'. Lower down on the note he had written 'Husband is a bully. Under pressure and she wants peace'. A further attendance note read:
'Both our proposals were rejected out of hand by your husband although bank rep. also present, agreed that the bank only wanted the house. Your husband very rude and overbearing but you seemed to be quite content to submit and expressed your confidence in the business'".
In the case of two of the charges, the court held that, Mrs. Aboody having come to the bank herself to execute the charges, it could not be said that the bank left it to the husband to obtain the wife's signature. In relation to the third charge, it was likewise clear that the bank could never have been said "to have left it to the husband to obtain the signature of the wife" on the charge documents. The case is clearly distinguishable from Kings North Trust Ltd. v. Bell and Barclays Bank plc v. Kennedy. The trial judge held that if the influence established against the husband had led to the wife executing the charge and it was an agreement manifestly to her disadvantage, then the bank would have been affected by it. Under the rubric of "agency" Slade L.J. underlined the distinction between a common law agency which has in some cases distracted the court, and the real question which arises in cases where the issue is equitable relief. Slade L.J. adopted the passage from the judgment of Dillon L.J. in Kings North Trust Ltd. v. Bell:
"(i) Agency
Some confusion may have been caused by the use of the word 'agent'. We are not concerned here with the question as to whether or not the bank is vicariously responsible for the acts of Mr. Aboody. The issue is whether the bank can be in any better position than Mr. Aboody if, when Mr. Aboody was acting on its behalf, Mr. Aboody exerted (or if this was a Class 2 case was presumed to have exerted) undue influence. As we have made clear in answer to Issue (4), the undue influence is required to have brought about the transaction, and it would be inconsistent with the equitable nature of the relief for the bank not to be affected by the undue influence exerted by its agent when the transaction would not exist but for the wrongful acts of its agent. As a matter of principle, the bank in such circumstances should not be entitled to rely on the transaction and this is the view which has been taken by a series of authorities going back to the beginning of this century. The clearest statement of the principle, which we would adopt, is to be found in the judgment of Dillon L.J. in Kings North Trust v. Bell [1986] 1 W.L.R. 199 at page 123:
'If a creditor, or potential creditor, of a husband desires to obtain, by way of security for a husband's indebtedness, a guarantee from his wife or a charge on property of his wife and if the creditor entrusts to the husband himself the task of obtaining the execution of the relevant document by the wife, then the creditor can be in no better position than the husband himself, and the creditor cannot enforce the guarantee or the security against the wife if it is established that the execution of the document by the wife was procured by undue influence by the husband and the wife had no independent advice'.
As Dillon L.J. made clear, this approach is in accord with the approach of the general law of principal and agent in relation to fraudulent misrepresentations made by an agent in carrying out the specific instructions of his principal".
The bank were held to be affected by the knowledge of the independent solicitor, Mr. Hallworth of the undue influence brought upon Mrs. Aboody to sign the particular charge. Thus when the bank has actual or constructive notice of the exercise of undue influence it will be restrained from enforcing the charge:-
(ii) Notice
If a creditor has actual or constructive notice (at the time of the execution of the charge or guarantee in question) that the guarantee or charge on which it relies has been procured by the exercise of undue influence, it cannot enforce the transaction; an equity is raised against the creditor irrespective of any question of agency. Examples of the application of this principle are to be found in Kempson v. Ashbee (1874) L.R. 10 Ch. App. 15 and Bainbriqqe v. Browne [1881] 18 ChD 188. In the former case James L.J. said (at page 21):
'The first question, therefore, is whether the bond was obtained by the undue exercise of influence of the stepfather, and was it obtained under such exercise as that the knowledge of it can be imputed to the defendant [the creditor]?'
What notice will be requisite will depend upon the nature of the undue influence alleged. Thus, in a Class 1 case (actual undue influence), the creditor must have notice of the circumstances alleged to constitute the actual exercise of the undue influence; in a Class 2 case it must have notice of the circumstances from which the presumption of undue influence is alleged to arise.
In Avon Finance Co. Ltd. v. Bridger [1985] 2 All E.R. 281, the majority of the court (Brandon and Brightman L.JJ.) decided the case on a combination of the two grounds of agency and constructive notice".
Summary
The danger of attempting to categorise the situations in which equitable relief will be afforded is well recognised in the authorities and, if I may say so, rightly. However, the authorities in general appear to support the following propositions:-
1. Creditor institutions owe no duty at common law to a third party who enters into a contract of surety arising per se out of the proposed relationship of creditor and surety.
2. (1) above is without prejudice to any duty arising out of a collateral relationship such as bank and customer - see the undisputed liability in negligence in Midland Bank pic, v. Perry; or short of a customer/bank relationship a duty properly to advise which might arise from some other relationship as in Hedley Byrne and Co. Ltd. V. Heller and Partner Ltd. [1964] AC 465.
3. Where the creditor leaves it to the debtor to obtain the signature of a third party surety on documents of guarantee or on documents charging the surety's principal or important asset; it exposes itself to the possibility of being restrained under applicable equitable doctrines. In any particular case, what steps a prudent creditor should take will depend upon the circumstances existing and the state of knowledge in the creditor. The following are by way of being examples and are not intended to be definitive:-
(i) Where the relationship between the debtor and the proposed surety is one in which the real possibility of the exercise of undue influence in any of its well recognised forms or of misrepresentation is present to the knowledge of the creditor, the creditor must take notice of the position and act reasonably in the circumstances (see per Dillon L.J. in Kings North Trust v. Bell).
(ii) Unless the contract is to the manifest disadvantage of the surety, equity will not grant relief - National Westminster Bank v. Morgan [1985] AC 686. (iii) Unless undue influence or misrepresentation of the nature envisaged under (i) has in fact occurred, and has led to the execution of the document in question by the surety, again equity will not intervene, on that account.
(iv) If the creditor is aware, or ought to have been aware that the surety has been subjected to undue influence by the debtor, it would be unlikely to be sufficient if the creditor merely took steps to ensure that the surety understood the nature of the liability he or she was accepting. Nothing less than clear and unambiguous advice to obtain independent legal advice would probably be necessary to avoid the restraining hand of equity; unless the attempt to give this was frustrated by circumstances beyond the reasonable anticipation of the creditor - see Coldunell v. Gallon, Bank of Montreal v. Stuart [1911] AC 120 and, in relation to the third charge in that case, Bank of Credit and Commerce International v. Aboody. If the creditor knew that the surety, whilst understanding the nature of the liability he or she was accepting, was in fact acting under the influence of the debtor, then it would not be safe for the creditor to rely upon a document executed in these circumstances, unless it believed on reasonable grounds that the surety had in fact received independent advice.
As Scott L.J. has already indicated, although it was not what Mr. Tucker intended, the bank did leave it entirely to Mr. O'Brien to explain the transaction to his wife and to procure her consent to it. As a result of the way in which the husband carried out this function the wife executed the documents believing that her liability would be limited to £60,000. As a result, the creditor bank is affected by the unconscionable actions of the husband and will be restrained from recovering more than the £60,000 which they have already received. For these reasons and for the reasons given in the judgment of Scott L.J., I, too, would allow this appeal
Order: Appeal allowed, with costs of appeal and below; leave to appeal to House of Lords refused.
