ON APPEAL FROM THE HIGH COURT OF JUSTICE
MANCHESTER DISTRICT REGISTRY
Mr Justice David Richards
Vice-Chancellor of the County Palantine of Lancaster
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE PATTEN
LADY JUSTICE BLACK
| ROYAL BANK OF SCOTLAND PLC
|- and -
|BALA PERAMPALAM CHANDRA
MARIA PERPETUA CHANDRA
Peter Knox QC (instructed by Keoghs and Nicholls, Lindsell & Harris) for the Second Defendant (Appellant)
Hearing date : 13th December 2010
Crown Copyright ©
Lord Justice Patten :
The case on undue influence
The judge's findings
"27. The problem has arisen in the context of wives guaranteeing payment of their husband's business debts. In recent years judge after judge has grappled with the baffling question whether a wife's guarantee of her husband's bank overdraft, together with a charge on her share of the matrimonial home, was a transaction manifestly to her disadvantage.
28. In a narrow sense, such a transaction plainly ('manifestly') is disadvantageous to the wife. She undertakes a serious financial obligation, and in return she personally receives nothing. But that would be to take an unrealistically blinkered view of such a transaction. Unlike the relationship of solicitor and client or medical adviser and patient, in the case of husband and wife there are inherent reasons why such a transaction may well be for her benefit. Ordinarily, the fortunes of husband and wife are bound up together. If the husband's business is the source of the family income, the wife has a lively interest in doing what she can to support the business. A wife's affection and self-interest run hand-in-hand in inclining her to join with her husband in charging the matrimonial home, usually a jointly-owned asset, to obtain the financial facilities needed by the business. The finance may be needed to start a new business, or expand a promising business, or rescue an ailing business.
29. Which, then, is the correct approach to adopt in deciding whether a transaction is disadvantageous to the wife: the narrow approach, or the wider approach? The answer is neither. The answer lies in discarding a label which gives rise to this sort of ambiguity. The better approach is to adhere more directly to the test outlined by Lindley LJ in Allcard v Skinner, 36 Ch D 145, and adopted by Lord Scarman in National Westminster Bank Plc v Morgan  AC 686, in the passages I have cited.
30. I return to husband and wife cases. I do not think that, in the ordinary course, a guarantee of the character I have mentioned is to be regarded as a transaction which, failing proof to the contrary, is explicable only on the basis that it has been procured by the exercise of undue influence by the husband. Wives frequently enter into such transactions. There are good and sufficient reasons why they are willing to do so, despite the risks involved for them and their families. They may be enthusiastic. They may not. They may be less optimistic than their husbands about the prospects of the husbands' businesses. They may be anxious, perhaps exceedingly so. But this is a far cry from saying that such transactions as a class are to be regarded as prima facie evidence of the exercise of undue influence by husbands."
"Just as leaving the development of the property to Mr Chandra does not necessarily mean that Mrs Chandra placed trust and confidence in him in relation to the guarantees, her independence in their personal lives does not mean that she did not do so. In my judgment, she did place a large measure of trust and confidence in her husband as regards these personal financial decisions which were bound up with the company's business. In practice, she was almost bound to depend on him for information about the development and the need for further finance and for an assessment or view of the risk involved in giving the guarantee, and I find that she in fact did so. Mr Cawson pointed out that she remained worried about giving the guarantee and mortgage up to the last moment, when she had her private discussion with Mr Lopeman before executing the documents. In my view that is not inconsistent with a large measure of trust and confidence in Mr Chandra. The law does not require blind faith. Nor does the evidence that Mr Chandra put some pressure on her to sign negate the existence of trust and confidence."
(1) the costs overrun which led to the request for a further loan was identified by the bank's own monitoring surveyors. The minutes of the credit committee indicate that the surveyors thought that £700,000 would be sufficient to complete the development including a sum for contingencies;
(2) Mr Chandra asked RBS for an increase in the facility of £950,000 which included a further contingency of £250,000 over one of £200,000 already contained in the £700,000 figure. But the credit committee agreed to approve a loan of £700,000. One member of the committee is recorded as having expressed concern that the further £250,000 might be used by Mr Chandra to make changes in the design specification;
(3) Jeremy Bell of RBS, basing himself on information derived from the Company's quantity surveyor, noted as late as October 2001 that:
"Facility now approved at £11,350k. Also, of the £782k, this includes contingencies of c. £200k which any excess needs applying against, i.e. leaves £118k of unused contingencies. Also, the straight comparison of the build costs to the facility is not strictly correct, as this discounts the cash contribution of £4.6m but there are also other costs. The CFF also needs to be reviewed to assess the full project. This reveals that with the £700k agreed there are currently sufficient available facilities to BPC to complete the project. We continue to monitor our exposure carefully going forward";
(4) as part of its then standard procedures RBS asked the Chandras to nominate a firm of solicitors to advise them in relation to the proposed guarantees. They nominated Messrs Brooke North in Leeds and the bank wrote to the firm on 10th October 2001 enclosing copies of the guarantees. The letter stated:
"In accordance with our obligations under the Banking Code we encourage all potential guarantors to take Independent Legal Advice to make sure that they understand their commitment and the potential consequences of their decision.
In this regard your Clients have requested that the Guarantee be forwarded to you to enable it to be fully explained to them prior to execution. We have asked your Clients to contact you to arrange a convenient appointment. For the avoidance of doubt we should stress that you are not being asked to act for the Bank in relation to the Guarantee and your Clients will be responsible for your fees.
Accordingly we now enclose the relevant Guarantee together with a copy for each of your Clients. Assuming that your Clients are happy to proceed, please arrange for the Guarantee to be executed and witnessed, preferably by a partner or a qualified solicitor. Please also sign the panels on the Guarantee confirming that you have explained the documents to your Clients.";
(5) Mr Stephen Lopeman, a partner in Brooke North, who had previously advised and acted for Mr and Mrs Chandra and the Company, visited the Chandras at home to discuss the guarantees. He did not give evidence but Mrs Chandra's evidence was that he saw her alone. She explained that she was a little worried about giving the guarantee and the charge on the house. Mr Lopeman warned her that by signing the documents she would put the house at risk. But he added that Mr Chandra "has never let you down so far";
(6) Mrs Chandra agreed to execute the guarantee and Mr Lopeman witnessed her signature. The printed guarantee contained an endorsement which Mr Lopeman signed stating that:
"I confirm that I am a Solicitor/Legal Executive, and that prior to the execution of this deed I explained the nature, content and effect of this deed to [Mr/Mrs Chandra] who informed me that he/she fully understood the same."
"154. Mrs Chandra relied principally on one of the alleged misrepresentations, that the extra loan of £700,000 would be enough to complete the hotel. This is said to have been a misrepresentation because the amount needed to fund the existing cost overrun was £782,246 and it could not be said with confidence that there would be no further cost overruns in the future.
155. I accept the evidence of Mr and Mrs Chandra that he said words to the effect that the further £700,000 would be enough to complete the project. This was indeed what he genuinely believed, his evidence being that he was "confident we could complete the project if we got a further £700,000". There was no misrepresentation in this. It was essentially a matter of judgment and Mr Chandra's view, and that of the bank, was that £700,000 would be sufficient. The figure of £782,246 pleaded by Mrs Chandra refers to the figure in the quantity surveyor's report, but as Mr Bell noted at the time this included £118,000 of unused contingencies. No reliance can be placed on Mr Chandra's request for further funding of £950,000 because the entire excess over £700,000 was for contingencies, in addition to the figure for contingencies forming part of the figure of £700,000, and because of Mr Chandra's own confidence that £700,000 would be sufficient.
156. It is said that while it was believed that £700,000 would be enough, it could not be said with certainty. Given that it was a forecast, it would be clear to any reasonable person that it could not be a certainty. Mrs Chandra knew there was risk involved, as her conversation with Mr Lopeman makes clear, and I am satisfied that she did not understand Mr Chandra's statement to be said as a complete certainty."
"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.
It is at this stage that, in my view, the "invalidating tendency" or the law's "tender treatment" of married women, becomes relevant. As I have said above in dealing with undue influence, this tenderness of the law towards married women is due to the fact that, even today, many wives repose confidence and trust in their husbands in relation to their financial affairs. This tenderness of the law is reflected by the fact that voluntary dispositions by the wife in favour of her husband are more likely to be set aside than other dispositions by her: a wife is more likely to establish presumed undue influence of Class 2(B) by her husband than by others because, in practice, many wives do repose in their husbands trust and confidence in relation to their financial affairs. Moreover the informality of business dealings between spouses raises a substantial risk that the husband has not accurately stated to the wife the nature of the liability she is undertaking, i.e., he has misrepresented the position, albeit negligently."
"34. The problem considered in O'Brien's case and raised by the present appeals is of comparatively recent origin. It arises out of the substantial growth in home ownership over the last 30 or 40 years and, as part of that development, the great increase in the number of homes owned jointly by husbands and wives. More than two-thirds of householders in the United Kingdom now own their own homes. For most home-owning couples, their homes are their most valuable asset. They must surely be free, if they so wish, to use this asset as a means of raising money, whether for the purpose of the husband's business or for any other purpose. Their home is their property. The law should not restrict them in the use they may make of it. Bank finance is in fact by far the most important source of external capital for small businesses with fewer than ten employees. These businesses comprise about 95% of all businesses in the country, responsible for nearly one-third of all employment. Finance raised by second mortgages on the principal's home is a significant source of capital for the start-up of small businesses.
35. If the freedom of home-owners to make economic use of their homes is not to be frustrated, a bank must be able to have confidence that a wife's signature of the necessary guarantee and charge will be as binding upon her as is the signature of anyone else on documents which he or she may sign. Otherwise banks will not be willing to lend money on the security of a jointly owned house or flat.
36. At the same time, the high degree of trust and confidence and emotional interdependence which normally characterises a marriage relationship provides scope for abuse. One party may take advantage of the other's vulnerability. Unhappily, such abuse does occur. Further, it is all too easy for a husband, anxious or even desperate for bank finance, to misstate the position in some particular or to mislead the wife, wittingly or unwittingly, in some other way. The law would be seriously defective if it did not recognise these realities."
"41. There is a further respect in which O'Brien departed from conventional concepts. Traditionally, a person is deemed to have notice (that is, he has 'constructive' notice) of a prior right when he does not actually know of it but would have learned of it had he made the requisite inquiries. A purchaser will be treated as having constructive notice of all that a reasonably prudent purchaser would have discovered. In the present type of case, the steps a bank is required to take, lest it have constructive notice that the wife's concurrence was procured improperly by her husband, do not consist of making inquiries. Rather, O'Brien envisages that the steps taken by the bank will reduce, or even eliminate, the risk of the wife entering into the transaction under any misapprehension or as a result of undue influence by her husband. The steps are not concerned to discover whether the wife has been wronged by her husband in this way. The steps are concerned to minimise the risk that such a wrong may be committed.
42. These novelties do not point to the conclusion that the decision of this House in O'Brien is leading the law astray. Lord Browne-Wilkinson acknowledged he might be extending the law: see  1 AC 180, 197. Some development was sorely needed. The law had to find a way of giving wives a reasonable measure of protection, without adding unreasonably to the expense involved in entering into guarantee transactions of the type under consideration. The protection had to extend also to any misrepresentations made by a husband to his wife. In a situation where there is a substantial risk the husband may exercise his influence improperly regarding the provision of security for his business debts, there is an increased risk that explanations of the transaction given by him to his wife may be misleadingly incomplete or even inaccurate."
"32. I add a cautionary note, prompted by some of the first instance judgments in the cases currently being considered by the House. It concerns the general approach to be adopted by a court when considering whether a wife's guarantee of her husband's bank overdraft was procured by her husband's undue influence. Undue influence has a connotation of impropriety. In the eye of the law, undue influence means that influence has been misused. Statements or conduct by a husband which do not pass beyond the bounds of what may be expected of a reasonable husband in the circumstances should not, without more, be castigated as undue influence. Similarly, when a husband is forecasting the future of his business, and expressing his hopes or fears, a degree of hyperbole may be only natural. Courts should not too readily treat such exaggerations as misstatements.
33. Inaccurate explanations of a proposed transaction are a different matter."
"Mis-stating the position or misleading the wife is different from an inadvertent failure to disclose, a distinction familiar in the law of misrepresentation. Of course a statement which, though strictly true, is misleading without qualification will fall within these observations of Lord Nicholls. Likewise, a deliberate suppression of information because the husband knows that, if disclosed, it will deter the wife from giving the guarantee will involve an abuse by him of her confidence. It would be unconscionable and rightly categorised as unacceptable means. I do not, however, accept Mr Knox's submission that if deliberate concealment can lead to a finding of undue influence, so too should inadvertent non-disclosure. As it seems to me, they are quite different in nature."
Lady Justice Black :
Lord Justice Ward :