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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Leggatt & Anor v National Westminster Bank [2000] EWCA Civ 261 (19 October 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/261.html
Cite as: [2000] EWCA Civ 261
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Case No: CCRTF 2000 0531 B3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM EPSOM COUNTY COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 19-10-2000
LORD JUSTICE KENNEDY
LORD JUSTICE WALLER
and
LORD JUSTICE JONATHAN PARKER
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MRS BARBARA ANN LEGGATT & Anor |
Appellant | |
- and - |
||
NATIONAL WESTMINSTER BANK |
Respondent |
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr Roland Higgs of Counsel (instructed by Georgiou Nicholas) appeared on behalf of the Appellant
Mr David Wolfson of Counsel (instructed by Denton Wilde Sapte) appeared on behalf of the Respondent)
JUDGMENT
As Approved by the Court
Crown Copyright
LORD JUSTICE JONATHAN PARKER:
Introduction
1. This is an appeal by the second defendant in the action, Mrs Barbara Ann Leggatt, against an Order made by His Honour Judge Hull QC in the Epsom County Court on 7 March 2000. Permission to appeal was granted by Peter Gibson LJ on 11 May 2000.
2. By his Order, Judge Hull QC made an order for possession of property known as 7, Woodlands Park, Boxhill Road, Tadworth, Surrey, on the application of National Westminster Bank plc as chargee under a Legal Charge dated 13 September 1990 ("the 1990 Charge"). The property is the matrimonial home of Mrs Leggatt and her husband Mr Brian Leggatt and is registered in their joint names. Mr Leggatt is the first defendant in the action. He has not served an appellant's notice, and is not a party to this appeal. Mrs Leggatt appears by Mr Roland Higgs of counsel; the Bank by Mr David Wolfson of counsel.
3. The 1990 Charge is expressed to secure all the liabilities to the Bank of a partnership in which Mr Leggatt was then a partner, known as Brian Leggatt Partnership ("the Partnership"). The Partnership, which was formed in 1974 between Mr Leggatt and a Mr Jiggins, carried on business as civil engineers. At no time was Mrs Leggatt a partner in, nor was she at any time employed by, the Partnership.
4. Mrs Leggatt's Defence to the Bank's claim to enforce the 1990 Charge is based on the decision of the House of Lords in Barclays Bank plc v. O'Brien [1994] 1 AC 180. Mrs Leggatt alleges (1) that at all material times there existed a relationship of trust and confidence between herself and Mr Leggatt; (2) that entering into the 1990 Charge was manifestly disadvantageous to her; (3) that in the circumstances it is to be presumed that she entered into the 1990 Charge by reason of undue influence exercised over her by Mr Leggatt; (4) that she was induced to enter into the 1990 Charge by misrepresentations made by the Bank to solicitors instructed to give her independent advice (such misrepresentations being adopted by Mr Leggatt); (5) that had the solicitors advised her as to the true effect of the 1990 Charge and the liability it was securing she would not have entered into it; (6) that she accordingly has a right as against Mr Leggatt to have the 1990 Charge set aside; and (7) that the Bank took the 1990 Charge with constructive notice of her right to have it set aside and accordingly subject to that right.
5. The Judge rejected that Defence; the issue on this appeal is whether he was right to do so.
The factual background
6. I now turn in more detail to the factual background, as admitted or as found by the Judge.
7. Mr and Mrs Leggatt were married in 1971. In July 1972 they bought 7, Woodlands Park in their joint names, with the aid of a mortgage from a third party. They have since lived there as their matrimonial home. On 4 October 1972 they granted an unlimited second Charge over the property in favour of the Bank ("the 1972 Charge").
8. The 1972 Charge defined Mr and Mrs Leggatt together as "the Mortgagor". Clause 1 of the 1972 Charge provided that the expression "the Mortgagor" was to be construed as referring to both or to either one of them and that their liabilities under the charge were to be joint and several. Clause 2(a) of the 1972 Charge provided that the charge was to be a continuing security for all present and future indebtedness of "the Mortgagor" to the Bank and (by subparagraph (ii)):
".... all other liabilities whatsoever of the Mortgagor to the Bank, present future actual or contingent."
9. The 1972 Charge was endorsed with a certificate by a solicitor in the following terms:
"I certify that I explained the terms of this deed to [Mrs Leggatt] and she appeared to understand its contents."
10. In July 1974 Mr Leggatt formed the Partnership with Mr Jiggins.
11. On 31 August 1976 Mrs Leggatt signed an unlimited Guarantee in favour of the Bank, guaranteeing all liabilities of the Partnership to the Bank.
12. The Partnership was a commercial success, and provided Mr and Mrs Leggatt with their main, if not their only, source of income.
13. In about mid-1986 the Bank formed the view that the 1972 Charge was "unsuitable for the purposes of securing the liabilities of the Partnership" (I quote from an internal memorandum of the Bank), since it did not refer specifically to such liabilities. It seems that there was another form of charge in use by the Bank which referred specifically to partnership liabilities, and the Bank took the view that the 1972 Charge should be replaced by a charge in that form. Accordingly in June 1986 the Bank contacted Mr Leggatt and advised him that a replacement charge in that form would be required. In the event, however, the matter was not pursued at that stage, and the 1972 Charge remained in place.
14. In June 1988 the Partnership's borrowings exceeded its then overdraft facility of £65,000 by some £17,500. Shortly thereafter a number of cheques drawn on the Partnership account were dishonoured. In January 1989 the Partnership's overdraft facilities were increased to £90,000. During the period from June 1988 until May 1990 the Partnership exceeded its overdraft facilities on a number of occasions. On 8 January 1990 the Bank wrote to the Partnership granting additional overdraft facilities. In the course of that letter, under the heading "Security", the Bank said this:
"The existing security position remains unsatisfactory. We still require insurance cover of at least £75,000 on each partner to cover first death. Additionally, it has come to our attention that [the 1972 Charge] only secures their joint liabilities. We shall require the execution of a Charge Form to secure the Partnership liabilities additionally. This matter will be taken forward in the next few weeks."
15. In a further letter to the Partnership dated 19 January 1990 the Bank repeated the above paragraph.
16. An internal report on the Partnership account by the Bank dated 4 June 1990 refers to the 1972 Charge as "not relied upon". The report records that the profitability of the Partnership was being consistently demonstrated, but that there was a capital deficiency of about £23,000. The report goes on to comment:
".... the lending here has not been regarded as fully secured in view of the fact that .... half of the security (i.e. that given by Brian Leggatt) is deficient. At present, we hold Form NWM1015 dated 4 October 1972 from Brian Leggatt and his wife, under which Bank valuation as at March 1986 amounted to £80,000. The Charge was originally looked to as security because the liability of Mrs Leggatt was tied in by way of guarantee but (quite rightly) Hyde Park Area declined to accept this position as satisfactory.
It has been said, however, that this deficiency in the security position appears never to have been brought to the attention of the partners and now that I have discussed it with him, they are quite happy to regularise the Bank's security, which upon an updated basis (being obtained) will give the Bank very ample cover for the liabilities."
17. In a further internal report dated 12 June 1990, Mr Webb, an assistant manager, said this:
"We are in the process of trying [to] regularise the securities position on this account. We presently hold a Guarantee signed by Mrs Barbara Leggatt in favour of the Partnership liability. However, this was incorrectly supported by an NWB 1015 signed by Mr & Mrs Leggatt over their property Highlands, 7, Woodlands Park, Boxhill, Tadworth, Surrey. I have today written to Mr Leggatt clearly outlining the securities position in order to obtain his confirmation he is willing to proceed with the new security position."
The letter to which Mr Webb was referring was a letter dated 13 September 1990 to Mr Leggatt, which reads as follows:
" I understand you are prepared to provide a Mortgage over the above mentioned property to cover the borrowing of Brian Leggatt Partnership from the Bank.
As the property is owned jointly by both you and your wife the Bank also requires your wife's confirmation that she too is prepared to mortgage the matrimonial home. We would therefore be grateful if you could sign and return the enclosed letter as your authority for the Bank to disclose information to your wife regarding the partnership.
If your wife is prepared to Mortgage the property the Bank will release its existing Charge over the matrimonial home and also release the guarantee given by Mrs Leggatt in favour of the Brian Leggatt Partnership. Once we have received your wife's confirmation in this regard we will be in a position to commence our security formalities.
We look forward to receiving your authority shortly."
Enclosed with the letter dated 13 June 1990 was a letter dated 14 June 1990 from Mr Webb to Mrs Leggatt, with a space for a countersignature by Mr Leggatt, together with a form of Charge, limited to £103,000. The letter addressed to Mrs Leggatt reads as follows:
"I understand that you have agreed to provide a mortgage over your home to cover the borrowing of Brian Leggatt Partnership from the Bank.
The Bank currently provides the following borrowing facilities to the Brian Leggatt Partnership:
Loan £12,250
Overdraft £90.000
In addition to the Mortgage that you have agreed to enter into, the Bank holds the following security:
Loan Mortgage from M A & C Jiggins
Over 59 High Beeches Banstead
Guarantee unlimited
From Mrs B. Leggatt
I enclose a copy of the Bank's form of Legal Mortgage. It is an important legal document. Please read it carefully. Your liability will be limited to £103,000 plus interest. You must consider if you are prepared to become personally liable for this sum and to mortgage your home to the Bank. You may wish to take professional legal advice in connection with this matter generally and, in particular, as regards the terms of the Mortgage. The Bank recommends that you seriously consider doing so. It would be clearly be advisable to seek advice from someone who is not already advising the Partnership, but this is a matter for you.
If you are prepared to Mortgage your property as outlined above the Bank will release the Charge it already holds over your property dated 4 October 1972. We will also release your Guarantee given to the Brian Leggatt Partnership signed on 31 August 1976.
Please let me know if you are prepared to Mortgage your home to the Bank as security for the liabilities to the Bank of Brian Leggatt Partnership. Your signature to the Mortgage should be witnessed either by your Solicitor, in which case please let me know his name and address, or by an officer of the Bank."
18. In the event, Mr Leggatt did not countersign the letter and return it to the Bank until more than two months later, and Mrs Leggatt said in evidence that she had no recollection of having seen it. Certainly it is common ground that the Bank never sent a letter in those terms direct to Mrs Leggatt.
19. On 29 August 1990, following reminders from the Bank, Mr Leggatt wrote to the Bank returning the letter dated 14 June 1990, which he had countersigned, and suggesting the name of Messrs Gallyers Lightfoot Marchbanks as solicitors to give Mrs Leggatt independent advice in relation to the proposed new Charge.
20. The Bank took up Mr Leggatt's suggestion, and wrote to Gallyers Lightfoot Marchbanks on 4 September 1990. The precise terms of this letter are central to Mrs Leggatt's defence in this case, and I therefore set it out in full:
"We have been offered a legal charge over the aforementioned property in support of an advance to be made to Brian Leggatt Partnership, our reliance on the deeds being to the extent of £103,000.
As the deeds to the property are vested in the joint names of Mr and Mrs Leggatt, it is appropriate that Mrs Leggatt receives the benefit of separate legal advice, which, I understand, you are prepared to provide to her.
Accordingly, I shall be grateful if you will arrange for Mr and Mrs Leggatt to call and sign the enclosed mortgage forms, one copy of which is for her retention.
Please ensure that Mr and Mrs Leggatt acknowledge receipt of the copy form where indicated on the mortgage form. Signature of the form should be witnessed by the solicitor providing the separate advice.
Please return the mortgage form, duly executed and dated, to us as soon as possible."
21. It is to be noted that the letter of instructions to the solicitors mistakenly refers to the proposed charge as securing an advance "to be made" to the Partnership, whereas the true purpose of the charge was to replace the 1972 Charge and thus to secure existing, as well as future borrowings of the Partnership. Mrs Leggatt accepts that the mistake was an innocent one, but she categorises it as a misrepresentation by the Bank which, she contends, effectively disables it from relying on the fact that she received independent advice from the solicitors as an answer to the allegation of constructive notice. Mrs Leggatt also relies for the same purpose on the reference in the letter to the Bank "having been offered" the proposed new charge, when the fact was that the Bank had asked for the charge.
22. On receipt of the letter of instructions, Mr Simon Gallyer (a partner in the firm) wrote to Mr and Mrs Leggatt in the following terms:
"I understand from National Westminster Bank Plc, Kensington, Royal Garden Branch that you wish to offer the Bank a Legal Charge over the above property.
I have received the Form of Charge from the Bank and the Bank has requested that I arrange for you to execute the Form of Charge in my presence, particularly so that I can give Mrs Leggatt independent Legal Advice regarding the importance and significance of the Form of Charge as I understand that the Charge is being offered to support an advance being made to Brian Leggatt Partnership.
I would therefore be grateful if you would telephone me to make a mutually convenient appointment to attend my Office to execute the Legal Charge. I look forward to hearing from you."
23. Mr Gallyer also wrote to the Bank acknowledging the letter of instructions.
24. On 13 September 1990 Mr and Mrs Leggatt attended on Mr Gallyer, and Mr Gallyer advised Mrs Leggatt about the proposed new charge. The Judge found that Mr Leggatt was present throughout. Following the giving of advice by Mr Gallyer to Mrs Leggatt, she and Mr Leggatt executed the form of Charge. Mr Gallyer witnessed Mrs Leggatt's signature, writing against his own signature: "having provided Mrs B.A.Leggatt with independent legal advice".
25. As at 13 September 1990 the total indebtedness of the Partnership to the Bank was in the region of £103,000.
26. On 14 September 1990 Mr Gallyer returned the completed form of Charge to the Bank, under cover of a letter in the course of which he said this:
"We confirm that we provided Mrs Leggatt with independent legal advice regarding the Legal Mortgage and furthermore we handed to Mr & Mrs Leggatt a completed copy of the Legal Mortgage and arranged for them to sign the acknowledgement that they had received a completed copy."
27. In 1992 the Partnership became insolvent, and demands were made on Mr and Mrs Leggatt under the 1990 Charge. The demands were not met, and the present proceedings were commenced by the Bank on 23 June 1995. On 7 March 2000 Judge Hull QC made the Order for possession against which Mrs Leggatt appeals.
Barclays Bank plc v. O'Brien [1994] 1 AC 180 and subsequent authorities
28. In Barclays Bank plc v. O'Brien, the House of Lords analysed the legal and equitable basis upon which, and the circumstances in which, a creditor will be fixed with constructive notice of a surety's equity to set aside the contract of suretyship as against the principal debtor on grounds of undue influence, misrepresentation or other legal wrong, so as to prevent the creditor from recovering against the surety. The only speech was delivered by Lord Browne-Wilkinson, with whom the remainder of their Lordships agreed. In discussing undue influence, Lord Browne-Wilkinson adopted the classification which had previously been adopted by this court in BCCI v. Aboody [1990] 1 QB 923. Class 1 in that classification comprises cases of actual undue influence. Class 2 comprises cases of presumed undue influence. In relation to Class 2 cases, Lord Browne-Wilkinson said:
"In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relationship to the particular transaction impugned: once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship can be established in two ways, viz.,
Class 2(A)
Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised.
Class 2(B)
Even if there is no relationship falling within Class 2(A), if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence. In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned."
29. In the instant case, as is apparent from my summary of her Defence earlier in this judgment, Mrs Leggatt alleges Class 2(B) undue influence.
30. Turning to consider the position of third party creditor banks, Lord Browne-Wilkinson said this:
" Of course, if the wrongdoing husband is acting as an agent for the creditor bank in obtaining the surety from the wife, the creditor will be fixed with the wrongdoing of its own agent and the surety contract can be set aside as against the creditor. Apart from this, if the creditor bank has notice, actual or constructive, of the undue influence exercised by the husband (and consequently of the wife's equity to set aside the transaction) the creditor will take subject to that equity and the wife can set aside the transaction against the creditor (albeit a purchaser for value) as against the husband: see Bainbrigge v. Browne ( 1881 ) 18 Ch. 188 and Bank of Credit and Commerce International S.A. v. Aboody [ 1990 ] 1 Q.B. 923, 973. Similarly, in cases such as the present where the wife has been induced to enter into the transaction by the husband's misrepresentation, her equity to set aside the transaction will be enforceable against the creditor if either the husband was acting as the creditor's agent or the creditor had actual or constructive notice."
31. Later in his judgment, Lord Browne-Wilkinson said this, in relation to the equitable doctrine of notice:
" In my judgment, if the doctrine of notice is properly applied, there is no need for the introduction of a special equity in these types of cases. 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 principals of equity, her right to set aside that transaction will be enforceable against third parties (e.g. against a creditor) if either the husband was acting as the third party's agent or the third party had actual or constructive notice of the facts giving rise to her equity. Although there may be cases where, without artificiality, it can properly be held that the husband was acting as the agent of the creditor in procuring the wife to stand as surety, such cases will be of very rare occurrence. The key to the problem is to identify the circumstances in which the creditor will be taken to have had notice of the wife's equity to set aside the transaction.
The doctrine of notice lies at the heart of equity. Given that there are two innocent parties, each enjoying rights, the earlier right prevails against the later right if the acquirer of the later right knows of the earlier right (actual notice) or would have discovered it if he had taken proper steps (constructive notice). In particular, if the party asserting that he takes free of the earlier rights of another knows of certain facts which put him on inquiry as to the possible existence of the rights of that other and he fails to make such inquiry or take such steps as are reasonable to verify whether such earlier right does or does not exist, he will have constructive notice of the earlier right and take subject to it. Therefore where a wife has agreed to stand surety for her husband's debts as a result of undue influence or misrepresentation, the creditor will take subject to the wife's equity to set aside the transaction if the circumstances are such as to put the creditor on inquiry as to the circumstances in which she agreed to stand surety."
32. Lord Browne-Wilkinson continued (at page 196D):
"Therefore in my judgment a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.
It follows that unless the creditor who is put on inquiry takes reasonable steps to satisfy himself that the wife's agreement to stand surety has been properly obtained, the creditor will have constructive notice of the wife's rights.
What, then are reasonable steps which the creditor should take to ensure that it does not have constructive notice of the wife's rights, if any? Normally the reasonable steps necessary to avoid being fixed with constructive notice consist of making inquiry of the person who may have the earlier right (i.e. the wife) to see whether such right is asserted. It is plainly impossible to require of banks and other financial institutions that they should inquire of one spouse whether he or she has been unduly influenced or misled by the other. But in my judgment, the creditor in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk that she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test. However, for the future in my judgment a creditor will have satisfied the requirements if it insists that the wife attend a private meeting (in the absence of the husband) with a representative of the creditor at which she is told of the extent of her liability as surety, warned of the risk that she is running and urged to take independent legal advice. If these steps are taken in my judgment the creditor will have taken such reasonable steps as are necessary to preclude a subsequent claim that it had constructive notice of the wife's rights. I should make it clear that I have been considering the ordinary case where the creditor knows that the wife is to stand surety for the husband's debts. I would not exclude exceptional cases where a creditor has knowledge of further facts which render the presence of undue influence not only possible, but probable. In such cases, the creditor to be safe will have to insist that the wife is separately advised."
33. In Royal Bank of Scotland plc v. Etridge (No 2) [1998] 4 All ER 705 ("Etridge") this court laid down the principles to be applied in determining whether a bank seeking to enforce a charge against a wife is able to rely on the fact that the wife received legal advice before entering into the charge to rebut the presumption of undue influence and imputed or constructive notice, and whether the bank ought to have been put on inquiry to ascertain whether the wife entered into the charge under her husband's undue influence. Paragraph 36 of the judgment of the court in Etridge reads as follows:
"The effect of the landmark decision of the House of Lords in O'Brien's case is that, even so, the bank is put on inquiry by the combination of two factors: (a) the transaction is not on its face to the financial advantage of the wife; and (b) there is a substantial risk that, in procuring his wife to guarantee or provide collateral security for his debts, the husband has acted improperly. The risk which Lord Browne-Wilkinson identified is the risk that one party has exploited the emotional pressure and trust which derive from cohabitation whether inside or outside marriage. The result is that, where condition (a) is satisfied, the bank is put on inquiry if, but only if, that bank is aware that the parties are cohabiting or that the particular surety places implicit trust and confidence in the principal debtor in relation to her financial affairs."
34. Later in its judgment in Etridge (in paras 41-50), the court considered the effect of legal advice given to the wife. Paragraphs 41 and 42 of the judgment read as follows:
"41. It is now settled law that the question whether the bank can exercise its legal rights against the wife depends in the first instance on whether the wife has an equity to set aside the transaction and in the second place on whether, at the time it gave value, the bank had notice, actual imputed or constructive, of the wife's equity. In relation to the first question, the issue is whether the advice actually given was sufficient to rebut the presumption of undue influence. In relation to the second, the issue is different: it is whether, in the light of the facts known to the bank, including the availability of legal advice, any risk of the wife having an equity reasonably appeared to have been dispelled. The first question depends on what actually happened between the wife, her husband, and the solicitor. The second question depends on how the transaction appeared to the bank.
42. Although these issues raise questions of fact, the structure of the underlying transaction is so commonplace and the efficient funding of small businesses is so dependent on its validity, that the parties, and in particular the lending institutions, must be entitled to proceed in accordance with a settled practice which is effective to secure the validity of the transaction while at the same time affording the wife the protection of proper legal advice. It is highly undesirable that the validity of such transactions should depend on fine distinctions, particularly on distinctions in the wording of the instructions to the solicitors or the certificates they give." (Emphasis supplied.)
35. The court then referred to a line of authority which (it concluded) established a number of propositions, which are set out in paragraph 44 of the judgment. These propositions include the proposition that "the bank is entitled to expect the solicitor to regard himself as owing a duty to the wife alone when giving her advice"; that "the bank is entitled to rely on the fact that the solicitor undertook the task of explaining the transaction to the wife as showing that he considered himself to be sufficiently independent for this purpose"; and that "the bank is not concerned with the sufficiency of the advice".
36. Paragraph 49 of the judgment in Etridge reads as follows:
"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 it 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 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 notice."
37. In Barclays Bank plc v. Coleman [2000] 1 All ER 385 Nourse LJ considered the authorities relating to the concept of "manifest disadvantage" as a requirement of presumed undue influence (see the decision of the House of Lords in National Westminster Bank v. Morgan [1985] AC 686). Nourse LJ concluded that the disadvantage did not have to be large or even medium-sized; it could be small, provided it was clear, obvious and more than de minimis. Furthermore, the test of "manifest disadvantage" was an objective one. Nourse LJ said (at page 400c-d):
"In deciding whether a transaction is manifestly disadvantageous, it is agreed that an objective view must be taken as at the date at which the transaction is entered into."
The judgment
38. The Judge heard oral evidence from Mr and Mrs Leggatt and from Mr Gallyer. He found the evidence of Mr and Mrs Leggatt about the circumstances in which the 1990 Charge was executed to be "profoundly unsatisfactory" (transcript p.12 lines 14/15). He continued:
"If that mortgage were not signed, then the Partnership business would collapse; both of them knew that. The idea that it made some difference to Mrs Leggatt's decision that the Bank had said that the charge was being offered to the Bank in support of an advance to be made is, in my view, wholly unrealistic and the product of wishful thinking by Mr and Mrs Leggatt, probably inspired by Mr Rendall."
(Mr Rendall is a retired solicitor who assisted both Mr and Mrs Leggatt, and who continued to assist Mr Leggatt after Mrs Leggatt was separately represented.)
39. The Judge went on to observe that Mr and Mrs Leggatt's account of the meeting with Mr Gallyer "almost passes belief". He continued (transcript p.12 line 24):
"During the whole period when it is alleged Mr Gallyer was advising Mrs Leggatt on a wholly incorrect basis, Mr Leggatt sat quietly by never saying anything about the true facts, namely that it was not a case of new borrowing but offering a valid security for existing borrowing. Moreover, it must have been obvious to both of them that, if Mrs Leggatt had refused to execute the mortgage, the Partnership business would have collapsed and the Bank would have insisted on repayment, probably trying to enforce its earlier security and, of course the guarantee, and in any event issuing proceedings, obtaining a judgment, and levying execution on the house. When this was pointed out to Mrs Leggatt she stuck obstinately, and I am afraid disingenuously, to her story that she would still not have signed."
40. As to the pleaded misrepresentations, the Judge said this (transcript p.14 line 10):
"I have been driven to the conclusion that the contentious parts of Mr and Mrs Leggatt's evidence are unreliable and I regard the reliance on the two errors in the Bank's letter as opportunistic, insincere, and entirely free from merit. Indeed the reference to security being offered is no more than a banker's euphemism or catch-phrase, which in my view means exactly the same as demanded or requested in this context"
41. Notwithstanding that there was an issue on the pleadings as to whether the 1972 Charge was effective to secure Mr Leggatt's liabilities as a partner in the Partnership, the Bank contending that it was effective to do so, the Judge did not find it necessary to decide that issue. He concluded that even on the basis that it was ineffective to do so it could not be said that the 1990 Charge was manifestly disadvantageous to Mrs Leggatt. He expressed himself thus (transcript p.15 line 13):
" I am entirely satisfied that the 1990 mortgage was not to the manifest disadvantage of Mrs Leggatt. So far from putting her home at risk, entry into the mortgage was the only practicable way of preserving it if the Bank continued to doubt the validity of the 1972 mortgage. There was no question of extra borrowing, as Mr Leggatt knew perfectly well, even if Mrs Leggatt did not. If Mrs Leggatt had refused to sign, then the disastrous consequences that I have referred to already would in all probability have ensued."
42. The Judge found that Mr Gallyer had failed to advise Mrs Leggatt with proper care, and that had he done so, and had he asked Mrs Leggatt the questions which he should have asked her, he would have discovered the true position in relation to the 1990 Charge (namely that it was intended by the Bank to replace the 1972 Charge and was thus intended to secure existing borrowings). However, the Judge went on to conclude that if Mr Gallyer had fully acquainted himself with all the material facts (as he should have done), his advice to Mrs Leggatt would have been no different; and that accordingly the non-disclosure of the Bank's doubts as to whether the 1972 Charge covered Mr Leggatt's liabilities as a partner in the Partnership had not caused her to enter into the 1990 Charge.
43. The Judge accordingly rejected Mrs Leggatt's Defence, and made an order for possession.
The arguments on this appeal
44. Mr Higgs (for Mrs Leggatt) submits that the Judge ought to have concluded (a) that it was to Mrs Leggatt's manifest disadvantage to enter into the 1990 Charge, and (b) that by reason of the misrepresentations in its letter of instructions to the solicitors, the Bank cannot be said to have taken reasonable steps to satisfy itself that Mrs Leggatt's agreement to execute the 1990 Charge had been properly obtained - in other words, that it is disabled from relying on the fact that Mrs Leggatt received independent advice from the solicitors as defeating the allegation of constructive notice.
45. As to manifest disadvantage, Mr Higgs submits that the 1972 Charge was, as a matter of construction, ineffective to secure Mr Leggatt's partnership liabilities, with the consequence that, far from one charge being replaced by another, the 1990 Charge had the effect of subjecting the matrimonial home to a charge to secure liabilities which were not previously secured on it. In any event, he submits, the Bank's doubts about the effectiveness of the 1972 Charge meant that in practice there must have been a real likelihood that, whether or not those doubts were well-founded, the Bank would not have sought to enforce the 1972 Charge in respect of Mr Leggatt's partnership liabilities; and that this is a factor which is to be taken into account in assessing whether or not it was to Mrs Leggatt's manifest disadvantage to enter into the 1990 Charge. Mr Higgs submits that when that factor is taken into account, the conclusion follows that it was to Mrs Leggatt's manifest disadvantage to enter into the 1990 Charge.
46. As to the effect of the alleged misrepresentations in the letter of instructions, Mr Higgs was, I think, disposed to concede that the reference in the letter to the Bank having been "offered" a charge is of no significance. If he made that concession, he was certainly right to do so, in my judgment, since there is plainly nothing in the point. At all events, Mr Higgs' submissions were directed entirely to the reference in the letter to an advance "to be made". He submits that the effect of this mistaken reference to a future loan was to cause the solicitors to "take their eye off the ball", as he put it, in that it effectively absolved them from having to conduct any investigation into the past financial history of the Partnership; whereas had the solicitors been told that the 1990 Charge was to secure an existing indebtedness of some £103,000 they would have been concerned to investigate how that indebtedness had come into existence and what prospect there was of the Partnership being able to repay it.
47. Mr Wolfson (for the Bank) submits the Judge was right to conclude that it was not to Mrs Leggatt's manifest disadvantage to enter into the 1990 Charge, for the reasons he gave. Mr Wolfson submits that it is absurd to suppose that, whatever its doubts as to whether the 1972 Charge was effective to secure Mr Leggatt's partnership liabilities, the Bank would not have attempted to enforce the 1972 Charge in respect of those liabilities had it needed to do so. In any event, Mr Wolfson submits, the 1972 Charge was plainly effective according to its terms to secure Mr Leggatt's partnership liabilities.
48. As to the reference in the letter of instructions to an advance "to be made", Mr Wolfson points to the Judge's finding that even if the true position had been explained to Mrs Leggatt, she would still have entered into the 1990 Charge. In any event, he submits, the Bank was entitled to assume that the solicitors would discharge their duty to their client. Had they done so, they must have discovered the true position (although, as the Judge concluded, their advice to Mrs Leggatt would still have been the same). In the circumstances, he submits, there is no basis for fixing the Bank with constructive notice.
Conclusions
49. As Lord Browne-Wilkinson made clear in Barclays Bank v. O'Brien (at page 196D), where a wife stands surety - or, as in the instant case, provides security - for her husband's debts, the creditor will be put on inquiry if the transaction is on its face not to the financial advantage of the wife, with the consequence that unless the creditor takes reasonable steps to satisfy himself that the wife's agreement to enter into the transaction has been properly obtained, he will have constructive notice of the wife's rights.
50. It follows in the instant case that if it was not on its face financially disadvantageous to Mrs Leggatt to enter into the 1990 Charge, the Bank was not put on inquiry and no question of constructive notice arises.
51. As noted earlier, the Judge concluded that even on the basis that the 1972 Charge was ineffective to secure Mr Leggatt's partnership liabilities, it was plainly to Mrs Leggatt's advantage to replace it with the 1990 Charge, since unless the 1990 Charge was signed the Partnership business would (as she knew) collapse, and the Bank would then take steps to enforce her 1976 Guarantee. I agree with that conclusion.
52. There is, however, a further factor which makes the position even clearer, in my judgment; namely that, as I construe it, the 1972 Charge was clearly effective according to its terms to secure Mr Leggatt's partnership liabilities. As noted earlier, the 1972 Charge was expressed to secure "all other liabilities whatsoever" of Mr or Mrs Leggatt to the Bank. In the face of those clear and all-embracing words I cannot see any basis for implying some limit on their scope. Mr Higgs made a valiant attempt to suggest that, in the context of the low level of Mr Leggatt's borrowings in 1972, coupled with the fact the Partnership was not then in existence, the 1972 Charge is to be construed as limited in effect to their joint borrowings, alternatively their personal borrowings; but in the face of the clear words of the deed such a construction seems to me to be quite unsustainable.
53. Nor has any O'Brien point (if I may so describe it) been taken any stage in relation to the 1972 Charge. This is, perhaps, not surprising in the light of the solicitor's certificate to which I referred earlier in this judgment.
54. Mr Higgs submitted that even if the 1972 Charge was in truth effective to secure Mr Leggatt's partnership liabilities, nevertheless the subjective views of the Bank on that question (albeit mistaken), leading to what he termed its "disinclination" to rely on the 1972 Charge, are factors which are to be taken into account in considering whether, viewing the matter objectively, the 1990 Charge was to Mrs Leggatt's disadvantage. However, even assuming (without deciding) that it is legitimate to have regard for this purpose to the expressed attitude of the creditor towards the enforcement of a security, I agree with Mr Wolfson that in the instant case such doubts as the Bank had as to the enforceability of the 1972 Charge would not have deterred it from taking every possible step to enforce it had the need arisen.
55. I therefore conclude that the 1990 Charge was not on its face disadvantageous to Mrs Leggatt. On the contrary, given the enforceability of the 1972 Charge and the fact (found by the Judge) that unless the 1990 Charge was signed the Partnership business would collapse, it was to her financial advantage to sign it.
56. That conclusion is sufficient to dispose of this appeal, but in deference to Mr Higgs' submissions I will turn briefly to the issue as to whether the so-called misrepresentation in the letter of instructions to the solicitors ("an advance to be made") leads to the conclusion that the Bank cannot rely on the fact that Mrs Leggatt was received independent solicitors' advice as preventing it from having constructive notice of (presumed) undue influence on the part of Mr Leggatt.
57. In this context, I bear in mind what this court said in paragraphs 41 and 42 of its judgment in Etridge, quoted earlier. In particular, I bear in mind the last sentence of paragraph 42 of that judgment, where the court observed that it was highly undesirable that the validity of commonplace transactions should depend upon fine distinctions, particularly on distinctions in the wording of instructions to solicitors.
58. For my part, I can see no basis in principle or authority for the proposition that an immaterial inaccuracy in the letter of instructions to the solicitors (immaterial in the sense that the Judge found that Mrs Leggatt would have signed the 1990 Charge even if the true position had been disclosed to her by the solicitors) should have the effect of saddling the Bank with constructive notice. On the contrary, for the reasons explained by this court in Etridge I can see every reason why it should not have that effect.
59. Nor can I accept Mr Higgs' submission that the inaccuracy had the effect of somehow circumscribing the scope of the inquiries which the solicitors were required to make. Whether the charge was to secure existing borrowings or a fresh borrowing, the solicitors, if they were to discharge their duty to their client (Mrs Leggatt) properly, would need to inquire into the financial history of the partnership in order to form a view as to the risks of the charge being enforced. In the circumstances, the fact that (on the Judge's findings) they signally failed to discharge their duty to Mrs Leggatt cannot, in my judgment, be laid at the door of the Bank.
60. For the reasons which I have attempted to express, therefore, I would dismiss this appeal.
Lord Justice Waller:
63. I agree.
Lord Justice Kennedy:
64. I also agree.
Order: Appeal dismissed with detailed assessment of costs.
(Order does not form part of approved judgment.)