Scottish Court of Session Decisions

Clydesdale Bank Public Company v. Black [2002] ScotCS 130 (10th May, 2002)

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Coulsfield Lord Marnoch Lord Sutherland	XA65/01 OPINION OF LORD COULSFIELD in APPEAL FOR DEFENDER From the Sheriffdom of North Strathclyde at Dumbarton in the cause CLYDESDALE BANK PUBLIC LIMITED COMPANY Pursuers and Respondents; against MRS. CATHERINE MARY BLACK Defender and Appellant: _______

 

 

Act: McNeill, Q.C.; Anderson Strathern, W.S. (Pursuers and Respondents)

Alt: Upton; Drummond Miller, W.S. (for Friels, Uddingston) (Defender and Appellant)

10 May 2002

1. In this action, the pursuers and respondents are attempting to enforce a standard security granted by the defender and appellant over subjects at 150 East Clyde Street, Helensburgh and registered in the Land Register on 11 December 1996. On 16 April 1998, the pursuers served on the defender a calling-up notice requiring payment of certain sums, including a sum of £50,000 described as the principal amount due under a guarantee granted by the defender. Other sums were mentioned in the calling-up notice but they have now been paid or satisfied. In due course the present action was raised and a closed record was made up. The action was debated before the sheriff on 26 March and 27 April 1999 and on 20 July 1999 the sheriff granted decree in favour of the pursuers. The defender appealed to the sheriff principal who refused the appeal on 14 December 2000. The defender now appeals to this court.
2. The defender is married to James Black who was formerly managing director of a company named DEM1 Limited. On 14 December 1994, James Black granted a guarantee of the obligations of the company in favour of the pursuers. On 14 October 1996, the defender signed a letter addressed to an officer of the pursuers at an address in Bearsden. The heading of the letter referred to "DEM1 account 194960 at Hillhead Branch" and, as originally typed, stated:

"I write to confirm that I, Mrs. Catherine McGregor Black of Rockmount 150 East Clyde Street, Helensburgh am willing to grant a standard security over my home in favour of the above company. The amount of my liability under the standard security should be limited to £50,000."

3. In the letter as produced in process, the words "the above company" have been crossed out and the words "my husband James Black" substituted in manuscript. On 8 November 1996, the defender granted a guarantee, described as "Guarantee and Indemnity subject to the Consumer Credit Act 1974" in favour of the pursuers. The guarantee bore to be given in respect of the obligations of James Black under a loan account, the initial amount of which was stated as £150,000, but contained a provision that the grantor's liability was limited to £50,000 plus interest. The conditions of the guarantee, which are lengthy, are set out in twenty three clauses. On the last page of the document, after the final numbered clause, deals with governing law, the document contains the following passage:

"IMPORTANT - YOU SHOULD READ THIS CAREFULLY

YOUR RIGHTS

The Consumer Credit Act 1974 covers this guarantee and indemnity and lays down certain requirements for your protection. If they are not carried out the bank cannot enforce the guarantee and indemnity against you without a court order.

Until the agreement between the bank and the debtor has been made, you can change your mind about giving the guarantee and indemnity. If you wish to withdraw, you must given WRITTEN notice to the bank which must reach it BEFORE the main agreement is made. Once it has been made you can no longer change your mind.

Under this guarantee and indemnity YOU MAY HAVE TO PAY INSTEAD of the debtor and fulfil any other obligations under the guarantee and indemnity. (But you cannot be made to pay more than he could have been made to pay unless he is under 18.) However, if the debtor fails to keep to his side of the agreement the bank must send him a default notice (and a copy to you) giving him a chance to put things right before any claim is made on

you.

If you would like to know more about your rights under the Act you should contact either your local Trading Standards Department or your nearest Citizen's Advice Bureau.

You should take independent legal advice before signing this guarantee and indemnity. The maximum which you may be required to pay is limited to the sums referred to at the beginning of this document.

ACKNOWLEDGEMENT

I/we acknowledge that, when this guarantee was presented or sent for the purpose of being signed by or on behalf of me/us there was also presented or sent one copy of this guarantee each for me/us to keep."

4. There is then a section, which is given emphasis by being enclosed in a box, which contains the following words:

"This is a guarantee and indemnity subject to the Consumer Credit Act 1974. If the debtor fails to keep to his agreement with the bank YOU MAY HAVE TO PAY INSTEAD and fulfil any other obligations under the guarantee and indemnity. Sign only if you want to be legally bound by its terms."

5. The signature of the defender was placed on the document within the box immediately after the passage of text last quoted above. The document bears to have been signed on 8 November 1996 at Clyde Holme Road in the presence of two witnesses, Thomas Rooney, described as a motor mechanic of 45 Monks Road, Airdrie and R. Taylor, an office manageress of 105 West Clyde Street, Helensburgh.
6. On 14 November 1996, a firm of solicitors instructed on behalf of the defender wrote to a firm acting for the pursuers in connection with the standard security. Further correspondence followed, including a letter dated 22 November 1996 in which the defender's solicitors stated that they were sending the draft standard security back approved and asked to receive the engrossed deed for signature as soon as possible. On 22 November 1996, the solicitors acting for the pursuers wrote to Mr. and Mrs. Black stating, inter alia that they had been asked by the defender's solicitors to forward the standard security to be signed by them in favour of the bank. The letter contained instructions about signature and also stated:

"You should contact your solicitors to discuss the legal implications of signing this document prior to doing so. We wish to make it clear that we are acting solely on the bank's behalf in this matter and can give you no advice as to whether indeed you should sign this document. We understand that your solicitors wish you to return the document to them as soon as it is signed."

7. The copy letter produced bears to be directed to James G.W. Black, Esq., with the words "to be uplifted". The standard security itself bears to have been signed by the defender and also by James Black, who is mentioned in the standard security as consenting to it, on 25 November 1996.
8. In her defences to the action, the defender admits that she instructed her own solicitors to act on her behalf in relation to the revising of the standard security and that she had independent legal advice in respect of the granting of the standard security. The content of that advice is not stated. The defender explains that she signed the letter which bears the date 14 October at about that date, but states that its meaning and consequences were unknown to her, other than that it was in the interest of her husband and his company that she sign it. Her defences draw attention to the manuscript change made to the terms of the letter, but she does not explain how she came to sign the letter. The defences further aver:

"The defender's instructions to her solicitors were to revise the standard security prepared by the pursuers' solicitors. These instructions were imparted to the defender's solicitors on or about 14 November 1996. The standard security was signed by the defender in support of the company DEM1 Limited's obligations to the pursuers but not exceeding the sum of £50,000. The defender is and has at all material times been married to Mr. James George Wood Black. Since about 1996 she and Mr. Black have lived in the dwellinghouse at 150 East Clyde Street, Helensburgh ('the family home'). At all material times she was sole proprietor of the subjects. Mr. Black was a director of a demolition company. In about November 1996 Mr. Black placed a document before the defender at the family home and asked her to sign it. She did so. She did not then read the document nor was it explained to her. She was unaware that she was being asked to sign a guarantee and had accordingly no reason to tell her solicitor of a guarantee or to take advice about its meaning and effect. In 1998 it was brought to her notice that a guarantee and indemnity had been granted by her in favour of the pursuers. At or around that time she signed a standard security over the family home. The standard security bears to have been executed on 25 November 1996. It bears the defender's signature. The guarantee and indemnity bears to have been executed on 8 November 1996. It bears the defender's signature. The defender has not signed any other documents that could have been the guarantee and indemnity. In the circumstances she believes and avers that the document that she signed at her husband's request in 1996 was the said guarantee and indemnity."

9. The defender further avers that neither the two named witnesses to the guarantee nor any other person was present when she signed the guarantee and indemnity. She avers that the pursuers did not hold a meeting with the defender outwith her husband's presence at which they warned her of the consequences of signing the guarantee or advised her to obtain independent legal advice. She avers that she has at all times reposed affection and trust in her husband and relied on him to take and execute decisions for them both relating to important or long-term financial matters. She was a housewife and he was managing director of the company. She further avers:

"Before 1998, the defender received no other explanation or advice about the guarantee and indemnity. She signed it unaware of what it was in all material respects. The material fact that it was a guarantee and indemnity, that it was for the outstanding debts of the business to the extent of £50,000 plus interest were concealed from her. Her husband and the pursuers thus obtained gratuitous advantage from her."

10. In their answers to the defender's averments, the pursuers state a number of calls. In particular they call on the defender to specify the basis upon which she instructed her solicitors to prepare the standard security and to specify what information she placed before her solicitors at the time of so instructing them. The defender does not answer those calls in any way.
11. The defender's case, as argued before the sheriff and the sheriff principal, was that she had signed the guarantee and indemnity without being aware of its true nature and under the undue influence of her husband and she sought a proof in order to establish her averments to that effect. The pursuers maintained that the defender had failed to make any relevant averments of undue influence and, in any event, that from the circumstances described in the pleadings it was apparent that the pursuers had taken adequate steps to inform the defender of the nature of the obligation and that there was no ground on which enforcement of it could be refused. The pursuers succeeded on both of these arguments before the sheriff principal. Both the sheriff and the sheriff principal dealt with the issues carefully in very full judgments. They also required to deal with a number of points which are not in issue in the present appeal.
12. On the pleadings, therefore, it is clear that this is a case of a class which is now familiar and that it raises questions of the kind discussed in Barclays' Bank plc v. O'Brien 1994 1 AC 180, Smith v. Bank of Scotland 1997 S.C. (H.L.) 111 and Royal Bank of Scotland plc v. Etridge (No. 2), [2001] UKHL 44 [2001] 3 WLR 1021.
13. In this particular case, in my view, there are, on the pleadings, very real doubts about the basis upon which the defender's case is being made. The defender makes certain averments about the guarantee and indemnity. It is, however, clear that the guarantee and indemnity and the standard security are closely related, the former being the document which created the liability which is secured by the latter. The defender nowhere clearly explains what her understanding was in regard to the standard security. The letter of 14 October 1966 predated the guarantee and indemnity. It is in clear terms and includes a reference to "my house" as the subject of a standard security. The defender alleges, nevertheless, that the meaning of the letter was not known to her. The defender does not say that she did not know that she was signing a standard security or that she did not know what the effect of that document was. She says nothing about the circumstances in which she signed it, or why she signed it. What, then, can have been involved in the discussion of the standard security? What advice was she given? What could the defender possibly have thought was happening? As regards the guarantee itself, how could she have failed to see what was printed on the form of guarantee, given that she signed within the printed box? She does not, for example, aver that the document was obscured or covered up when she signed it. In these circumstances, I have been very much inclined to doubt whether her pleadings are relevant or, even, properly frank about her knowledge of the transaction and her participation in it. I would add that the discussion of the facts of the eight cases which were before the House of Lords in Etridge (No. 2), particularly in the speech of Lord Scott of Foscote, seems to me to emphasise that it is undue influence that can invalidate a transaction, not merely influence: and I doubt whether there is enough in the pleadings to suggest that there was undue influence in this case. However, the test whether pleadings are sufficiently relevant to go to proof is whether the defender must inevitably fail even if everything averred is proved. In Etridge (No. 2) Lord Clyde, in particular, stressed that the existence or non-existence of undue influence is a matter of evidence and proof. The same point was forcibly made by Lord Maxwell in Honeyman's Executor v. Sharp 1978 S.C. 233. On that basis, I am prepared to accept that there must be a proof on the question whether undue influence was exercised in relation to the signing of the guarantee and indemnity. That being so, I would ordinarily prefer to let the whole case go to proof before considering any other legal questions. In my view, it is far from easy to assess the effects on the law of Scotland of the three House of Lords decisions cited above and I think that it would be preferable to discuss these effects by reference to established facts. I have, however, with considerable hesitation, been persuaded to agree that this case can, in the particular circumstances, be disposed of without inquiry. In order to explain that conclusion, it is necessary to go through the principal arguments submitted to us, but I propose to try to do so without, so far as possible, expressing a concluded view on the issues argued.
14. The essence of the pursuers' argument which the Sheriff and Sheriff Principal accepted, is that whatever may be the requirements which, under English law, are imposed upon the person in whose favour a gratuitous guarantee is granted in circumstances in which the possibility of undue influence arises, the issue in Scotland is whether the creditor acted in good faith. The pursuers maintain that they can show that they acted in good faith by showing that they took reasonable steps to warn the defender that she was entering into a contract of guarantee, which might have consequences for the family home. They further argue that the more onerous requirements explained in Barclays' Bank plc v. O'Brien and in Etridge (No. 2), which, in short, require that the nature of the deed in question be "brought home" to the person signing it are derived from English rules of equity and are not applicable or necessary in Scotland. For the present purpose, it is not necessary, in my view, to discuss what those more onerous requirements are. The pursuers' argument does, however, require consideration of two issues. The first is what is the principle on which the requirements discussed in O'Brien and, more fully, in Etridge are based. The second is what is the basis on which the authority of O'Brien was accepted in regard to Scotland in Smith.
15. Much of the discussion in O'Brien was directed towards English rules of equity, and with the circumstances in which a presumption of undue influence might be held to arise: these are matters on which I am not qualified to comment. What does, nevertheless, seem to me to stand out in the speech of Lord Browne-Wilkinson, is that his Lordship recognised a need to guard against an injustice, or potential injustice, to wives (and also, in some circumstances at least, to cohabitees). That is reflected at page 196 where his Lordship referred to the law's "tender treatment" of married women and continued:

"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."

16. A little later his Lordship said:

"Therefore in my judgment a creditor is put on enquiry 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 enquiry 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."

17. His Lordship then discussed the reasonable steps which the creditor should take and in the course of that discussion said:

"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 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 these 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 risks she is running and urged to take independent legal advice."

18. It is, as I have indicated, reasonably clear from these passages that his Lordship was setting out to provide a remedy, and in certain respects a new remedy, for a perceived injustice. The fact that doing so involved an extension of the previous law is indicated, apart from anything else, by the distinction which his Lordship drew between what might satisfy the court as to the creditor's position in regard to past transactions and what would be necessary in the future. That understanding of the decision in O'Brien is, in my view, endorsed by the speeches in Etridge. For example, Lord Nicholls of Birkenhead discussed the social and economic factors which had given rise to the problem considered in O'Brien in paragraphs 34 and following of his speech and in paragraph 37 said:

"In O'Brien's case this House decided where the balance should be held between these competing interests. On the one side, there is the need to protect a wife against a husband's undue influence. On the other side, there is the need for the bank to be able to have reasonable confidence in the strength of its security. Otherwise it would not provide the required money. The problem lies in finding the course best designed to protect wives in a minority of cases without unreasonably hampering the giving and taking of security. The House produced a practical solution."

19. His Lordship then considered criticisms of the decision in O'Brien and, in particular, of the use to which the concept of constructive notice had been put and said, in paragraph 40:

"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."

20. His Lordship then affirmed that, despite these novelties, the decision in O'Brien should be regarded as a proper extension of equitable principles. Lord Scott of Foscote discussed the same issues in paragraphs 139 and following of his speech and, at paragraph 147, emphasised that the bank, in a situation such as this, is not put on enquiry about the existence of undue influence because no enquiry could reasonably be expected to satisfy the bank that there was no undue influence. This was not enquiry in the traditional constructive notice sense, what the bank should be seen as required to do was to take reasonable steps to satisfy itself that the wife understood the transaction that she was entering into.
21. Lord Scott's summary of his conclusions in paragraph 191 points to the same understanding of the decision. His Lordship said, inter alia:

"(3) If the wife's consent has in fact been procured by undue influence or misrepresentation, the bank may not rely on her apparent consent unless it has good reason to believe that she understands the nature and effect of he transaction.

(4) Unless the case has some special feature, the bank's knowledge that a solicitor is acting for the wife and has advised her about the nature and effect of the transaction will provide a good reason for the purposes of (3) above. That will also be so if the bank had a reasonable belief that a solicitor is acting for her and has so advised her. Written confirmation by a solicitor acting for the wife that he has so advised her will entitle the bank to hold that reasonable belief.

(5) So too a sufficient explanation of the nature and effect of the transaction given by a senior bank official would constitute good reason for the purposes of (3) above.

...

(7) If the bank has not taken reasonable steps to satisfy itself that the wife understands the nature and effect of the transaction, the wife will, subject to such matters as delays, acquiescence, change of position etc., be able to set aside the transaction if her consent was in fact procured by undue influence or misrepresentation."

22. As I have said, it is only with great diffidence that I can comment on any aspect of the English law of equity. It does, however, respectfully appear to me that, in reading the decisions in O'Brien and Etridge (No. 2), it is possible to distinguish between the terminology of equity, in the technical sense, in which the reasoning is expressed and an underlying determination that social and economic justice requires certain positive steps to be taken by a creditor bank when dealing with a gratuitous obligation granted by a wife. The practical upshot seems to me to be clear, namely that the cases require the creditors to take positive steps to satisfy itself that the wife understands the transaction. The necessary positive steps are discussed at very considerable length, but there seems to me to be no doubt that in both cases their Lordships were suggesting that the creditors should not merely rely on some written communication to the wife drawing attention to the nature of the transaction but should satisfy itself that steps had been taken, to protect the wife by giving her proper advice by itself or by others. It is, I think, also of interest that in some of the speeches their Lordships were fortified by the practice already adopted by many banks which recognised that some such positive steps should be taken.
23. The extension of the law approved in O'Brien was accepted as applying to Scotland in Smith. Before looking at the House of Lords decision in Smith, however, it is, I think, helpful to mention the Inner House decision, which was reversed by the House of Lords. The decision is reported under the name Mumford v. Bank of Scotland Smith v. Bank of Scotland 1996 S.L.T. 392. In giving the opinion of the court, Lord President Hope first of all pointed out that the apparent basis of the cases for the two wives involved was one of bad faith, but went on to demonstrate that there was no existing authority in Scots law which could justify the application of such a principle in favour of the wives in these circumstances. He discussed the reception of the concept of undue influence in to Scots law in Gray v. Binnie 1879 7 R 332 and quoted from the opinion of Lord Shand in that case and went on to say:

"There is no indication in this passage that a presumption of undue influence can arise merely from the nature of the transaction and the fact of the relationship. What is important is the effect of that relationship in the particular case, with the result that each case must be examined upon its own facts."

24. On the following page he said:

"It is significant that we were not referred to any Scottish case - and we are not aware of any - where the law of Scotland has recognised that a presumption of undue influence can arise in a question with a third party, where the transaction is not on its face to the wife's advantage, merely because it may be expected that the wife has reposed in her husband's trust and confidence in relation to their financial affairs. The Scottish cases indicated that something more is needed to justify constructive knowledge by the third party that consent to the wife's transaction has been obtained by the husband's undue influence. What is needed, according to the law of Scotland, is proof of knowledge by the third party of facts and circumstances indicating that undue influence was in fact exercised. This requires knowledge of the assumption by the husband of a position of quasi fiduciary responsibility over his wife's affairs, such as to deprive her of her own power of decision-making. In our opinion the tendency in English law to invalidate such transactions between husband and wife in a question with a third party merely on the ground of the wife's vulnerability to undue influence goes well beyond the limits of the law of undue influence as hitherto recognised in this country."

25. The decision in O'Brien was, of course, relied on before the Inner House and it is, in my opinion, clear that the Inner House considered the issue on the basis of principles of good faith as recognised in Scotland up to that point and declined to accept that the policy considerations underlying the decision in O'Brien justified any alteration in the law of Scotland, at least at the hand of the court. The Lord President did suggest that if there was any perceived injustice, the matter might be one for legislation.
26. When the case came to the House of Lords, the only two substantial speeches were given by Lord Jauncey and Lord Clyde. Lord Jauncey's speech shows that he had considerable reservations about the decision which was adopted, although he did not dissent from it. The grounds on which the extension of O'Brien to Scotland proceeded, have to be found in the speech of Lord Clyde. Three passages in his Lordship's speech have to be particularly examined. Firstly, at page 120 his Lordship said:

"Counsel for the bank cautioned against the imposition of a change in the law of Scotland where, as was recognised in Invercargil City Council v. Hamlyn, a monolithic uniformity might be destructive of the individual development of a distinct common law system. But in the present case we are dealing with an area of the law whose development has for a long time been influenced by decisions on the other side of the border. I am not persuaded that there are any social or economic considerations which would justify a difference in the law between the two jurisdictions in the particular point here under consideration. Indeed when similar transactions with similar institutions or indeed branches of the same institutions may be taking place in both countries there is a clear practical advantage in the preservation of corresponding legal provisions. Furthermore, the development which is here proposed is one which is of clear advantage and usefulness to those who may be prompted to join with a spouse or other close companion in the granting of a security over their home or other property with grave advantage (sic) to themselves, which they may not even fully appreciate, and with a particular benefit to the business interests of the companion. Of course, in many cases such transactions may be entered into with full knowledge and understanding. It is not to be supposed or presumed that simply because there is a close personal relationship the security will be given otherwise than with a full and free consent, that is to say with a full understanding and a truly voluntary consent. But to require the creditor to take some initiative where the circumstances of the case may reasonably seem to give rise to the risk that the cautioner's consent is not full and free does not necessarily create as matter of the law of evidence any presumption in the proving of any ground of reduction. What it does is to render less easy for the creditor to challenge a reduction of the security if the cautioner seeks to take that course.

I have not been persuaded that there are sufficiently cogent grounds for refusing the extension to Scotland of the development which has been achieved in England by the decision there in Barclays' Bank plc v. O'Brien. On the contrary I take the view that it is desirable to recognise a corresponding extension of the law in Scotland."

27. Lord Clyde then discussed the basis upon which the extension might be made. At page 121, he said that it was not disputed that effect might be given to the decision in O'Brien in Scotland by the use of the concept of constructive notice but went on to say:

"But it seems to me preferable to recognise the element of good faith which is required of the creditor on the constitution of a contract of cautionery and find there a proper basis for decision. The law already recognises, as I have sought to explain, that there may arise a duty of disclosure to a potential cautioner in certain circumstances. As part of that same good faith which lies behind that duty it seems to me reasonable to accept that there should also be a duty in particular circumstances to give the potential cautioner certain advice. Thus in circumstances where the creditor should reasonably suspect that there may be factors bearing on the participation of the cautioner which might undermine the validity of the contract through his or her intimate relationship with the debtor the duty would arise and would have to be fulfilled if the creditor is not to be prevented from later enforcing the contract. Such a duty does not alter the existing law regarding the duty, or the absence of a duty, to make representations. Nor does it carry with it a duty of investigation. This is simply a duty arising out of the good faith of the contract to give advice. It is necessary on the approach which I have suggested to deem the creditor a potential participant in any misrepresentation by the debtor."

28. His Lordship then went on to consider a little further what the effect of the extension of O'Brien might be and said, at page 122:

"All that is required of him (the creditor) is that he should take reasonable steps to secure that in relation to the proposed contract he acts throughout in good faith. So far as the substance of those steps is concerned it seems to me that it would be sufficient for the creditor to warn the potential cautioner of the consequences of entering into the proposed cautionery obligation and to advise him or her to take independent advice. Of course, in accordance with the existing law, he will still have the duty to make a full and honest disclosure if occasion arises for that to be done. But apart from that it seems to me that the giving of the warning and the advice should be sufficient so far as Scots law is concerned to fulfil the duty on the creditor and secure that he remains in good faith in relation to the proposed transaction. As was recorded by the Lord President a practice has been recognised by banks and building societies of advising private individuals proposing to act as guarantors or cautioners for the liabilities of another to issue a warning regarding the consequences and to point out the importance of receiving independent advice. This practice may extend more widely than is required by the duty which I have described in so far as it may not be limited to cases where a close personal relationship exists, but adoption of the wider practice would clearly help to obviate any practical problem in deciding whether or not the duty arises in any given case."

29. In his speech in Etridge (No. 2), Lord Clyde also made observations which are relevant in considering the position in Scotland. Lord Clyde expressed reservations about attempting to categorise instances of undue influence and in particular in about attempting to categorise presumed undue influence. He emphasised that cases of undue influence may be very varied and that the question whether undue influence has been exercised is one primarily for evidence and proof. When he came to deal with the steps to be taken by a creditor, his Lordship quoted what Lord Browne- Wilkinson had said in O'Brien to the effect that the creditor could reasonably be expected to take steps to bring home to the wife the risk she was running and referred to his own suggestion in Smith, which I have already quoted. He then observed that what he had said echoed what was understood to be the existing practice recognised by banks and building societies and that it seemed to him that steps of that kind should be enough to counter allegations of bad faith. In paragraph 95, his Lordship said:

"One course is for the lender himself to warn the surety of the risk and to recommend the taking of legal advice. But there may well be good reasons, particularly for banks, to feel it inappropriate or even unwise for them to be giving any detailed form of warning or explanation, and to take the view that it is preferable for that matter to be managed by a solicitor acting for the wife. It is certainly possible to suggest courses of action which should be sufficient to absolve the creditor from constructive notice of any potential undue influence."

30. His Lordship then quoted again from the speech of Lord Browne-Wilkinson and continued:

"But matters of banking practice are principally matters for the banks themselves in the light of the rights and liabilities which the law may impose upon them. I would not wish to prescribe what those practices should be. One can only suggest some courses of action which should meet the requirements of the law. These are not matters of ritual, the blind performance of which will secure the avoidance of room, but sensible steps which seek to secure that the personal and commercial interests of the parties involved are secured with certainty and fairness. Necessarily the precise course to be adopted will depend upon the circumstances. In the Scottish case of Forsyth v. Royal Bank of Scotland plc 2000 S.L.T. 1295 it appeared to the creditor that the wife had already had the benefit of professional legal advice. In such a case, it may well be that no further steps need be taken by the creditor to safeguard his rights. Of course if the creditor knows or ought to know from the information available to him that the wife has no in fact received the appropriate advice then the transaction may be open to challenge."

31. I think that it is reasonably clear from the passages which I have quoted that Lord Clyde had reservations about any attempts, whether in Scotland or in England, to set out in too much detail the steps which a creditor can be regarded as obliged to take. I think that it can also be said that Lord Clyde does not regard it as required by, or even consistent with, the basis upon which he approved the extension of the O'Brien requirements into Scotland that any definite requirements should be prescribed to satisfy the demands of good faith. To lay down any such detailed and prescribed requirements would, in any event, be difficult to reconcile with the normal approach of Scots law to questions of good faith. There is, therefore, nothing in Lord Clyde's opinion and, I would respectfully suggest, nothing in the speeches of the other members of the House in any of the cases to which I have referred which need be construed as requiring this court to hold that the specific requirements discussed in Etridge (No. 2) form part of the law of Scotland.
32. The more difficult question is whether the extension of the O'Brien decision to Scotland requires the Scottish courts to apply the same underlying test in determining whether the creditor has acted in good faith as the English courts apparently require to do in determining whether the creditor is or is not affected by constructive notice. In other words, the question is whether, as a result of Smith, the Scottish courts require to ask whether the creditor has taken reasonable steps to satisfy itself that the wife understands the nature and effect of the transaction. This is a question which I have found very difficult. On the one hand, I do not detect any significant reservations on the part of Lord Clyde in regard to the underlying reasons which motivated the decision in O'Brien. As I have explained above, it seems to me that these reasons were the need that the law should extend protection to granters of securities, such as wives, who may be exposed to undue influence and the need to make some extension to the law in order to cope with that problem. In any event, it seems to me to be difficult to envisage that there should be any material difference in principle between the obligations incumbent on a lender in Scotland and England respectively, given that it was recognised in Smith that the same problems existed in both jurisdictions and that it was expressly stated that consistency between the jurisdictions was to be desired. On the other hand, when Lord Clyde discussed the steps which a creditor should take he spoke in terms of "advising" or "warning" the potential cautioner, rather than in terms of "bringing home" to her the nature of the transaction or "satisfying itself" that she had been properly advised. Lord Clyde also apparently approved the decision in Forsyth v. Royal Bank of Scotland. That was a case in which the bank had asked solicitors to see that the wife was given separate advice and to confirm that that had been done, but had proceeded without receiving such confirmation: it may be questionable whether what the bank had done would meet the requirements explained in Etridge (No. 2). More generally, for the reasons given by the Lord President in Smith and by Lord Marnoch and Lord Sutherland in this case, it is very hard indeed to see how any requirement of the kind called for in Etridge (No. 2) could be derived from the pre-existing law in Scotland as to the requirements of good faith. The force of that point is perhaps reduced by the argument that O'Brien represented a conscious extension of the law of England and that Smith similarly represented a conscious extension of the law of Scotland. Nevertheless, the basis on which the extension was made in Smith was good faith, and one would hope that the consequences could be logically related to that concept.
33. In view of these difficulties, as I have said, I am extremely reluctant to attempt to set out any general conclusion, and I would prefer to deal with the problems on a case by case basis and on established facts. As regards the present case, however, there is an additional consideration, to which Lord Sutherland has drawn attention. That is that at the time of the transaction in the present case, the law was understood to be as it was stated by the Inner House in Smith, and that the House of Lords decision was expressly an "extension" of the law. What the pursuers did in this case complied exactly with the requirements of good faith and proper banking practice, as understood in Scotland at the time. The distinction between the tests to be applied to past actings and future actings is clearly recognised in the cases. It is true, as Lord Marnoch points out, that normally a court decision on a question of common law is regarded as stating the law as it always has been. In this case, however, we are dealing with the effects of decisions which expressly extended the law and expressly distinguished between consequences for past transactions and consequences for future transactions. Accordingly, I agree with Lord Sutherland that in the particular circumstances of this case, it has not been relevantly averred that the pursuers failed in their duty of good faith. It follows that this appeal should be refused.

Clydesdale Bank Public Company v. Black [2002] ScotCS 130 (10th May, 2002)

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Coulsfield Lord Marnoch Lord Sutherland	XA65/01 OPINION OF LORD MARNOCH in APPEAL FOR DEFENDER From the Sheriffdom of North Strathclyde at Dumbarton in the cause CLYDESDALE BANK PUBLIC LIMITED COMPANY Pursuers and Respondents; against MRS. CATHERINE MARY BLACK Defender and Appellant: _______

 

 

Act: McNeill, Q.C.; Anderson Strathern, W.S. (Pursuers and Respondents)

Alt: Upton; Drummond Miller, W.S. (for Friels, Uddingston) (Defender and Appellant)

10 May 2002

1. In this action the pursuers and respondents seek to enforce against the defender and appellant a Standard Security granted by her on 25 November 1996. They seek to do that in relation to the defender's obligations under a Guarantee signed by her about two weeks previously, on 8 November 1996. In terms of the latter the defender guaranteed, up to a limit of £50,000, the indebtedness of her husband who had himself earlier granted in favour of the pursuers a Guarantee for the debts of a company which he operated. The defender maintains that the Guarantee dated 8 November 1996 is unenforceable and should be set aside as having been impetrated by undue influence of her husband; and that accordingly the sum of £50,000 referred to in the notice calling up the Standard Security is not, as matter of fact, resting owing to the pursuers. The present case thus follows in the line of authority commenced (so far as Scotland is concerned) by Smith v. Bank of Scotland 1997 S.C. (H.L.) 111. As to that, there was no dispute between the parties but that in seeking to defend the present action it was incumbent on Mrs. Black to set out relevant averments to the effect, first, that in signing the Guarantee she had been subjected to the "undue influence" of her husband and, second, that the pursuers, for their part, had failed to take the "reasonable steps" desiderated by Lord Clyde in Smith cit. sup. at pps. 121-122, whatever that may now involve.
2. In what I consider to be a thoughtful and penetrating judgment the Sheriff Principal held that the defender had failed to plead a relevant case under either of the above heads and he accordingly adhered to an earlier interlocutor of the Sheriff granting decree de plano in favour of the pursuers. In the appeal before us it was submitted by counsel for the defender and appellant that the Sheriff Principal had erred in his decision on each of these matters. I deal with each in turn.
3. So far as the matter of undue influence is concerned I share the concerns of your Lordship in the chair regarding what is on any view the unsatisfactory nature of the case averred by the defender. In particular, I am struck by the apparent contradiction between, on the one hand, averring that Mr. Black placed the Guarantee before the defender and asked her to sign it and, on the other hand, averring at a later stage, and without further explanation, that the nature of the document, as being a Guarantee and Indemnity, was somehow "concealed" from her. Just as importantly, there is, it seems to me, a very pointed refusal to answer the pursuers' "call" as to why, within days of signing the Guarantee, she instructed solicitors to act on her behalf in the preparation of the Standard Security. It is certainly clear now that the two documents were closely interconnected and there is, I think, much force in the view that the pursuers are entitled to an explanation as to why that was not clear to the defender in 1996. As against these considerations, however, I note the defender's averment that, despite the signatures of witnesses, there were, in fact, no witnesses present when she signed the Guarantee; and I further note her averment that at all material times she relied on her husband "to take and execute decisions for them both relating to important or long-term financial matters." Particularly in light of this last averment I consider that there is just enough in the defender's pleadings to warrant enquiry under this head by way of proof before answer. In reaching that view I bear in mind what was said about undue influence by Lord Maxwell in Honeyman's Executors v. Sharp 1978 SC 223 at p. 230:

"What is involved is some kind of abuse of the position of trust for the benefit of the person in whom the trust is confided and it seems to me that whether there has been such an abuse to an extent which would justify the court's interference is a matter which cannot readily be confined within stated rules or ascertained on the basis of written pleadings without enquiry into the facts."

The Sheriff Principal did not, I think, have the benefit of having that dictum cited to him.

4. Turning, however, to the second matter, I find myself in complete agreement with the Sheriff Principal. As he points out, the Guarantee contains on its final page immediately above the box provided for the grantor's signature the following legend:

"IMPORTANT - YOU SHOULD READ THIS CAREFULLY

YOUR RIGHTS

...

UNDER THIS GUARANTEE AND INDEMNITY YOU MAY HAVE TO PAY INSTEAD of the debtor and fulfil any other obligations under the Guarantee and Indemnity. ... ... you should take independent legal advice before signing this Guarantee and Indemnity."

5. Within the signature box itself there is then the further legend:

"This is a Guarantee and Indemnity subject to the Consumer Credit Act 1974. If the debtor fails to keep to his agreement with the Bank YOU MAY HAVE TO PAY INSTEAD and fulfil any other obligations under the Guarantee and Indemnity. Sign only if you want to be legally bound by its terms."

6. As the Sheriff Principal goes on to point out these legends complied, almost to the letter, with paragraph 12.1 of the Code of Banking Practice adopted by banks and building societies in Scotland in March 1992. What is more, I am of opinion that they comply exactly with what was desiderated by Lord Clyde in the passage in Smith cited above. After referring to the taking of "reasonable steps" Lord Clyde goes on to say that:

"So far as the substance of those steps is concerned it seems to me that it would be sufficient for the creditor to warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and to advise him or her to take independent advice".

He then goes on to approve, in terms, of the Code of Practice referred to above saying only that it "might extend more widely than is required by the duty which I have described in so far as it may not be limited to cases where a close personal relationship exists...". I accordingly demur to the suggestion advanced by counsel for the defender and appellant that in Smith Lord Clyde, and those of their Lordships who agreed with Lord Clyde, in some way imported into Scots law the more precise requirements previously set out for England by Lord Browne-Wilkinson in Barclays Bank plc v. O'Brien and Another 1994 1 AC 180.

7. That would be an end of the matter but for the fact that between the date of the Sheriff Principal's decision and the date of the appeal there was decided, again by the House of Lords, the important case of Royal Bank of Scotland plc v. Etridge (No. 2) [2001] 3 WLR 1021. Although the speeches delivered in that case were in some instances both lengthy and complex, it seems to me that for present purposes the relevant ratio is conveniently encapsulated by the following passage from the speech of Lord Nicholls of Birkenhead at p. 1046:

"In respect of past transactions, the bank will ordinarily be regarded as having discharged its obligations if a solicitor who was acting for the wife in the transaction gave the bank confirmation to the effect that he had brought home to the wife the risks she was running by standing as surety."

Counsel for the defender and appellant submitted that this should be regarded as the law, both in Scotland and England, and it had not been complied with in the present case. The policy considerations in favour of uniformity had been made clear in Smith and there was no reason, said counsel for the defender and appellant, why satisfaction of this requirement should not now be deemed to have been embraced by the wider duty to evince "good faith" referred to by Lord Clyde in Smith.

8. I have given anxious consideration to this submission but, in the end, I reject it. Unlike your Lordships, I do not attach much importance to the consideration that the events with which this case is concerned pre-dated the decision in Etridge (No. 2). Court decisions which affect the Common Law are of their nature retrospective in character, even if they touch on what appear to be subjective matters such as the presence or absence of good faith. In such cases the real question remains what, in the eyes of the law at its present stage of development, is treated as satisfying the requirement in question. The passage from the speech of Lord Nicholls of Birkenhead which is quoted above was, for example, both recognised and intended to have retrospective effect although there are, of course, other passages in both O'Brien and Etridge (No. 2) which, rather unusually, bear to relate only to the future. In any event, I am satisfied that the submission in question should in general be rejected.
9. In this connection, the first point to notice, in my opinion, is that in Smith there was, as I see it, no intention to achieve exact uniformity as between the laws of Scotland and England. In particular, and as stated above, I see no indication of any intention to import into Scots law the more precise requirements set out for England in the earlier case of Barclays Bank plc v. O'Brien and Another. As it happens, I do not, myself, see why policy considerations in favour of broadly similar results in this area of the law should extend to even a desire for precise assimilation. If, however, I am wrong about that, the best course might be to resort to legislation.
10. The second point to notice is that in England this whole area of the law has been developed by an extension of the equitable concept of constructive notice - see generally Royal Bank of Scotland plc v. Etridge (No. 2) cit. sup. per Lord Nicholls of Birkenhead at p. 1036 et. seq. This means that the question, as it presents in England, is whether the bank or other creditor has done enough to "shed the constructive notice imputed to it" - ibid. per Lord Scott of Foscote at p. 1096. In relation to Scotland, however, this jurisprudential route was expressly disavowed in Smith - perhaps, not least, because of what had been said on that matter in the courts below - and instead, and in accordance with existing principle, the route chosen by the House of Lords was to develop the concept of "good faith" which could already be detected in Scottish authority. This concept was explored in some detail by Lord Clyde in Smith at p. 117 where, after dealing with cases of knowledge or imputed knowledge of actual fraud, Lord Clyde goes on to deal with another category of case which, he says, forms an exception to the general rule that a cautioner is expected to look to his own interests. The passage in question reads as follows:

"Another exception is where the creditor does make some representation to the potential cautioner, either spontaneously or in response to a question. The representation then made by the creditor must be full and fair. The creditor must not mislead the cautioner by withholding part of the truth. Again, if there is some fact in the relationship between the creditor and the debtor which is material to the risk and that is a fact which would not be expected to exist and of which the cautioner is excusably ignorant, the creditor must disclose it. Again, if the guarantor makes a statement in the presence of the creditor which demonstrates that he entirely misunderstands the position of the debtor, that also will require the creditor to give a true and accurate explanation...

Lying behind these examples of situations where the creditor is obliged to take steps in the interest of the cautioner is the basic element of good faith. As was recognised by Gloag and Irvine at p. 706 there must be perfect fairness of representation on the part of the creditor in the constitution of the contract. Thus if the creditor misleads the cautioner either by his silence or by some positive representation he will be acting in bad faith and may thereby lose the right to enforce the contract."

11. It is, I believe, in that context - and in that context alone - that Lord Clyde later says what he does at p. 121:

"The law already recognises, as I have sought to explain, that there may arise a duty of disclosure to a potential cautioner in certain circumstances. As a part of that same good faith which lies behind that duty it seems to me reasonable to accept that there should also be a duty in particular circumstances to give the potential cautioner certain advice. ... Such a duty does not alter the existing law regarding the duty, or the absence of a duty, to make representations. Nor does it carry with it a duty of investigation."

12. According to that statement of the law, therefore, there is, in my opinion, no place for the sort of investigation envisaged by their Lordships' House in Royal Bank of Scotland plc v. Etridge (No. 2) cit. sup. Nor, indeed, is the emphasis necessarily on "bringing home" to the wife the risks she was running by standing as surety. Unlike England, there is no requirement for the creditor to "shed" the constructive notice which might otherwise be imputed to him. On the contrary, as Lord Clyde puts the matter in Smith (at p. 122):

"Whether there has in fact been or may yet be any conduct by the debtor directed at the cautioner which might vitiate the contract is not a matter necessarily to be explored by the creditor. All that is required of him is that he should take reasonable steps to secure that in relation to the proposed contract he acts throughout in good faith" (my italics).

In short, as I see it, all that is requisite in Scotland is that, in the course of his communings with the cautioner, in addition to compliance with the duties already incumbent upon him under the earlier law, the creditor should now "warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and ... advise him or her to take independent advice" - ibid. at p. 122. As it happens, these same steps are again referred to by Lord Clyde in Royal Bank of Scotland plc v. Etridge (No. 2), at p. 1051, and I see no suggestion there that, for Scotland, the position should be regarded as having in any way altered. In particular, there is no suggestion that the duty which Lord Clyde identified in Smith should now be seen, contrary to what was said in Smith, "to carry with it a duty of investigation".

13. There is one final point I wish to make, and that relates to what was said by Lord Nicholls of Birkenhead in Royal Bank of Scotland v. Etridge (No. 2) regarding what, for the future, would be necessary if creditors in England were successfully to "shed" the constructive notice imputed to them. The relevant passage is again to be found at p. 1046 of the Report (para. 79) and is to the effect that the creditor should volunteer to the wife's solicitor "the necessary financial information" including, inter alia, "the current amount of the husband's indebtedness". So far, at least, as Scotland is concerned, this would traverse a strong and clear line of authority which is referred to by Lord Clyde in Smith, at p. 117. Accordingly, in my opinion, this is a further reason why their Lordships' decision in Royal Bank of Scotland v. Etridge (No. 2) should not - and, indeed, cannot - be regarded as touching on Scots law.
14. For all the foregoing reasons I am of opinion that in the present case there are no relevant averments that the pursuers have breached their duty of good faith, even assuming that undue influence on the part of Mr. Black were to be established. It follows that this appeal should be refused.

 

Clydesdale Bank Public Company v. Black [2002] ScotCS 130 (10th May, 2002)

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Coulsfield Lord Marnoch Lord Sutherland	XA65/01 OPINION OF LORD SUTHERLAND in APPEAL FOR DEFENDER From the Sheriffdom of North Strathclyde at Dumbarton in the cause CLYDESDALE BANK PUBLIC LIMITED COMPANY Pursuers and Respondents; against MRS. CATHERINE MARY BLACK Defender and Appellant: _______

 

 

Act: McNeill, Q.C.; Anderson Strathern, W.S. (Pursuers and Respondents)

Alt: Upton; Drummond Miller, W.S. (for Friels, Uddingston) (Defender and Appellant)

10 May 2002

1. The principal issue in this case is what is the nature and extent of the steps which require to be taken by a creditor to prevent a successful challenge by a guarantor where the guarantor is the spouse of the principal debtor and alleges that the guarantee was signed because of undue influence on the part of the debtor. This involves consideration of the cases of Barclays Bank plc v O'Brien 1994 1 AC 180; Smith v Bank of Scotland 1997 S.C. (H.L.) 111; and Royal Bank of Scotland plc v Etridge (No.2) 2001 3 WLR 1021. As it is clear that the whole basis for any steps being required at all may be different in England and Scotland, for present purposes the decision in Smith is by far the most important. Lord Jauncey in Smith said that applying the principles of Scots law only, he would have been disposed to dismiss the appeal, but did not feel able to dissent having regard to the practical advantages of applying the same law to similar transactions in both jurisdictions. It is accordingly to Lord Clyde's speech that one must look to discover why, and in what way, the development of the law in O'Brien was extended to Scotland. What he said was:

"It was not disputed that effect could be given in Scotland to the decision in O'Brien by the use of the concept of constructive notice... But it seems to me preferable to recognise the element of good faith which is required of the creditor on the constitution of a contract of cautionary and find there a proper basis for decision. The law already recognises, as I have sought to explain, that there may arise a duty of disclosure to a potential cautioner in certain circumstances. As a part of that same good faith which lies behind that duty it seems to me reasonable to accept that there should also be a duty in particular circumstances to give the potential cautioner certain advice. Thus in circumstances where the creditor should reasonably suspect that there may be factors bearing on the participation of the cautioner which might undermine the validity of the contract through his or her intimate relationship with the debtor, the duty would arise and would have to be fulfilled if the creditor is not to be prevented from later enforcing the contract. Such a duty does not alter the existing law regarding the duty, or the absence of a duty, to make representations. Nor does it carry with it a duty of investigation. This is simply a duty arising out of the good faith of the contract to give advice."

The steps to be taken are set out at p.122:

"Secondly if the duty arises, then it requires that the creditor should take certain steps to secure that he remains in good faith so far the proposed transaction is concerned. Whether there has in fact been or may yet be any conduct by the debtor directed at the cautioner which might vitiate the contract is not a matter necessarily to be explored by the creditor. All that is required of him is that he should take reasonable steps to secure that in relation to the proposed contract he acts throughout in good faith. So far as the substance of those steps is concerned it seems to me that it would be sufficient for the creditor to warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and to advise him or her to take independent advice. Of course, in accordance with the existing law, he will still have the duty to make a full and honest disclosure if occasion arises for that to be done. But apart from that it seems to me that the giving of the warning and the advice should be sufficient so far as Scots law is concerned to fulfil the duty on the creditor and secure that he remains in good faith in relation to the proposed transaction. As was recorded by the Lord President a practice has been recognised by banks and building societies of advising private individuals proposing to act as guarantors or cautioners for the liabilities of another to issue a warning regarding the consequences and to point out the importance of receiving independent advice. This practice may extend more widely than is required by the duty which I have described insofar as it may not be limited to cases where a close personal relationship exists, but adoption of the wider practice will clearly help to obviate any practical problem in deciding whether or not the duty arises in any given case."

The reference which Lord Clyde makes to the practice of banks is a reference to the Code on Banking Practice adopted by banks in Scotland in March 1992. The terms of paragraph 12.1 of that Code are set out in O'Brien at p.197-8 and it is apparent that the terms of the guarantee and Standard Security in the present case follow almost word for word the recommendation in the Code.

2. The guarantee in this case was signed on 8 November 1996 and the Standard Security on 25 November 1996. At these times the law relating to the issue was set out by the Inner House decision in Smith reported in 1996 S.L.T. 392. Even though the appeal to the House of Lords was allowed, that was done on the basis of a "development" in the law of Scotland to recognise the decision in O'Brien and to ensure conformity of approach in both jurisdictions. In my opinion, in considering what was the appropriate duty owed by a creditor in November 1996, the law to be looked at is that contained in the Inner House decision in Smith, particularly as the issue involves whether or not the creditor was acting in good faith. It seems to me that it would be difficult to say that someone was not acting in good faith when he was complying directly with the law apparently in force at that time. That these "developments" can not be regarded as retrospective is quite clear from what was said by Lord Browne-Wilkinson in O'Brien where he says:

"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 she is running by standing as a 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 these requirements if insists that the wife attend a private meeting....".

Similar observations are made in Etridge by Lord Nicholls at para.80. Be all that as it may, in my opinion the steps taken by the respondents to give warning and advice contained in both the guarantee and the Standard Security complied in full with the requirement of good faith as set out by Lord Clyde in Smith, even for the future. Whatever may be the desirability of harmonising the law so that the same protection is given to vulnerable persons in both jurisdictions, I do not think that this should be done if it involves departure from the principles of Scots law or by creeping so-called "development" of that law. If harmonisation is regarded as necessary, that, in my opinion, is the function of the legislature and not of the courts.

3. It only remains to consider the effect of Etridge. The decision in that case was to add yet further steps to be taken for the future by lenders in England to avoid being held to have constructive notice of the risk of undue influence being exerted against the guarantor. Lord Clyde took part in that case. What he said in his speech was

"The second point relates to the steps which were suggested in Barclays Bank plc v O'Brien as being appropriate for the lender to escape constructive notice of the wrongdoing in question. I agree that what was suggested in the case was not intended to be prescriptive. So far as past cases were concerned it was said (Lord Browne-Wilkinson at p.196) that the creditor 'can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice.' Those two courses of action were reflected in the Scottish case of Smith v Bank of Scotland by the suggestion which I made in relation to the corresponding situation under Scots law that 'it would be sufficient for the creditor to warn the potential cautioner of the consequences of entering into the proposed cautionary obligation and to advise him or her to take independent advice'. That statement echoed what was understood to be the existing practice recognised by banks and building societies and it seemed to me that steps of that kind ought to be enough to enable the creditor to counter any allegation on bad faith. But Lord Browne-Wilkinson proposed more stringent requirements for the avoidance of constructive notice in England for the future. These were that the creditor should insist '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 she is running and urged to take independent legal advice' (see p.196). He also recognised, at p.197, that there might be exceptional cases where undue influence was not simply possible but was probable and advised that in such cases 'the creditor to be safe will have to insist that the wife is separately advised'.

One course is for the lender himself to warn the surety of the risk and to recommend the taking of legal advice. But there may well be good reasons, particularly for banks, to feel it inappropriate or even unwise for them to be giving any detailed form of warning or explanation, and to take the view that it is preferable for that matter to be managed by a solicitor acting for the wife. It is certainly possible to suggest courses of action which shall be sufficient to absolve the creditor from constructive notice of any potential undue influence. Thus in the summary at the end of his speech Lord Browne-Wilkinson said, at p.199: 'Unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety (at a meeting not attended by the principal debtor) of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice'.

But matters of banking practice are principally matters for the banks themselves in light of the rights and liabilities which the law may impose upon them. I would not wish to prescribe what those practices should be. One can only suggest some courses of action which should meet the requirements of the law. These are not matters of ritual, the blind performance of which will secure the avoidance of doom, but sensible steps which seek to secure that the personal and commercial interests of the parties involved are secured with certainty and fairness. Necessarily the precise course to be adopted will depend upon the circumstances. In the Scottish case of Forsyth v Royal Bank of Scotland 2000 S.L.T. 1295 it appeared to the creditor that the wife had already had the benefit of professional legal advice. In such a case it may well be that no further steps need be taken by the creditor to safeguard his rights. Of course if the creditor knows or ought to know from the information available to him that the wife has not in fact received the appropriate advice then the transaction may be opened to challenge."

Obviously it has to be borne in mind that Lord Clyde's decision to agree in the result was taken in the context of English law. Furthermore, the comments which he makes as to the steps which have to be taken by a lender are also to be seen in the context of English law. I have quoted this passage in full to ascertain if there can be discerned any departure referable to Scots law from what he said in Smith. Having considered the matter carefully I am satisfied not only that he did not seek to extend (or further "develop") the law of Scotland but that he confirms what he said in Smith. I am therefore satisfied that Etridge makes no practical difference to the law of Scotland. In any event, again, it is difficult to see how it could have any bearing on whether or not the respondents acted in good faith in 1996. I do not consider that any inference can be drawn from what Lord Clyde said either in Smith or in Etridge that he was of opinion that in Scotland there was or should be a duty to investigate how far the written warnings and advice had been seen, understood and followed up by a guarantor and thereby "satisfy" themselves that all was well. To achieve such satisfaction would in my view require a lender to indulge in investigation of the type which it is agreed he has no duty to carry out. It follows that I am of opinion that the defender and appellant has failed to aver any relevant basis for saying that the pursuers and respondents failed in any duty owed by them to her, and that accordingly this appeal should be refused.

4. I would only add that what I have said so far has been on the assumption that the defender has averred sufficient to show that she was unduly influenced by her husband. I agree with your Lordships that her pleadings are seriously defective in this regard. For my own part I would have been inclined to agree with the courts below that she has not averred a relevant case of undue influence. In particular I find it totally unsatisfactory that a person who is imputing a failure to act in good faith on the part of another party should produce pleadings which, on one view, may be thought to be totally lacking in frankness. It is not necessary however to investigate this matter further as the appeal has been refused on another ground.