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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Portman Building Society v Dusangh & Ors [2000] EWCA Civ 142 (19 April 2000)
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Cite as: [2000] EWCA Civ 142
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Case No: CCRTF 1999/0577/B3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR RECORDER GOLDRING QC
(FROM DERBY COUNTY COURT)
Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday 19 April 2000
LORD JUSTICE SIMON BROWN
LORD JUSTICE WARD
and
LORD JUSTICE SEDLEY
- - - - - - - - - - - - - - - - - - - - -
PORTMAN BUILDING SOCIETY |
Claimants/Respondents | |
- and - |
||
DUSANGH & ORS |
Defendants/Appellant |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr B.N. Bedford (instructed by Mushtaq & Co, 14-15 Bristol Street, Birmingham B5 7AA, solicitors) for the Appellant
Mr A. Malek QC & Mr J. Davies-Jones (instructed by Clarke Willmott & Clarke of Yeovil BA20 1EP, solicitors) for the Respondents
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE SIMON BROWN:
This is the first defendant's appeal against the order of Mr Recorder Goldring QC in the Derby County Court on 9 March 1999 declaring the claimant building society (Portman) entitled to a charge by way of legal mortgage (the mortgage) over the whole of the legal and beneficial interest in 72 Kenilworth Avenue, Derby (the property), granting them possession of the property, and ordering payment to them of £61,428.69 and costs.
Before identifying the issue now arising on the appeal, it is convenient
first to set out the essential facts of the case.
The mortgage was granted on 5 December 1989 when the appellant was aged 72 and
retired. It was a twenty-five year repayment mortgage. The sum advanced was
£33,750 (about 75% of the value of the property), £4,383 of which
went to the Halifax Building Society to pay off an existing mortgage on the
property, the balance to the appellant's son, the third defendant (one of his
eight children). The appellant had purchased the property on 20 June 1977 and
lived there with his wife (the second defendant). This was the second
property the appellant had bought in Derby. He and his wife had come to
England from India in 1964. His understanding of spoken English had remained
poor and he was illiterate.
The mortgage was guaranteed by the son and, moreover, the son agreed with his
father to pay it off. He needed the money for a Spar supermarket in Telford
which he and a friend (Mr Basi Junior) were buying together. They needed the
money urgently: they had already paid £20,000 and, indeed, were already
in occupation of the shop and trading.
The same solicitor acted for Portman, father and son in the transaction. He
was Mr Haycocks, a sole practitioner in Telford.
The appellant's mortgage application form falsely stated that he had a private
income of £9,600. Subsequently, in a self-certification form, he instead
detailed income from a pension and a part-time job totalling £2,196 p.a.,
income which he had omitted from the application form. His son worked as a
fitter at Rolls Royce and disclosed an income of £14,500 p.a. and a
£22,000 mortgage of his own.
In the event the Spar was not a success. The son fell behind with the
mortgage repayments. His guarantee proved worthless. He became bankrupt.
It was in these circumstances that the mortgage repossession proceedings were
begun.
At the trial below the appellant advanced three defences. First he invoked
the doctrine of non est factum and alleged that the charge was void.
Second he alleged that his son had procured his signature on the charge by
undue influence and/or by misrepresentation and that Portman had actual or
constructive knowledge of the resultant equity against his son. Third he
alleged that in any event he was entitled to set aside the charge directly
against Portman as an unconscionable bargain. The Recorder rejected all
three defences. The appeal is brought solely with regard to the third, the
appellant's contention being that the Recorder never dealt properly with this
defence and that he is entitled to succeed upon it even despite the Recorder's
many adverse findings of fact.
Before turning to the argument it is necessary first to summarise what these
findings were. This I shall do by quoting short passages from the judgment
below. As to the defence of non est factum, the Recorder said
this:
"Although I accept [father's] knowledge of English was rudimentary, I accept Mr
Haycocks' evidence when he says Mr Dusangh Senior (and Mr Basi Senior [who was
entering into a similar transaction for his son]) understood the nature of the
transaction. ... I accept Mr Haycocks' evidence that Mr Dusangh Senior
entered into this transaction to turn Mr Dusangh Junior from a labourer at
Rolls Royce to the owner of a large supermarket. ... It comes to this. I
conclude Mr Dusangh Senior agreed to re-mortgage his house. He did so for his
son's benefit."
As to undue influence, the Recorder referred to the relevant authorities and,
having correctly directed himself that this was a class 2B case within the
Barclays Bank v O'Brien [1994] 1 AC 180 formulation and observed
that father therefore had to prove "by affirmative evidence that [he] was
accustomed to repose trust and confidence in" his son, concluded:
"I am afraid that I do not accept that. Such evidence as there is tends to
suggest that Mr Dusangh Senior did not have trust and confidence in his
son."
Although, as the Recorder rightly observed, those findings were sufficient to
dispose of the undue influence (and misrepresentation) defence, he nevertheless
turned to consider what the position would have been had he found on the
contrary that father had been subject to undue influence by his son such
as to give rise to an equity in his favour. Under the heading of
"constructive knowledge" the Recorder made these findings:
"I conclude it is probable she [Mrs Gray, Portman's branch manager who dealt
with the appellant's application] did speak to Mr Robson [the mortgage agent
who introduced the appellant and his son to Portman] about the loan and its
purpose. He would probably have said something to the effect that the
re-mortgage was to raise finance for a business or family business. ....
It does not seem to me that an application for a re-mortgage by an elderly man
of probable Asian origin, guaranteed by his son, was something which should
have put Portman on notice of a possible equity the father might have against
the son. Such things as an application containing different writing, a shaky
signature, how access to the property is to be arranged seem to me of little
significance. None of those things say anything about the relationship
between Mr Dusangh Senior and Junior. Neither, in my view, does the fact
that Portman probably knew the purpose of the re-mortgage was in respect of a
business or family business. In short, I would have concluded that Portman
did not have notice of any equity as between father and son."
That, therefore, was a second fatal impediment to the defence of undue
influence. The Recorder then proceeded to find a third such impediment,
namely that arising from the solicitor's involvement in this transaction.
The Recorder held:
"From 18 November 1989, Portman was entitled to proceed on the basis that Mr
Dusangh Senior was receiving legal advice. It was entitled to assume the
advice was competent. It was entitled to believe that Haycocks would give Mr
Dusangh Senior any advice which it was a solicitor's duty to give in relation
to the transaction. ...
In my view, it could not be said that the transaction was `so extravagantly
improvident that it was difficult to explain in the absence of impropriety'
[Royal Bank of Scotland v Etridge [1998] 4 AllER 705, 719]. It could
reasonably be explained on the basis of a borrower/father's wish to help his
son purchase and run a small business, that he was doing this out of natural
love and affection. The notion that it is common for parents to make
financial sacrifices for their children, whether or not within the Asian
community, is commonplace. Indeed that is what I conclude happened here. In
short, this was not a sort of transaction which Portman ought to have known was
one into which no competent solicitor could properly advise Mr Dusangh Senior
to enter."
The Recorder then turned to the third defence, which he dealt with in the
following short passage in his judgment:
"Unconscionable Bargain
Finally, reliance was placed on the notion of an unconscionable bargain. Mr
Bedford sought to suggest that this doctrine was quite unlike that of undue
influence: it was not necessary for Portman to have constructive notice of the
unconscionable bargain between Mr Dusangh Senior and his son. Again, I am
afraid I cannot agree.
As Millett LJ said in Burch [Credit Lyonnais Bank Nederland NV v Burch]
[1997] 1 AllER 144], the circumstances in which the doctrine of unconscionable
bargains would apply were similar to those of undue influence: 153 c-d. In
my view for the reasons expressed, this case falls short of that. Moreover,
again for the reasons expressed, not least in view of the independent legal
advice received from Mr Haycocks, Portman was not fixed with constructive
knowledge of it. Because the transaction was capable of reasonable
explanation on the basis of parental affection, it was not necessary for
Portman to make further enquiry once it knew that Mr Haycocks was acting for Mr
Dusangh."
The authority upon which Mr Becket Bedford principally relies in this appeal is
Credit Lyonnais Bank Nederland v Burch. When considering the judgments
in that case, however, it is as well to have its facts in mind. Miss Burch
was a junior employee of the principal debtor (a one-man company whose alter
ego was a Mr Pelosi). She had a salary of between £12,000 and
£14,000 p.a. She lived in a flat valued at £100,000 with a mortgage
of £30,000. The company wished to increase its bank overdraft limit from
£250,000 to £270,000. To that end Miss Burch entered into an
all-monies charge making herself liable for all the company's debts. In
short, she risked personal bankruptcy and the loss of her home for a
£20,000 increase in the overdraft facility of a company in which she had
no direct financial interest. The bank had urged her to take independent
legal advice but she had declined to do so.
The Court of Appeal held that the transaction was so manifestly disadvantageous
to Miss Burch that the presumption of undue influence on Mr Pelosi's part was
irresistible, and that the bank had not taken reasonable steps to avoid being
fixed with constructive notice of that undue influence. Accordingly the
transaction had to be set aside. Importantly for present purposes, however,
the Court also concluded that Miss Burch might well have been entitled,
directly against the bank, to have had the legal charge set aside as an
unconscionable bargain. Nourse LJ, at p.151, said this:
"On that state of facts it must, I think, have been very well arguable that
Miss Burch could, directly against the bank, have had the legal charge set
aside as an unconscionable bargain. Equity's jurisdiction to relieve against
such transactions, although more rarely exercised in modern times, is at least
as venerable as its jurisdiction to relieve against those procured by undue
influence. In Fry v Lane, re Fry, Whittet v Bush (1889) 40 Ch D 312 at
322, [1886-90] All ER Rep 1084 at 1089, where sales of reversionary interests
at considerable undervalues by poor and ignorant persons were set aside, Kay J,
having reviewed the earlier authorities, said:
`The result of the decisions is that where a purchase is made from a poor and
ignorant man at a considerable undervalue, the vendor having no independent
advice, a Court of Equity will set aside the transaction. This will be done
even in the case of property in possession, and a fortiori if the
interest be reversionary. The circumstances of poverty and ignorance of the
vendor, and absence of independent advice, throw upon the purchaser, when the
transaction is impeached, the onus of proving, in Lord Selborne's words, that
the purchase was `fair, just, and reasonable'.'
Lord Selborne LC's words will be found in Earl of Aylesford v Morris
(1873) LR 8 Ch App 484 at 491, [1861-73] All ER Rep 300 at 303. The decision
of Megarry J in Cresswell v Potter [1978] 1 WLR 255 where he suggested
that the modern equivalent of `poor and ignorant' might be `a member of the
lower income group ... less highly educated', demonstrates that the
jurisdiction is in good heart and capable of adaptation to different
transactions entered into in changing circumstances. See also the interesting
judgment of Balcombe J in Backhouse v Backhouse [1978] 1 All ER 1158 at
1165-6, [1978] 1 WLR 243 at 250-52, where he suggested that these cases may
come under the general heading which Lord Denning MR referred to in Lloyds
Bank Ltd v Bunday [1974] 3 All ER 757 at 765, [1975] QB 326 at 339 as
`inequality of bargaining power'.
A case based on an unconscionable bargain not having been made below, a
decision of this court cannot be rested on that ground. But the
unconscionability of the transaction remains of direct materiality to the case
based on undue influence. Since it was so manifestly disadvantageous to Miss
Burch, the bank could not be said to have taken reasonable steps to avoid being
fixed with constructive notice of Mr Pelosi's undue influence over her when
neither the potential extent of her liability had been explained to her nor had
she received independent advice."
Millett LJ, at pp.152-153, having summarised the facts, continued:
"No court of equity could allow such a transaction to stand. The facts which
I have recited are sufficient to entitle Miss Burch to have the transaction set
aside as against Mr Pelosi and the company. Every one of those facts was
known to the bank when it accepted the security. The bank must accordingly be
taken to have had notice of Miss Burch's equity, and must submit to the
transaction being set aside against it also.
An eighteenth century Lord Chancellor would have contented himself with saying
as much. It is an extreme case. The transaction was not merely to the
manifest disadvantage of Miss Burch; it was one which, in the traditonal
phrase, `shocks the conscience of the court'. Miss Burch committed herself to
a personal liability far beyond her slender means, risking the loss of her home
and personal bankruptcy, and obtained nothing in return beyond a relatively
small and possibly temporary increase in the overdraft facility available to
her employer, a company in which she had no financial interest. The
transaction gives rise to grave suspicion. It cries aloud for an
explanation.
Miss Burch did not seek to have the transaction set aside as a harsh and
unconscionable bargain. To do so she would have had to show not only that the
terms of the transaction were harsh or oppressive, but that `one of the parties
to it has imposed the objectionable terms in a morally reprehensible manner,
that is to say, in a way which affects his conscience' (see Multiservice
Bookbinding Ltd v Marden [1978] 2 All ER 489 at 502, [1979] Ch 84 at 110
per Browne-Wilkinson J and Alec Lobb (Garages) Ltd v Total Oil GB Ltd
[1983] 1 All ER 944 at 961, [1983] 1 WLR 87 at 95, where I pointed out that
there must be some impropriety, both in the conduct of the stronger party and
in the terms of the transaction itself, but added that `the former may often be
inferred from the latter in the absence of an innocent explanation').
In the present case, the bank did not obtain the guarantee directly from Miss
Burch. It was provided to the bank by Mr Pelosi, who obtained it from Miss
Burch by the exercise of undue influence. In such a context, the two equitable
jurisdictions to set aside harsh and unconscionable bargains and to set aside
transactions obtained by undue influence have many similarities. In either
case it is necessary to show that the conscience of the party who seeks to
uphold the transaction was affected by notice, actual or constructive, of the
impropriety by which it was obtained by the intermediary, and in either case
the court may in a proper case infer the presence of the impropriety from the
terms of the transaction itself."
A little later in his judgment at page 155, Millett LJ said this:
"No competent solicitor could possibly have advised [Miss Burch] to enter into
[the transaction]. He would be bound to warn her against it in the strongest
possible terms, and to have refrained from acting for her further if she had
persisted in it against his advice (see Powell v Powell [1900] 1 Ch 243
at 247)."
Having concluded that the bank's suspicions should have been confirmed by Miss
Burch's refusal to take independent legal advice, Millett LJ continued:
"That is sufficient to dispose of this appeal, but I should not be taken to
accept that it would have necessarily have made any difference even if Miss
Burch had entered into the transaction after taking independent legal advice.
...
The cases show that it is not sufficient that she should have received
independent advice unless she has acted on that advice. If this were not so,
the same influence that produced her desire to enter into the transaction would
cause her to disregard any advice not to do so. They also show that the
solicitor must not be content to satisfy himself that his client understands
the transaction and wishes to carry it out. His duty is to satisfy himself
that the transaction is one which his client could sensibly enter into if free
from improper influence; and if he is not so satisfied to advise her not to
enter into it, and to refuse to act further for her if she persists. ...
It is next necessary to consider the position of the third party who has been
put on enquiry of the possible existence of some impropriety and who wishes to
avoid being fixed with constructive notice. One means of doing so is to
ensure that the complainant obtains competent and independent legal advice
before entering into the transaction. If she does so, and enters into the
transaction nonetheless, the third party will usually escape the consequences
of notice. This is because he is normally entitled to assume that the
solicitor has discharged his duty and that the complainant has followed his
advice. But he cannot make any such assumption if he knows or ought to know
that it is false.
In the present case, the bank did not have actual notice of the exercise of
undue influence, or even of the existence of a relationship of trust and
confidence between Miss Burch and Mr Pelosi. It did not know for a fact that
Miss Burch had no incentive to enter into the transaction. For all the bank
knew, for example, the parties might be intending to set up home together and
live off the profits of the company's business. It did not, therefore, know
(as was the case) that no competent solicitor could possibly advise Miss Burch
to guarantee the company's overdraft.
But it must have known that no competent solicitor could advise her to enter
into a guarantee in the terms she did. He would be bound to enquire, of the
bank if necessary, of the reason why it required additional security. Having
discovered that it was to enable the limit of the company's overdraft to be
increased from £250,000 to £270,000, he would be bound to advise Miss
Burch that an unlimited guarantee was unnecessary and inappropriate for this
purpose, and that, if she felt that she must accommodate Mr Pelosi's wishes,
she should offer a limited guarantee to the limit of £20,000 or (better
still) a guarantee of the company's liability in excess of £250,000 with a
maximum of £270,000. ...
I do not, therefore, accept that a bank, in circumstances where it ought to
appreciate the possibility that undue influence has been exercised, can escape
the consequences by putting forward an unnecessarily onerous form of guarantee
and relying on the failure of the guarantor's solicitor to advise her of the
possibility of offering a guarantee on less onerous terms and more appropriate
to the situation."
I have cited those passages at some length because it seems to me important to
recognise (a) the clear limitations in the scope of the doctrine of
unconscionable bargains implicit in them, and (b) the very real distinctions
between that case and this on the facts.
Let me start with the latter. First among the distinctions, of course, is
that in Burch there was undue influence, here there was not. Second,
it was not "manifestly disadvantageous" to this appellant that he should be
able to raise money by way of re-mortgage so as to benefit his son. This was
a far cry from Miss Burch's suretyship by which she risked all under an
unnecessarily onerous guarantee for no, or virtually no, benefit whatever.
Third, unlike Miss Burch, the appellant was advised by a solicitor. True, as
Millett LJ made plain, it would have made no difference to the result there
even had Miss Burch received independent advice. But the reason for that was
because "no competent solicitor could possibly have advised [her] to enter into
[the transaction]" and, moreoever, the bank "must have known that no competent
solicitor could advise her to enter a guarantee in the terms she did". As
this court explained in Royal Bank of Scotland v Etridge [1994] 4 AllER
705, 722:
"While the bank is normally entitled to assume that a solicitor who is asked to
advise the wife will discharge his duties fully and competently, and that he
will not have restricted himself to giving an explanation of the transaction
and satisfying himself that she appears to understand it, it cannot make any
such assumption if he knows or ought to know that it is false: Burch's case.
If the bank is in possession of material information which is not available to
the solicitor, or if the transaction is one into which no competent solicitor
could properly advise the wife to enter, the availability of legal advice is
insufficient to avoid the bank being fixed with constructive knowledge."
In the present case the respondent building society were not in possession of
material information unavailable to Mr Haycocks. Quite the contrary. Nor in
my judgment was this a transaction into which no competent solicitor could
properly advise the appellant to enter and in regard to which, therefore, Mr
Haycocks should have refused to act for him. I readily accept that this
mortgage was improvident for the appellant and his wife (and, insofar as they
had any expectations in the property, for their other seven children). That,
however, is to be contrasted with the situation in Burch, as described
in Etridge at p.719:
"... where the transaction is so extravagantly improvident that it is difficult
to explain in the absence of some impropriety ..."
As the Recorder here found, the appellant entered into this transaction to turn
his son from a labourer at Rolls Royce into the owner of a large supermarket.
Should he have been prevented from doing so? That is the ultimate question
raised by this appeal. In submitting that he should and that the respondents
were morally bound to refuse this mortgage application, Mr Bedford stresses the
appellant's personal circumstances and the essential unwisdom of the
transaction from his point of view. The appellant, submits Mr Bedford, is
(and was at the date of this transaction), the modern equivalent of "poor and
ignorant" as explained by Nourse LJ in Burch: elderly, illiterate and
on a very low income. I agree. And, as already indicated, I would agree
too that the transaction was an improvident one, necessarily dependent for its
success upon the son's ability to make the monthly repayments and thus upon the
success of the supermarket venture. Undoubtedly, therefore, it placed the
property at risk. But I simply cannot accept that building societies are
required to police transactions of this nature to ensure that parents (even
poor and ignorant ones) are wise in seeking to assist their children. Mr
Bedford points to the respondents' several failures to follow their own policy
and safeguards for ensuring that the appellant would be able to meet his
commitments in the future. But these safeguards exist to protect the building
society's interests, not their borrowers. That it was commercially unwise for
the respondents to put their trust in the appellant (and his son) is not to say
that it was morally culpable for them to do so. It was the appellant who
approached them, not they him. He applied to borrow £33,750 and they
agreed to lend it on their normal condition that the loan was secured.
To my mind none of the essential touchstones of an unconscionable bargain are
to be found in this case. The appellant was not at a serious disadvantage to
the building society: neither he nor his son had any existing indebtedness
towards them. His situation was not exploited by the building society. The
building society did not act in a morally reprehensible manner. The
transaction, although improvident, was not "overreaching and oppressive". In
short, the conscience of the court is not shocked.
In the result I conclude that the Recorder was right to reject this defence
along with the others, and for my part would dismiss the appeal.
LORD JUSTICE WARD:
I am grateful to Mr Becket Bedford for appearing pro bono for the
appellant. His generous and valiant submissions have, however, wholly failed
to convince me.
The appellant's case is, or can be, put in two ways, firstly, unconscionable
conduct by the son affecting the building society, and, secondly, the
unconscionable conduct by the building society itself. Although there is
inevitably some overlap, the argument is essentially this:
1. The charge to the property was obtained by the son's exploiting the
weaknesses of his father's position in order to benefit from a transaction
which was manifestly disadvantageous to the father. Such unconscionable
conduct was a vitiating factor, similar to undue influence, of which the
building society had notice and by which it is bound on Barclays Bank plc v
O'Brien [1994] 1 AC 180 principles.
2. The building society itself acted unconscionably in taking a mortgage of
the property which was a manifestly disadvantageous transaction for a "poor and
ignorant man" acting without adequate legal advice and which the building
society could not show was fair, just and reasonable.
Although I agree with the judgment of Simon Brown L.J., which I have read in
draft, the points raised are of sufficient interest for me to add, but add
shortly, some reasons of my own.
Unconscionable conduct by the son affecting the building society
Three questions seem to arise:-
1. was this unconscionable conduct?
2. do Barclays Bank plc v O'Brien principles apply, and if so;
3. are they satisfied?
Unconscionability
What are the hallmarks of unconscionability? In Multiservice
Bookbinding Ltd v Marden [1979] Ch. 84, 110, Browne-Wilkinson J.
said:-
"In my judgment a bargain cannot be unfair and unconscionable unless one of the
parties to it has imposed the objectionable terms in a morally reprehensible
manner, that is to say, in a way which affects his conscience."
That was followed in Alec Lobb (Garages) Ltd and others v Total Oil (Great
Britain) Ltd [1983] 1 W.L.R. 87, 94 where Mr Peter Millett Q.C. gave this
penetrating analysis of the authorities:-
"It is probably not possible to reconcile all the authorities, some of which
are of great antiquity, on this head of equitable relief, which came into
greater prominence with the repeal of the usury laws in the 19th century. But
if the cases are examined, it will be seen that three elements have almost
invariably been present before the court has interfered. First, one party has
been at a serious disadvantage to the other, whether through poverty, or
ignorance, or lack of advice, or otherwise, so that circumstances existed of
which unfair advantage could be taken: see, for example, Blomley v Ryan
(1954) 99 C.L.R. 362, where, to the knowledge of one party, the other was
by reason of his intoxication in no condition to negotiate intelligently;
secondly, this weakness of the one party has been exploited by the other in
some morally culpable manner: see, for example, Clark v Malpas (1862) 4
De G.F. & J. 401, where a poor and illiterate man was induced to enter into
a transaction of an unusual nature, without proper independent advice, and in
great haste; and thirdly, the resulting transaction has been, not merely hard
or improvident, but overreaching and oppressive. Where there has been a sale
at an undervalue, the undervalue has almost always been substantial, so that it
calls for an explanation, and is in itself indicative of the presence of some
fraud, undue influence, or other such feature. In short, there must, in my
judgment, be some impropriety, both in the conduct of the stronger party and in
the terms of the transaction itself (though the former may often be inferred
from the latter in the absence of an innocent explanation) which in the
traditional phrase "shocks the conscience of the court," and makes it against
equity and good conscience of the stronger party to retain the benefit of a
transaction he has unfairly obtained."
In the Privy Council in Hart v O'Connor [1985] 1 A.C. 1004, 1024,
Lord Brightman said:-
"In the opinion of their Lordships it is perfectly plain that historically a
court of equity did not restrain a suit at law on the ground of "unfairness"
unless the conscience of the plaintiff was in some way affected. ... An
unconscionable bargain in this context would be a bargain of an improvident
character made by a poor or ignorant person acting without independent advice
which cannot be shown to be a fair and reasonable transaction. "Fraud" in its
equitable context does not mean, or is not confined to, deceit; "it means an
unconscientious use of power arising out of the circumstances and conditions"
of the contracting parties; Earl of Aylesford v Morris (1873) L.R. 8 Ch.
App. 484, 491. It is victimisation, which can consist either of the active
extortion of a benefit or the passive acceptance of a benefit in unconscionable
circumstances."
The Privy Council considered matters again in Boustany v Pigott (1995)
69 P. & C.R. 298, 303 where Lord Templeman accepted these propositions:-
"(1) It is not sufficient to attract the jurisdiction of equity to prove that a
bargain is hard, unreasonable or foolish; it must be proved to be
unconscionable, in the sense that "one of the parties to it has imposed the
objectionable terms in a morally reprehensible manner, that is to say in a way
which affects his conscience": Multiservice Bookbinding v Marden.
(2) "Unconscionable" relates not merely to the terms of the bargain but to the
behaviour of the stronger party, which must be characterised by some moral
culpability or impropriety: Lobb (Alec) (Garages) Ltd v Total Oil (Great
Britain) Ltd.
(3) Unequal bargaining power or objectively unreasonable terms provide no basis
for equitable interference in the absence of unconscientious or extortionate
abuse of power where exceptionally, and as a matter of common fairness, "it was
not right that the strong should be allowed to push the weak to the wall":
Lobb (Alec) (Garages) Ltd v Total Oil (Great Britain) Ltd ([1985] 1 WLR 173, 183, per Dillon L.J.)
(4) A contract cannot be set aside in equity as "an unconscionable bargain"
against a party innocent of actual or constructive fraud. Even if the terms of
the contract are "unfair" in the sense that they are more favourable to one
party than the other ("contractual imbalance"), equity will not provide relief
unless the beneficiary is guilty of unconscionable conduct; Hart v O'Connor
... .
(5) "In situations of this kind it is necessary for the plaintiff who seeks
relief to establish unconscionable conduct, namely that unconscientious
advantage has been taken of his disabling condition or circumstances" per Mason
J. in Commercial Bank of Australia Ltd v Amadio (1983) 46 A.L.R. 402,
413."
Finally, in Credit Lyonnais Bank Nederland NV. v Burch [1997] 1 All ER 144, 151 Nourse L.J. said:-
"Equity's jurisdiction to relieve against (unconscionable bargains), although
more rarely exercised in modern times is at least as venerable as its
jurisdiction to relieve against those procured by undue influence. In Fry v
Lane, re Fry, Whittet v Bush (1889) 40 Ch. D 312 at 322 ... where sales of
reversionary interests at considerable undervalues by poor and ignorant
persons were set aside, Kay J., having reviewed the earlier authorities,
said:
"The result of the decision is that where a purchase is made from a poor and
ignorant man at a considerable undervalue, the vendor having no independent
advice, a court of equity will set aside the transaction. ... The
circumstances of poverty and ignorance of the vendor, and absence of
independent advice, throw upon the purchaser, when the transaction is
impeached, the onus of proving, in Lord Selborne's words, that the purchase was
`fair, just, and reasonable'."
"Lord Selborne LC's words will be found in Earl of Aylesford v
Morris(1873) L.R. 8 Ch. App. 484 at 491. The decision of Megarry J. in
Cresswell v Potter [1978] 1 W.L.R. 255 at 257 where he suggested that
the modern equivalent of "poor and ignorant" might be "a member of the lower
income group ... less highly educated", demonstrates that the jurisdiction is
in good heart and capable of adaptation to different transactions entered into
in changing circumstances."
It is against those principles that the conduct of the son has to be judged in
this case. The salient features here are that the son had committed himself to
the purchase of the small supermarket business. There is no reason to think
that he did not believe that it would be a profitable venture which would turn
out to his advantage. He needed money to complete the purchase. He persuaded
his father to lend it. On the findings of the judge there was no undue
influence and no misrepresentation. So it was a case of father coming to the
assistance of his son. True it is that it was a financially unwise venture
because, absent good profit from the business, there was never likely to be the
income to service the borrowing and the father's home was at risk. But there
was nothing, absolutely nothing, which comes close to morally reprehensible
conduct or impropriety. No unconscientious advantage has been taken of the
father's illiteracy, his lack of business acumen or his paternal generosity.
True it may be that the son gained all the advantage and the father took all
the risk, but this cannot be stigmatised as impropriety. There was no
exploitation of father by son such as would prick the conscience and tell the
son that in all honour it was morally wrong and reprehensible.
Does Barclays Bank v O'Brien apply?
That was a case concerned with undue influence. A person who has been induced
to enter into a transaction by undue influence of another (the wrongdoer) is
entitled to set that transaction aside as against the wrongdoer. Where a
person is unconscionably prevailed upon by the wrongdoer to enter into a
transaction, then equity again allows rescission. There is some interesting
argument for merging the two doctrines: see the article by David Capper, "Undue
Influence and Unconscionability" in (1998) 114 L.Q.R. 479, from which I
gratefully acknowledge having drawn some of these ideas. Professors Birks and
Chin in their article "On the Nature of Undue Influence", in
Good Faith and Fault in Contract Law (1995) would preserve the
distinction. They see undue influence as being "plaintiff-sided" and concerned
with the weakness of the plaintiff's consent owing to an excessive dependence
upon the defendant, and unconscionability as being "defendant-sided" and
concerned with the defendant's exploitation of the plaintiff's vulnerability. I
do not find it necessary to resolve this debate. I am content to accept for
present purposes the judgment of Mason J. in Commercial Bank of Australia
Ltd v Amadio (1983) 151 C.L.R. 447, 461:-
"Historically, courts have exercised jurisdiction to set aside contracts and
other dealings on a variety of equitable grounds. They include fraud,
misrepresentation, breach of fiduciary duty, undue influence and unconscionable
conduct. In one sense they all constitute species of unconscionable conduct on
the part of a party who stands to receive a benefit under a transaction which,
in the eye of equity, cannot be enforced because to do so would be inconsistent
with equity and good conscience. But relief on the ground of "unconscionable
conduct" is usually taken to refer to the class of case in which a party makes
unconscientious use of his superior position or bargaining power to the
detriment of a party who suffers from some special disability or is placed in
some special situation of disadvantage, e.g., ... an unfair contract made by
taking advantage of a person who is seriously affected by intoxicating drink.
Although unconscionable conduct in this narrow sense bears some resemblance to
the doctrine of undue influence, there is a difference between the two. In the
latter the will of the innocent party is not independent and voluntary because
it is overborne. In the former the will of the innocent party, even if
independent and voluntary, is the result of the disadvantageous position in
which he is placed and of the other party unconscientiously taking advantage of
that position."
In Barclays Bank plc v O'Brien Lord Browne-Wilkinson said at p.195:-
"A wife who has been induced to stand as a surety for her husband's debts by
his undue influence misrepresentation or some other legal wrong
has an equity as against him to set aside that transaction. Under the ordinary
principles of equity, her right to set aside her transaction will be
enforceable against third parties (e.g. against a creditor) if ... the third
party had actual or constructive notice of the facts giving rise to her
equity." (Emphasis added)
Unconscionable conduct is " some other legal wrong".
In Credit Lyonnias v Burch Millett L.J. said at p. 153:-
"... the two equitable jurisdictions to set aside harsh and unconscionable
bargains and to set aside transactions obtained by undue influence have many
similarities. In either case it is necessary to show that the conscience of
the party who seeks to uphold the transaction was affected by notice, actual or
constructive, of the impropriety by which it was obtained by the intermediary,
and in either case the court may in a proper case infer the presence of the
impropriety from the terms of the transaction itself."
From all of this, it quite clear that Barclays Bank PLC v O'Brien
principles apply.
Has the bank had notice so as to be put on inquiry?
Dealing with the case of undue influence, the Recorder was quite clear that the
bank did not have notice. He held:-
"It does not seem to me that an application for a re-mortgage by an elderly man
of probable Asian origin, guaranteed by his son was something which could have
put Portman on notice of a possible equity the father might have against the
son. Such things as an application containing different writing, a shaky
signature, how access to the property is to be arranged seemed to me of little
significance. None of these things say anything about the relationship between
Mr Dusangh Senior and Junior. Neither, in my view, does the fact that Portman
probably knew the purpose of the re-mortgage was in respect of a business or
family business. In short I would have concluded that Portman did not have
notice of any equity as between father and son."
The same applies to notice of any equity arising from unconscionable behaviour
of son toward father, assuming for this purpose, contrary to my finding, that
there was such impropriety.
The appellant has also to face the further difficulty that, as the building
society knew, he did receive independent advice. The society was entitled to
assume it was advice directed towards saving him from himself. Whether the
solicitors were negligent or not, it is not tenable to assert that no
reasonably competent solicitor would have permitted his client to enter into
this transaction. The society was not put upon further inquiry.
Unconscionable conduct by the building society itself
This became the primary basis of the appeal. The case was that the father was
entitled to set aside the charge directly against the building society as an
unconscionable bargain. It was submitted that the transaction was
unconscionable in the light of knowledge possessed by the building society that
the borrower was a retired man of 72 years who might well be dead before the
expiry of the 25 year term of the borrowing, whose existing mortgage was only
£4,000 and whose ability to repay the £33,750 lent on this occasion
could not be supported by his income even when supplemented by his son. It was
an improvident transaction which put the borrower's home at risk. Furthermore,
had the society's own policies been followed, then the society would have
learnt that the borrower was illiterate with a poor understanding of English,
had no need to mortgage his own home and did so solely for his son's benefit.
The case put was:-
"In summary the advance was unconscionable in that (the father) by reason of
his age, illiteracy, lack of education and poverty was under some serious
disadvantage affecting his ability to protect himself."
It was submitted:-
"The present case presents a novel set of circumstances for decision in English
Law. Assuming that it would have been unconscionable for the lender to enter
into a transaction knowing all the facts, the question is whether there is
jurisdiction to set aside where the party seeking to uphold the transaction had
cause to suspect and the means of knowing that by reason of the other party's
circumstances, the transaction was manifestly to his disadvantage, and where
the lender does not act reasonably to allay those suspicions."
As Simon Brown L.J. has tellingly demonstrated, the whole edifice of that
argument proceeds upon the assumption of unconscionability that is made. The
appellant's argument derives from an application of the judgment of Kay J. in
Fry v Lane (1888) 44 Ch. D. 312, 333, as modernised by Megarry J. in
Cresswell v Potter [1978] 1 W.L.R. 255. The appellant concentrates on
the three elements there referred to: first, the "poor and ignorant man";
second the considerable undervalue/manifest disadvantage; and third the lack of
independent advice.
It may be that the absence of legal advice is not so much an essential
freestanding requirement, but rather a powerful factor confirming the suspicion
of nefarious dealing which the presence of advice would serve to dispel. As
Megarry J. pointed out in Cresswell v Potter at p. 258, the authorities
seem to have related to conveyancing transactions where, by long usage, it was
regarded as usual, and, indeed, virtually essential, for the parties to have
the services of a solicitor. He added, and I agree:-
"The more usual it is to have a solicitor, the more striking will be his
absence, and the more closely will the courts scrutinise what was done."
Assuming, however, that all three elements are required and that they are all
established then, as Millett L.J. put it in Burch at p.152, "the
transaction gives rise to grave suspicion. It cries out for an explanation."
The burden then falls on the beneficiary of the transaction to show, in Lord
Selborne's words, that it was "fair, just and reasonable."
I venture to think, however, that when Kay J. cast the onus on the purchaser,
he had in mind no more than that the facts would give rise to an evidential
presumption of wrongdoing. I tend to agree with Capper (p. 496) that that
means that:-
"... where a sufficiently bad case of relational inequality and transactional
imbalance exists, one which almost speaks for its self that there has been
unconscionability, then unconscionable conduct can be inferred unless the
defendant can offer an explanation to displace it. To hold that a presumption
arising upon the mere coincidence of the first two elements of the doctrine of
unconscionability would be to deny the effect of high authority clearly stating
that unconscionable conduct is an essential part of this doctrine."
That is the weakness of the appellant's case. What the appellant's approach on
the facts of this case appears to me to miss is this: for the lending by the
building society to be unconscionable, it must, as is implicit in the very
word, be against the conscience of the lender - he must act with no conscience,
with no moral sense that he is doing wrong. Making all the assumptions in the
appellant's favour of the frailties of the father, the lack of wisdom in taking
on this large commitment with limited income, the real risk of foreclosure, the
failure by the building society to follow its own rules, even an assumption
that the building society in those heady days of rising property prices was
lending money almost irresponsibly, none of that, in my judgment, gets near to
establishing morally reprehensible conduct on its part. The family wanted to
raise money: the building society was prepared to lend it. One shakes one's
head, but with sadness and with incredulity at the folly of it all, alas not
with moral outrage. I am afraid the moral conscience of the court has not been
shocked. That is an end of the matter.
Accordingly the appeal should be dismissed.
LORD JUSTICE SEDLEY:
I also agree.