Lord Bingham of Cornhill Lord Nicholls of Birkenhead Lord Clyde
Lord Hobhouse of Wood-borough Lord Scott of Foscote
I have had the great advantage of reading in draft
the opinions prepared by each of my noble and learned friends.
The transactions which give rise to these appeals
are commonplace but of great social and economic importance. It is important
that a wife (or anyone in a like position) should not charge her interest in the
matrimonial home to secure the borrowing of her husband (or anyone in a like
position) without fully understanding the nature and effect of the proposed
transaction and that the decision is hers, to agree or not to agree. It is
important that lenders should feel able to advance money, in run-of-the-mill
cases with no abnormal features, on the security of the wife's interest in the
matrimonial home in reasonable confidence that, if appropriate procedures have
been followed in obtaining the security, it will be enforceable if the need for
enforcement arises. The law must afford both parties a measure of protection. It
cannot prescribe a code which will be proof against error, misunderstanding or
mishap. But it can indicate minimum requirements which, if met, will reduce the
risk of error, misunderstanding or mishap to an acceptable level. The paramount
need in this important field is that these minimum requirements should be clear,
simple and practically operable.
My Lords, in my respectful opinion these minimum
requirements are clearly identified in the opinions of my noble and learned
friends Lord Nicholls of Birkenhead and Lord Scott of Foscote. If these
requirements are met the risk that a wife has been misled by her husband as to
the facts of a proposed transaction should be eliminated or virtually so. The
risk that a wife has been overborne or coerced by her husband will not be
eliminated but will be reduced to a level which makes it proper for the lender
to proceed. While the opinions of Lord Nicholls and Lord Scott show some
difference of expression and approach, I do not myself discern any significant
difference of legal principle applicable to these cases, and I agree with both
opinions. But if I am wrong and such differences exist, it is plain that the
opinion of Lord Nicholls commands the unqualified support of all members of the
House.
In agreement with all members of the House, I
would allow the appeals of Mrs Wallace, Mrs Bennett and Desmond Banks & Co
and dismiss those of Mrs Etridge and Mrs Gill, in each case for the reasons
given by Lord Scott. I would allow the appeal of Mrs Harris, bearing in mind
that this is an interlocutory case, for the reasons given by Lord Hobhouse of
Woodborough. I would allow the appeal of Mrs Moore and dismiss that of Mrs
Coleman, in each case for the reasons given by Lord Scott.
LORD NICHOLLS OF BIRKENHEAD
My Lords,
Before your Lordships' House are appeals in eight
cases. Each case arises out of a transaction in which a wife charged her
interest in her home in favour of a bank as security for her husband's
indebtedness or the indebtedness of a company through which he carried on
business. The wife later asserted she signed the charge under the undue
influence of her husband. In Barclays Bank Plc v O'Brien [1994] 1 AC 180
your Lordships enunciated the principles applicable in this type of case. Since
then, many cases have come before the courts, testing the implications of the
O'Brien decision in a variety of different factual situations. Seven of
the present appeals are of this character. In each case the bank sought to
enforce the charge signed by the wife. The bank claimed an order for possession
of the matrimonial home. The wife raised a defence that the bank was on notice
that her concurrence in the transaction had been procured by her husband's undue
influence. The eighth appeal concerns a claim by a wife for damages from a
solicitor who advised her before she entered into a guarantee obligation of this
character.
Undue influence
The issues raised by these appeals make it
necessary to go back to first principles. Undue influence is one of the grounds
of relief developed by the courts of equity as a court of conscience. The
objective is to ensure that the influence of one person over another is not
abused. In everyday life people constantly seek to influence the decisions of
others. They seek to persuade those with whom they are dealing to enter into
transactions, whether great or small. The law has set limits to the means
properly employable for this purpose. To this end the common law developed a
principle of duress. Originally this was narrow in its scope, restricted to the
more blatant forms of physical coercion, such as personal violence.
Here, as elsewhere in the law, equity supplemented
the common law. Equity extended the reach of the law to other unacceptable forms
of persuasion. The law will investigate the manner in which the intention to
enter into the transaction was secured: 'how the intention was produced', in the
oft repeated words of Lord Eldon LC, from as long ago as 1807 (Huguenin v
Baseley 14 Ves 273, 300). If the intention was produced by an unacceptable
means, the law will not permit the transaction to stand. The means used is
regarded as an exercise of improper or 'undue' influence, and hence
unacceptable, whenever the consent thus procured ought not fairly to be treated
as the expression of a person's free will. It is impossible to be more precise
or definitive. The circumstances in which one person acquires influence over
another, and the manner in which influence may be exercised, vary too widely to
permit of any more specific criterion.
Equity identified broadly two forms of
unacceptable conduct. The first comprises overt acts of improper pressure or
coercion such as unlawful threats. Today there is much overlap with the
principle of duress as this principle has subsequently developed. The second
form arises out of a relationship between two persons where one has acquired
over another a measure of influence, or ascendancy, of which the ascendant
person then takes unfair advantage. An example from the 19th century, when much
of this law developed, is a case where an impoverished father prevailed upon his
inexperienced children to charge their reversionary interests under their
parents' marriage settlement with payment of his mortgage debts: see
Bainbrigge v Browne (1881) 18 Ch D 188.
In cases of this latter nature the influence one
person has over another provides scope for misuse without any specific overt
acts of persuasion. The relationship between two individuals may be such that,
without more, one of them is disposed to agree a course of action proposed by
the other. Typically this occurs when one person places trust in another to look
after his affairs and interests, and the latter betrays this trust by preferring
his own interests. He abuses the influence he has acquired. In Allcard v
Skinner (1887) 36 Ch D 145, a case well known to every law student, Lindley
LJ, at p 181, described this class of cases as those in which it was the duty of
one party to advise the other or to manage his property for him. In Zamet v
Hyman [1961] 1 WLR 1442, 1444-1445 Lord Evershed MR referred to
relationships where one party owed the other an obligation of candour and
protection.
The law has long recognised the need to prevent
abuse of influence in these 'relationship' cases despite the absence of evidence
of overt acts of persuasive conduct. The types of relationship, such as parent
and child, in which this principle falls to be applied cannot be listed
exhaustively. Relationships are infinitely various. Sir Guenter Treitel QC has
rightly noted that the question is whether one party has reposed sufficient
trust and confidence in the other, rather than whether the relationship between
the parties belongs to a particular type: see Treitel, The Law of
Contract, 10th ed (1999), pp 380-381. For example, the relation of banker
and customer will not normally meet this criterion, but exceptionally it may:
see National Westminster Bank Plc v Morgan [1985] AC 686, 707-709.
Even this test is not comprehensive. The
principle is not confined to cases of abuse of trust and confidence. It also
includes, for instance, cases where a vulnerable person has been exploited.
Indeed, there is no single touchstone for determining whether the principle is
applicable. Several expressions have been used in an endeavour to encapsulate
the essence: trust and confidence, reliance, dependence or vulnerability on the
one hand and ascendancy, domination or control on the other. None of these
descriptions is perfect. None is all embracing. Each has its proper place.
In CIBC Mortgages Plc v Pitt [1994] 1 AC 200 your Lordships' House decided that in cases of undue influence disadvantage
is not a necessary ingredient of the cause of action. It is not essential that
the transaction should be disadvantageous to the pressurised or influenced
person, either in financial terms or in any other way. However, in the nature of
things, questions of undue influence will not usually arise, and the exercise of
undue influence is unlikely to occur, where the transaction is innocuous. The
issue is likely to arise only when, in some respect, the transaction was
disadvantageous either from the outset or as matters turned out.
Burden of proof and presumptions
Whether a transaction was brought about by the
exercise of undue influence is a question of fact. Here, as elsewhere, the
general principle is that he who asserts a wrong has been committed must prove
it. The burden of proving an allegation of undue influence rests upon the person
who claims to have been wronged. This is the general rule. The evidence required
to discharge the burden of proof depends on the nature of the alleged undue
influence, the personality of the parties, their relationship, the extent to
which the transaction cannot readily be accounted for by the ordinary motives of
ordinary persons in that relationship, and all the circumstances of the
case.
Proof that the complainant placed trust and
confidence in the other party in relation to the management of the complainant's
financial affairs, coupled with a transaction which calls for explanation, will
normally be sufficient, failing satisfactory evidence to the contrary, to
discharge the burden of proof. On proof of these two matters the stage is set
for the court to infer that, in the absence of a satisfactory explanation, the
transaction can only have been procured by undue influence. In other words,
proof of these two facts is prima facie evidence that the defendant abused the
influence he acquired in the parties' relationship. He preferred his own
interests. He did not behave fairly to the other. So the evidential burden then
shifts to him. It is for him to produce evidence to counter the inference which
otherwise should be drawn.
The case of Bainbrigge v Browne, 18 Ch D
188, already mentioned, provides a good illustration of this commonplace type of
forensic exercise. Fry J held, at p 196, that there was no direct evidence upon
which he could rely as proving undue pressure by the father. But there existed
circumstances 'from which the court will infer pressure and undue influence.'
None of the children were entirely emancipated from their father's control. None
seemed conversant with business. These circumstances were such as to cast the
burden of proof upon the father. He had made no attempt to discharge that
burden. He did not appear in court at all. So the children's claim succeeded.
Again, more recently, in National Westminster Bank Plc v Morgan [1985] AC 686, 707, Lord Scarman noted that a relationship of banker and customer may
become one in which a banker acquires a dominating influence. If he does, and a
manifestly disadvantageous transaction is proved, 'there would then be room' for
a court to presume that it resulted from the exercise of undue influence.
Generations of equity lawyers have conventionally
described this situation as one in which a presumption of undue influence
arises. This use of the term 'presumption' is descriptive of a shift in the
evidential onus on a question of fact. When a plaintiff succeeds by this route
he does so because he has succeeded in establishing a case of undue influence.
The court has drawn appropriate inferences of fact upon a balanced consideration
of the whole of the evidence at the end of a trial in which the burden of proof
rested upon the plaintiff. The use, in the course of the trial, of the forensic
tool of a shift in the evidential burden of proof should not be permitted to
obscure the overall position. These cases are the equitable counterpart of
common law cases where the principle of res ipsa loquitur is invoked. There is a
rebuttable evidential presumption of undue influence.
The availability of this forensic tool in cases
founded on abuse of influence arising from the parties' relationship has led to
this type of case sometimes being labelled 'presumed undue influence'. This is
by way of contrast with cases involving actual pressure or the like, which are
labelled 'actual undue influence': see Bank of Credit and Commerce
International SA v Aboody [1990] I QB 923, 953, and Royal Bank of
Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, 711-712, paras 5-7. This
usage can be a little confusing. In many cases where a plaintiff has claimed
that the defendant abused the influence he acquired in a relationship of trust
and confidence the plaintiff has succeeded by recourse to the rebuttable
evidential presumption. But this need not be so. Such a plaintiff may succeed
even where this presumption is not available to him; for instance, where the
impugned transaction was not one which called for an explanation.
The evidential presumption discussed above is to
be distinguished sharply from a different form of presumption which arises in
some cases. The law has adopted a sternly protective attitude towards certain
types of relationship in which one party acquires influence over another who is
vulnerable and dependent and where, moreover, substantial gifts by the
influenced or vulnerable person are not normally to be expected. Examples of
relationships within this special class are parent and child, guardian and ward,
trustee and beneficiary, solicitor and client, and medical adviser and patient.
In these cases the law presumes, irrebuttably, that one party had influence over
the other. The complainant need not prove he actually reposed trust and
confidence in the other party. It is sufficient for him to prove the existence
of the type of relationship.
It is now well established that husband and wife
is not one of the relationships to which this latter principle applies. In
Yerkey v Jones (1939) 63 CLR
649, 675 Dixon J explained the reason. The Court of Chancery was not blind
to the opportunities of obtaining and unfairly using influence over a wife which
a husband often possesses. But there is nothing unusual or strange in a wife,
from motives of affection or for other reasons, conferring substantial financial
benefits on her husband. Although there is no presumption, the court will
nevertheless note, as a matter of fact, the opportunities for abuse which flow
from a wife's confidence in her husband. The court will take this into account
with all the other evidence in the case. Where there is evidence that a husband
has taken unfair advantage of his influence over his wife, or her confidence in
him, 'it is not difficult for the wife to establish her title to relief': see
In re Lloyds Bank Ltd, Bomze v Bomze [1931] 1 Ch 289, at p 302, per
Maugham J.
Independent advice
Proof that the complainant received advice from a
third party before entering into the impugned transaction is one of the matters
a court takes into account when weighing all the evidence. The weight, or
importance, to be attached to such advice depends on all the circumstances. In
the normal course, advice from a solicitor or other outside adviser can be
expected to bring home to a complainant a proper understanding of what he or she
is about to do. But a person may understand fully the implications of a proposed
transaction, for instance, a substantial gift, and yet still be acting under the
undue influence of another. Proof of outside advice does not, of itself,
necessarily show that the subsequent completion of the transaction was free from
the exercise of undue influence. Whether it will be proper to infer that outside
advice had an emancipating effect, so that the transaction was not brought about
by the exercise of undue influence, is a question of fact to be decided having
regard to all the evidence in the case.
Manifest disadvantage
As already noted, there are two prerequisites to
the evidential shift in the burden of proof from the complainant to the other
party. First, that the complainant reposed trust and confidence in the other
party, or the other party acquired ascendancy over the complainant. Second, that
the transaction is not readily explicable by the relationship of the
parties.
Lindley LJ summarised this second prerequisite in
the leading authority of Allcard v Skinner, 36 Ch D 145, where the donor
parted with almost all her property. Lindley LJ pointed out that where a gift of
a small amount is made to a person standing in a confidential relationship to
the donor, some proof of the exercise of the influence of the donee must be
given. The mere existence of the influence is not enough. He continued, at p
185:
'But if the gift is so large as not to be reasonably accounted for on the
ground of friendship, relationship, charity, or other ordinary motives on
which ordinary men act, the burden is upon the donee to support the gift.'
In Bank of Montreal v Stuart [1911] AC 120, 137 Lord Macnaghten used
the phrase 'immoderate and irrational' to describe this concept.
The need for this second prerequisite has
recently been questioned: see Nourse LJ in Barclays Bank Plc v Coleman
[2001] QB, 20, 30-32, one of the cases under appeal before your Lordships'
House. Mr Sher QC invited your Lordships to depart from the decision of the
House on this point in National Westminster Bank Plc v Morgan [1985] AC 686.
My Lords, this is not an invitation I would
accept. The second prerequisite, as expressed by Lindley LJ, is good sense. It
is a necessary limitation upon the width of the first prerequisite. It would be
absurd for the law to presume that every gift by a child to a parent, or every
transaction between a client and his solicitor or between a patient and his
doctor, was brought about by undue influence unless the contrary is
affirmatively proved. Such a presumption would be too far-reaching. The law
would out of touch with everyday life if the presumption were to apply to every
Christmas or birthday gift by a child to a parent, or to an agreement whereby a
client or patient agrees to be responsible for the reasonable fees of his legal
or medical adviser. The law would be rightly open to ridicule, for transactions
such as these are unexceptionable. They do not suggest that something may be
amiss. So something more is needed before the law reverses the burden of proof,
something which calls for an explanation. When that something more is present,
the greater the disadvantage to the vulnerable person, the more cogent must be
the explanation before the presumption will be regarded as rebutted.
This was the approach adopted by Lord Scarman in
National Westminster Bank Plc v Morgan [1985] AC 686, 703-707. He cited
Lindley LJ's observations in Allcard v Skinner, 36 Ch D 145, 185, which I
have set out above. He noted that whatever the legal character of the
transaction, it must constitute a disadvantage sufficiently serious to require
evidence to rebut the presumption that in the circumstances of the parties'
relationship, it was procured by the exercise of undue influence. Lord Scarman
concluded, at p 704:
'The Court of Appeal erred in law in holding that the presumption of undue
influence can arise from the evidence of the relationship of the parties
without also evidence that the transaction itself was wrongful in that it
constituted an advantage taken of the person subjected to the influence
which, failing proof to the contrary, was explicable only on the basis that
undue influence had been exercised to procure it.' (Emphasis added)
Lord Scarman attached the label 'manifest
disadvantage' to this second ingredient necessary to raise the presumption. This
label has been causing difficulty. It may be apt enough when applied to
straightforward transactions such as a substantial gift or a sale at an
undervalue. But experience has now shown that this expression can give rise to
misunderstanding. The label is being understood and applied in a way which does
not accord with the meaning intended by Lord Scarman, its originator.
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.
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.
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 [1985] AC 686, in the passages I
have cited.
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.
I have emphasised the phrase 'in the ordinary
course'. There will be cases where a wife's signature of a guarantee or a charge
of her share in the matrimonial home does call for explanation. Nothing I have
said above is directed at such a case.
A cautionary note
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.
Inaccurate explanations of a proposed transaction
are a different matter. So are cases where a husband, in whom a wife has reposed
trust and confidence for the management of their financial affairs, prefers his
interests to hers and makes a choice for both of them on that footing. Such a
husband abuses the influence he has. He fails to discharge the obligation of
candour and fairness he owes a wife who is looking to him to make the major
financial decisions.
The complainant and third parties: suretyship transactions
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 percent 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.
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.
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.
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. The House decided
what are the steps a bank should take to ensure it is not affected by any claim
the wife may have that her signature of the documents was procured by the undue
influence or other wrong of her husband. Like every compromise, the outcome
falls short of achieving in full the objectives of either of the two competing
interests. In particular, the steps required of banks will not guarantee that,
in future, wives will not be subjected to undue influence or misled when
standing as sureties. Short of prohibiting this type of suretyship transaction
altogether, there is no way of achieving that result, desirable although it is.
What passes between a husband and wife in this regard in the privacy of their
own home is not capable of regulation or investigation as a prelude to the wife
entering into a suretyship transaction.
The jurisprudential route by which the House
reached its conclusion in O'Brien's case has attracted criticism from
some commentators. It has been said to involve artificiality and thereby create
uncertainty in the law. I must first consider this criticism. In the ordinary
course a bank which takes a guarantee security from the wife of its customer
will be altogether ignorant of any undue influence the customer may have
exercised in order to secure the wife's concurrence. In O'Brien Lord
Browne-Wilkinson prayed in aid the doctrine of constructive notice. In
circumstances he identified, a creditor is put on inquiry. When that is so, the
creditor 'will have constructive notice of the wife's rights' unless the
creditor takes reasonable steps to satisfy himself that the wife's agreement to
stand surety has been properly obtained: see [1994] 1 AC 180, 196.
Lord Browne-Wilkinson would be the first to
recognise this is not a conventional use of the equitable concept of
constructive notice. The traditional use of this concept concerns the
circumstances in which a transferee of property who acquires a legal estate from
a transferor with a defective title may nonetheless obtain a good title, that
is, a better title than the transferor had. That is not the present case. The
bank acquires its charge from the wife, and there is nothing wrong with her
title to her share of the matrimonial home. The transferor wife is seeking to
resile from the very transaction she entered into with the bank, on the ground
that her apparent consent was procured by the undue influence or other
misconduct, such as misrepresentation, of a third party (her husband). She is
seeking to set aside her contract of guarantee and, with it, the charge she gave
to the bank.
The traditional view of equity in this tripartite
situation seems to be that a person in the position of the wife will only be
relieved of her bargain if the other party to the transaction (the bank, in the
present instance) was privy to the conduct which led to the wife's entry into
the transaction. Knowledge is required: see Cobbett v Brock (1855) 20
Beav 524, 528, 531, per Sir John Romilly MR, Kempson v Ashbee (1874) LR
10 Ch App 15, 21, per James LJ, and Bainbrigge v Browne, 18 Ch D 188,
197, per Fry J. The law imposes no obligation on one party to a transaction to
check whether the other party's concurrence was obtained by undue influence. But
O'Brien has introduced into the law the concept that, in certain
circumstances, a party to a contract may lose the benefit of his contract,
entered into in good faith, if he ought to have known that the other's
concurrence had been procured by the misconduct of a third party.
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.
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 [1994] 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.
The route selected in O'Brien ought not to
have an unsettling effect on established principles of contract. O'Brien
concerned suretyship transactions. These are tripartite transactions. They
involve the debtor as well as the creditor and the guarantor. The guarantor
enters into the transaction at the request of the debtor. The guarantor assumes
obligations. On the face of the transaction the guarantor usually receives no
benefit in return, unless the guarantee is being given on a commercial basis.
Leaving aside cases where the relationship between the surety and the debtor is
commercial, a guarantee transaction is one-sided so far as the guarantor is
concerned. The creditor knows this. Thus the decision in O'Brien is
directed at a class of contracts which has special features of its own. That
said, I must at a later stage in this speech return to the question of the wider
implications of the O'Brien decision.
The threshold: when the bank is put on inquiry
In O'Brien the House considered the
circumstances in which a bank, or other creditor, is 'put on inquiry.' Strictly
this is a misnomer. As already noted, a bank is not required to make inquiries.
But it will be convenient to use the terminology which has now become accepted
in this context. The House set a low level for the threshold which must be
crossed before a bank is put on inquiry. For practical reasons the level is set
much lower than is required to satisfy a court that, failing contrary evidence,
the court may infer that the transaction was procured by undue influence. Lord
Browne-Wilkinson said ([1994] 1 AC 180, 196):
'Therefore in my judgment a creditor in 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.'
In my view, this passage, read in context, is to be taken to mean, quite
simply, that a bank is put on inquiry whenever a wife offers to stand surety for
her husband's debts.
The Court of Appeal, comprising Stuart-Smith,
Millett and Morritt LJJ, interpreted this passage more restrictively. The
threshold, the court said, is somewhat higher. Where condition (a) is satisfied,
the bank is put on inquiry if, but only if, the 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: see
Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, 719.
I respectfully disagree. I do not read (a) and
(b) as factual conditions which must be proved in each case before a bank is put
on inquiry. I do not understand Lord Browne-Wilkinson to have been saying that,
in husband and wife cases, whether the bank is put on inquiry depends on its
state of knowledge of the parties' marriage, or of the degree of trust and
confidence the particular wife places in her husband in relation to her
financial affairs. That would leave banks in a state of considerable uncertainty
in a situation where it is important they should know clearly where they stand.
The test should be simple and clear and easy to apply in a wide range of
circumstances. I read (a) and (b) as Lord Browne-Wilkinson's broad explanation
of the reason why a creditor is put on inquiry when a wife offers to stand
surety for her husband's debts. These are the two factors which, taken together,
constitute the underlying rationale.
The position is likewise if the husband stands
surety for his wife's debts. Similarly, in the case of unmarried couples,
whether heterosexual or homosexual, where the bank is aware of the relationship:
see Lord Browne-Wilkinson in O'Brien's case, at p 198. Cohabitation is
not essential. The Court of Appeal rightly so decided in Massey v Midland
Bank Plc [1995] 1 All ER 929: see Steyn LJ, at p 933.
As to the type of transactions where a bank is
put on inquiry, the case where a wife becomes surety for her husband's debts is,
in this context, a straightforward case. The bank is put on inquiry. On the
other side of the line is the case where money is being advanced, or has been
advanced, to husband and wife jointly. In such a case the bank is not put on
inquiry, unless the bank is aware the loan is being made for the husband's
purposes, as distinct from their joint purposes. That was decided in CIBC
Mortgages Plc v Pitt [1994] 1 AC 200
Less clear cut is the case where the wife becomes
surety for the debts of a company whose shares are held by her and her husband.
Her shareholding may be nominal, or she may have a minority shareholding or an
equal shareholding with her husband. In my view the bank is put on inquiry in
such cases, even when the wife is a director or secretary of the company. Such
cases cannot be equated with joint loans. The shareholding interests, and the
identity of the directors, are not a reliable guide to the identity of the
persons who actually have the conduct of the company's business.
The steps a bank should take
The principal area of controversy on these
appeals concerns the steps a bank should take when it has been put on inquiry.
In O'Brien Lord Browne-Wilkinson, at [1994] 1 AC 180, 196-197, said that
a bank 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. That test is applicable to past transactions. All the cases now
before your Lordships' House fall into this category. For the future a
bank satisfies these requirements if it insists that the wife attend a private
meeting with a representative of the bank 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. In exceptional cases the bank, to be safe, has to
insist that the wife is separately advised.
The practice of the banks involved in the present
cases, and it seems reasonable to assume this is the practice of banks
generally, is not to have a private meeting with the wife. Nor do the banks
themselves take any other steps to bring home to the wife the risk she is
running. This has continued to be the practice since the decision in
O'Brien's case. Banks consider they would stand to lose more than they
would gain by holding a private meeting with the wife. They are, apparently,
unwilling to assume the responsibility of advising the wife at such a meeting.
Instead, the banking practice remains, as before, that in general the bank
requires a wife to seek legal advice. The bank seeks written confirmation from a
solicitor that he has explained the nature and effect of the documents to the
wife.
Many of the difficulties which have arisen in the
present cases stem from serious deficiencies, or alleged deficiencies, in the
quality of the legal advice given to the wives. I say 'alleged', because three
of the appeals before your Lordships' House have not proceeded beyond the
interlocutory stage. The banks successfully applied for summary judgment. In
these cases the wife's allegations, made in affidavit form, have not been tested
by cross-examination. On behalf of the wives it has been submitted that under
the current practice the legal advice is often perfunctory in the extreme and,
further, that everyone, including the banks, knows this. Independent legal
advice is a fiction. The system is a charade. In practice it provides little or
no protection for a wife who is under a misapprehension about the risks involved
or who is being coerced into signing. She may not even know the present state of
her husband's indebtedness.
My Lords, it is plainly neither desirable nor
practicable that banks should be required to attempt to discover for themselves
whether a wife's consent is being procured by the exercise of undue influence of
her husband. This is not a step the banks should be expected to take. Nor,
further, is it desirable or practicable that banks should be expected to insist
on confirmation from a solicitor that the solicitor has satisfied himself that
the wife's consent has not been procured by undue influence. As already noted,
the circumstances in which banks are put on inquiry are extremely wide. They
embrace every case where a wife is entering into a suretyship transaction in
respect of her husband's debts. Many, if not most, wives would be understandably
outraged by having to respond to the sort of questioning which would be
appropriate before a responsible solicitor could give such a confirmation. In
any event, solicitors are not equipped to carry out such an exercise in any
really worthwhile way, and they will usually lack the necessary materials.
Moreover, the legal costs involved, which would inevitably fall on the husband
who is seeking financial assistance from the bank, would be substantial. To
require such an intrusive, inconclusive and expensive exercise in every case
would be an altogether disproportionate response to the need to protect those
cases, presumably a small minority, where a wife is being wronged.
The furthest a bank can be expected to go is to
take reasonable steps to satisfy itself that the wife has had brought home to
her, in a meaningful way, the practical implications of the proposed
transaction. This does not wholly eliminate the risk of undue influence or
misrepresentation. But it does mean that a wife enters into a transaction with
her eyes open so far as the basic elements of the transaction are concerned.
This is the point at which, in the O'Brien
case, the House decided that the balance between the competing interests
should be held. A bank may itself provide the necessary information directly to
the wife. Indeed, it is best equipped to do so. But banks are not following that
course. Ought they to be obliged to do so in every case? I do not think Lord
Browne-Wilkinson so stated in O'Brien. I do not understand him to have
said that a personal meeting was the only way a bank could discharge its
obligation to bring home to the wife the risks she is running. It seems to me
that, provided a suitable alternative is available, banks ought not to be
compelled to take this course. Their reasons for not wishing to hold a personal
meeting are understandable. Commonly, when a bank seeks to enforce a security
provided by a customer, it is met with a defence based on assurances alleged to
have been given orally by a branch manager at an earlier stage: that the bank
would continue to support the business, that the bank would not call in its
loan, and so forth. Lengthy litigation ensues. Sometimes the allegations prove
to be well founded, sometimes not. Banks are concerned to avoid the prospect of
similar litigation which would arise in guarantee cases if they were to adopt a
practice of holding a meeting with a wife at which the bank's representative
would explain the proposed guarantee transaction. It is not unreasonable for the
banks to prefer that this task should be undertaken by an independent legal
adviser.
I shall return later to the steps a bank should
take when it follows this course. Suffice to say, these steps, together with
advice from a solicitor acting for the wife, ought to provide the substance of
the protection which O'Brien intended a wife should have. Ordinarily it
will be reasonable that a bank should be able to rely upon confirmation from a
solicitor, acting for the wife, that he has advised the wife appropriately.
The position will be otherwise if the bank knows
that the solicitor has not duly advised the wife or, I would add, if the bank
knows facts from which it ought to have realised that the wife has not received
the appropriate advice. In such circumstances the bank will proceed at its own
risk.
The content of the legal advice
In Royal Bank of Scotland Plc v Etridge (No
2) [1998] 4 All ER 705, 715, para 19, the Court of Appeal set out its views
of the duties of a solicitor in this context:
'A solicitor who is instructed to advise a person who may be subject to
the undue influence of another must bear in mind that it is not sufficient
that she understands the nature and effect of the transaction if she is so
affected by the influence of the other that she cannot make an independent
decision of her own. It is not sufficient to explain the documentation and
ensure she understands the nature of the transaction and wishes to carry it
out: see Powell v Powell [1900] 1 Ch 243, 247, approved in Wright v
Carter [1903] 1 Ch 27. His duty is to satisfy himself that his client is
free from improper influence, and the first step must be to ascertain whether
it is one into which she could sensibly be advised to enter if free from such
influence. If he is not so satisfied, it is his duty to advise her not to
enter into it, and to refuse to act further for her in the implementation of
the transaction if she persists. In this event, while the contents of his
advice must remain confidential, he should inform the other parties (including
the bank) that he has seen his client and given her certain advice, and that
as a result he has declined to act for her any further. He must in any event
advise her that she is under no obligation to enter into the transaction at
all and, if she still wishes to do so, that she is not bound to accept the
terms of any document which has been put before her: see Credit Lyonnais
Bank Nederland NV v Burch [1997] 1 All ER 144.'
I am unable to accept this as an accurate
formulation of a solicitor's duties in cases such as those now under
consideration. In some respects it goes much too far. The observations of
Farwell J in Powell v Powell [1900] 1 Ch 243, 247, should not be pressed
unduly widely. Powell v Powell was a case where strong moral pressure was
applied by a stepmother to a girl who was only just twenty one. She was regarded
as not really capable of dealing irrevocably with her parent or guardian in the
matter of a substantial settlement. Farwell J's observations cannot be regarded
as of general application in all cases where a solicitor is giving advice to a
person who may have been subject to undue influence.
More pertinently, in In re Coomber, Coomber v
Coomber [1911] 1 Ch 723, 730, Fletcher Moulton LJ summarised the general
rules applicable to cases of persons who are competent to form an opinion of
their own:
'All that is necessary is that some independent person, free from any
taint of the relationship, or of the consideration of interest which would
affect the act, should put clearly before the person what are the nature and
the consequences of the act. It is for adult persons of competent mind to
decide whether they will do an act, and I do not think that independent and
competent advice means independent and competent approval. It simply means
that the advice shall be removed entirely from the suspected atmosphere; and
that from the clear language of an independent mind, they should know
precisely what they are doing.'
Thus, in the present type of case it is not for
the solicitor to veto the transaction by declining to confirm to the bank that
he has explained the documents to the wife and the risks she is taking upon
herself. If the solicitor considers the transaction is not in the wife's best
interests, he will give reasoned advice to the wife to that effect. But at the
end of the day the decision on whether to proceed is the decision of the client,
not the solicitor. A wife is not to be precluded from entering into a
financially unwise transaction if, for her own reasons, she wishes to do so.
That is the general rule. There may, of course,
be exceptional circumstances where it is glaringly obvious that the wife is
being grievously wronged. In such a case the solicitor should decline to act
further. In Wright v Carter [1903] 1 Ch 27, 57-58, Stirling LJ approved
Farwell J's observations in Powell v Powell [1900] 1 Ch 243, 247. But he
did so by reference to the extreme example of a poor man divesting himself of
all his property in favour of his solicitor.
In Royal Bank of Scotland Plc v Etridge (No
2) [1998] 4 All ER 705, 722, para 49, the Court of Appeal said that if the
transaction is 'one into which no competent solicitor could properly advise the
wife to enter', the availability of legal advice is insufficient to avoid the
bank being fixed with constructive notice. It follows from the views expressed
above that I am unable to agree with the Court of Appeal on this point.
I turn to consider the scope of the
responsibilities of a solicitor who is advising the wife. In identifying what
are the solicitor's responsibilities the starting point must always be the
solicitor's retainer. What has he been retained to do? As a general proposition,
the scope of a solicitor's duties is dictated by the terms, whether express or
implied, of his retainer. In the type of case now under consideration the
relevant retainer stems from the bank's concern to receive confirmation from the
solicitor that, in short, the solicitor has brought home to the wife the risks
involved in the proposed transaction. As a first step the solicitor will need to
explain to the wife the purpose for which he has become involved at all. He
should explain that, should it ever become necessary, the bank will rely upon
his involvement to counter any suggestion that the wife was overborne by her
husband or that she did not properly understand the implications of the
transaction. The solicitor will need to obtain confirmation from the wife that
she wishes him to act for her in the matter and to advise her on the legal and
practical implications of the proposed transaction.
When an instruction to this effect is
forthcoming, the content of the advice required from a solicitor before giving
the confirmation sought by the bank will, inevitably, depend upon the
circumstances of the case. Typically, the advice a solicitor can be expected to
give should cover the following matters as the core minimum. (1) He will need to
explain the nature of the documents and the practical consequences these will
have for the wife if she signs them. She could lose her home if her husband's
business does not prosper. Her home may be her only substantial asset, as well
as the family's home. She could be made bankrupt. (2) He will need to point out
the seriousness of the risks involved. The wife should be told the purpose of
the proposed new facility, the amount and principal terms of the new facility,
and that the bank might increase the amount of the facility, or change its
terms, or grant a new facility, without reference to her. She should be told the
amount of her liability under her guarantee. The solicitor should discuss the
wife's financial means, including her understanding of the value of the property
being charged. The solicitor should discuss whether the wife or her husband has
any other assets out of which repayment could be made if the husband's business
should fail. These matters are relevant to the seriousness of the risks
involved. (3) The solicitor will need to state clearly that the wife has a
choice. The decision is hers and hers alone. Explanation of the choice facing
the wife will call for some discussion of the present financial position,
including the amount of the husband's present indebtedness, and the amount of
his current overdraft facility. (4) The solicitor should check whether the wife
wishes to proceed. She should be asked whether she is content that the solicitor
should write to the bank confirming he has explained to her the nature of the
documents and the practical implications they may have for her, or whether, for
instance, she would prefer him to negotiate with the bank on the terms of the
transaction. Matters for negotiation could include the sequence in which the
various securities will be called upon or a specific or lower limit to her
liabilities. The solicitor should not give any confirmation to the bank without
the wife's authority.
The solicitor's discussion with the wife should
take place at a face-to-face meeting, in the absence of the husband. It goes
without saying that the solicitor's explanations should be couched in suitably
non-technical language. It also goes without saying that the solicitor's task is
an important one. It is not a formality.
The solicitor should obtain from the bank any
information he needs. If the bank fails for any reason to provide information
requested by the solicitor, the solicitor should decline to provide the
confirmation sought by the bank.
As already noted, the advice which a solicitor
can be expected to give must depend on the particular facts of the case. But I
have set out this 'core minimum' in some detail, because the quality of the
legal advice is the most disturbing feature of some of the present appeals. The
perfunctory nature of the advice may well be largely due to a failure by some
solicitors to understand what is required in these cases.
Independent advice
I turn next to the much-vexed question whether
the solicitor advising the wife must act for the wife alone. Or, at the very
least, the solicitor must not act for the husband or the bank in the current
transaction save in a wholly ministerial capacity, such as carrying out
conveyancing formalities or supervising the execution of documents and
witnessing signatures. Commonly, in practice, the solicitor advising the wife
will be the solicitor acting also for her husband either in the particular
transaction or generally.
The first point to note is that this question
cannot be answered by reference to reported decisions. The steps a bank must
take once it is put on inquiry, if it is to avoid having constructive notice of
the wife's rights, are not the subject of exposition in earlier authority. This
is a novel situation, created by the O'Brien decision.
Next, a simple and clear rule is needed,
preferably of well nigh universal application. In some cases a bank deals
directly with a husband and wife and has to take the initiative in requiring the
wife to obtain legal advice. In other cases, a bank may deal throughout with
solicitors already acting for the husband and wife. The case of Bank of
Baroda v Rayarel [1995] 2 FLR 376 is an example of the latter type of case.
It would not be satisfactory to attempt to draw a distinction along these lines.
Any such distinction would lack a principled base. Inevitably, in practice, the
distinction would disintegrate in confusion.
Thirdly, here again, a balancing exercise is
called for. Some features point in one direction, others in the opposite
direction. Factors favouring the need for the solicitor to act for the wife
alone include the following. Sometimes a wife may be inhibited in discussion
with a solicitor who is also acting for the husband or whose main client is the
husband. This occurred in Banco Exterior Internacional v Mann [1995] 1
All ER 936: see the finding of the judge, at p 941F-G. Sometimes a solicitor
whose main client is the husband may not, in practice, give the same
single-minded attention to the wife's position as would a solicitor acting
solely for the wife. Her interests may rank lower in the solicitor's scale of
priorities, perhaps unconsciously, than the interests of the husband. Instances
of incompetent advice, or worse, which have come before the court might perhaps
be less likely to recur if a solicitor were instructed to act for the wife alone
and gave advice solely to her. As a matter of general understanding, independent
advice would suggest that the solicitor should not be acting in the same
transaction for the person who, if there is any undue influence, is the source
of that influence.
The contrary view is that the solicitor may also
act for the husband or the bank, provided the solicitor is satisfied that this
is in the wife's best interests and satisfied also that this will not give rise
to any conflicts of duty or interest. The principal factors favouring this
approach are as follows. A requirement that a wife should receive advice from a
solicitor acting solely for her will frequently add significantly to the legal
costs. Sometimes a wife will be happier to be advised by a family solicitor
known to her than by a complete stranger. Sometimes a solicitor who knows both
husband and wife and their histories will be better placed to advise than a
solicitor who is a complete stranger.
In my view, overall the latter factors are more
weighty than the former. The advantages attendant upon the employment of a
solicitor acting solely for the wife do not justify the additional expense this
would involve for the husband. When accepting instructions to advise the wife
the solicitor assumes responsibilities directly to her, both at law and
professionally. These duties, and this is central to the reasoning on this
point, are owed to the wife alone. In advising the wife the solicitor is acting
for the wife alone. He is concerned only with her interests. I emphasise,
therefore, that in every case the solicitor must consider carefully whether
there is any conflict of duty or interest and, more widely, whether it would be
in the best interests of the wife for him to accept instructions from her. If he
decides to accept instructions, his assumption of legal and professional
responsibilities to her ought, in the ordinary course of things, to provide
sufficient assurance that he will give the requisite advice fully, carefully and
conscientiously. Especially so, now that the nature of the advice called for has
been clarified. If at any stage the solicitor becomes concerned that there is a
real risk that other interests or duties may inhibit his advice to the wife he
must cease to act for her.
Agency
No system ever works perfectly. There will always
be cases where things go wrong, sometimes seriously wrong. The next question
concerns the position when a solicitor has accepted instructions to advise a
wife but he fails to do so properly. He fails to give her the advice needed to
bring home to her the practical implications of her standing as surety. What
then? The wife has a remedy in damages against the negligent solicitor. But what
is the position of the bank who proceeded in the belief that the wife had been
given the necessary advice?
Mr Sher contended that, depending on the facts,
the solicitor should be regarded as the agent of the bank. Commonly, what
happens is that the bank asks the solicitor acting for the husband to undertake
the conveyancing formalities on behalf of the bank. The bank also asks the
solicitor to undertake the further task of explaining the nature and effect of
the documents to the wife, and then confirming to the bank that he has done so.
In carrying out these requested tasks, it was submitted, the solicitor is acting
for the bank. The bank requires the solicitor to advise the wife, not for her
benefit, but for the benefit and protection of the bank. Any deficiencies in the
advice given to the wife should be attributed to the bank. In this regard, it
was submitted, the solicitor's knowledge is to be imputed to the bank. A
certificate furnished by the solicitor to the bank should not prejudice the
position of the wife when, as happened in several cases, the contents of the
certificate are untrue. If the solicitor has not given the wife any advice, her
rights should not be diminished by the solicitor telling the bank that she has
been fully advised.
I cannot accept this analysis. Confirmation from
the solicitor that he has advised the wife is one of the bank's preconditions
for completion of the transaction. But it is central to this arrangement that in
advising the wife the solicitor is acting for the wife and no one else. The bank
does not have, and is intended not to have, any knowledge of or control over the
advice the solicitor gives the wife. The solicitor is not accountable to the
bank for the advice he gives to the wife. To impute to the bank knowledge of
what passed between the solicitor and the wife would contradict this essential
feature of the arrangement. The mere fact that, for its own purposes, the bank
asked the solicitor to advise the wife does not make the solicitor the bank's
agent in giving that advice.
In the ordinary case, therefore, deficiencies in
the advice given are a matter between the wife and her solicitor. The bank is
entitled to proceed on the assumption that a solicitor advising the wife has
done his job properly. I have already mentioned what is the bank's position if
it knows this is not so, or if it knows facts from which it ought to have
realised this is not so.
Obtaining the solicitor's confirmation
I now return to the steps a bank should take when
it has been put on inquiry and for its protection is looking to the fact that
the wife has been advised independently by a solicitor.
(1) One of the unsatisfactory features in some of the
cases is the late stage at which the wife first became involved in the
transaction. In practice she had no opportunity to express a view on the
identity of the solicitor who advised her. She did not even know that the
purpose for which the solicitor was giving her advice was to enable him to send,
on her behalf, the protective confirmation sought by the bank. Usually the
solicitor acted for both husband and wife.
Since the bank is looking for its protection to legal advice
given to the wife by a solicitor who, in this respect, is acting solely for her,
I consider the bank should take steps to check directly with the wife the
name of the solicitor she wishes to act for her. To this end, in future the bank
should communicate directly with the wife, informing her that for its own
protection it will require written confirmation from a solicitor, acting for
her, to the effect that the solicitor has fully explained to her the nature of
the documents and the practical implications they will have for her. She should
be told that the purpose of this requirement is that thereafter she should not
be able to dispute she is legally bound by the documents once she has signed
them. She should be asked to nominate a solicitor whom she is willing to
instruct to advise her, separately from her husband, and act for her in giving
the necessary confirmation to the bank. She should be told that, if she wishes,
the solicitor may be the same solicitor as is acting for her husband in the
transaction. If a solicitor is already acting for the husband and the wife, she
should be asked whether she would prefer that a different solicitor should act
for her regarding the bank's requirement for confirmation from a solicitor.
The bank should not proceed with the transaction until it has
received an appropriate response directly from the wife.
(2) Representatives of the bank are likely to have a
much better picture of the husband's financial affairs than the solicitor. If
the bank is not willing to undertake the task of explanation itself, the bank
must provide the solicitor with the financial information he needs for this
purpose. Accordingly it should become routine practice for banks, if relying on
confirmation from a solicitor for their protection, to send to the solicitor the
necessary financial information. What is required must depend on the facts of
the case. Ordinarily this will include information on the purpose for which the
proposed new facility has been requested, the current amount of the husband's
indebtedness, the amount of his current overdraft facility, and the amount and
terms of any new facility. If the bank's request for security arose from a
written application by the husband for a facility, a copy of the application
should be sent to the solicitor. The bank will, of course, need first to obtain
the consent of its customer to this circulation of confidential information. If
this consent is not forthcoming the transaction will not be able to proceed.
(3) Exceptionally there may be a case where the bank
believes or suspects that the wife has been misled by her husband or is not
entering into the transaction of her own free will. If such a case occurs the
bank must inform the wife's solicitors of the facts giving rise to its belief or
suspicion.
(4) The bank should in every case obtain from the wife's solicitor
a written confirmation to the effect mentioned above.
These steps will be applicable to future
transactions. 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.
The creditor's disclosure obligation
It is a well-established principle that, stated
shortly, a creditor is obliged to disclose to a guarantor any unusual feature of
the contract between the creditor and the debtor which makes it materially
different in a potentially disadvantageous respect from what the guarantor might
naturally expect. The precise ambit of this disclosure obligation remains
unclear. A useful summary of the authorities appears in O'Donovan and
Phillips on the Modern Contract of Guarantee, 3rd ed (1996), at pp 122-130.
It is not necessary to pursue these difficult matters in this case. It is
sufficient for me to say that, contrary to submissions made, the need to provide
protection for wives who are standing as sureties does not point to a need to
re-visit the scope of this disclosure principle. Wives require a different form
of protection. They need a full and clear explanation of the risks involved.
Typically, the risks will be risks any surety would expect. The protection
needed by wives differs from, and goes beyond, the disclosure of information.
The O'Brien principle is intended to provide this
protection.
A wider principle
Before turning to the particular cases I must
make a general comment on the O'Brien principle. As noted by Professor
Peter Birks QC, the decision in O'Brien has to be seen as the progenitor
of a wider principle: see 'The Burden on the Bank', in Restitution and Banking
Law (ed Rose, 1998), at p 195. This calls for explanation. In the O'Brien
case the House was concerned with formulating a fair and practical solution
to problems occurring when a creditor obtains a security from a guarantor whose
sexual relationship with the debtor gives rise to a heightened risk of undue
influence. But the law does not regard sexual relationships as standing in some
special category of their own so far as undue influence is concerned. Sexual
relationships are no more than one type of relationship in which an individual
may acquire influence over another individual. The O'Brien decision
cannot sensibly be regarded as confined to sexual relationships, although these
are likely to be its main field of application at present. What is appropriate
for sexual relationships ought, in principle, to be appropriate also for other
relationships where trust and confidence are likely to exist.
The courts have already recognised this. Further
application, or development, of the O'Brien principle has already taken
place. In Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144
the same principle was applied where the relationship was employer and employee.
Miss Burch was a junior employee in a company. She was neither a shareholder nor
a director. She provided security to the bank for the company's overdraft. She
entered into a guarantee of unlimited amount, and gave the bank a second charge
over her flat. Nourse LJ, at p 146, said the relationship 'may broadly be said
to fall under [O'Brien]'. The Court of Appeal held that the bank was put
on inquiry. It knew the facts from which the existence of a relationship of
trust and confidence between Miss Burch and Mr Pelosi, the owner of the company,
could be inferred.
The crucially important question raised by this
wider application of the O'Brien principle concerns the circumstances
which will put a bank on inquiry. A bank is put on inquiry whenever a wife
stands as surety for her husband's debts. It is sufficient that the bank knows
of the husband-wife relationship. That bare fact is enough. The bank must then
take reasonable steps to bring home to the wife the risks involved. What, then,
of other relationships where there is an increased risk of undue influence, such
as parent and child? Is it enough that the bank knows of the relationship? For
reasons already discussed in relation to husbands and wives, a bank cannot be
expected to probe the emotional relationship between two individuals, whoever
they may be. Nor is it desirable that a bank should attempt this. Take the case
where a father puts forward his daughter as a surety for his business overdraft.
A bank should not be called upon to evaluate highly personal matters such as the
degree of trust and confidence existing between the father and his daughter,
with the bank put on inquiry in one case and not in another. As with wives, so
with daughters, whether a bank is put on inquiry should not depend on the degree
of trust and confidence the particular daughter places in her father in relation
to financial matters. Moreover, as with wives, so with other relationships, the
test of what puts a bank on inquiry should be simple, clear and easy to apply in
widely varying circumstances. This suggests that, in the case of a father and
daughter, knowledge by the bank of the relationship of father and daughter
should suffice to put the bank on inquiry. When the bank knows of the
relationship, it must then take reasonable steps to ensure the daughter knows
what she is letting herself into.
The relationship of parent and child is one of
the relationships where the law irrebuttably presumes the existence of trust and
confidence. Rightly, this has already been rejected as the boundary of the
O'Brien principle. O'Brien was a husband-wife case. The
responsibilities of creditors were enunciated in a case where the law makes no
presumption of the existence of trust and confidence.
But the law cannot stop at this point, with banks
on inquiry only in cases where the debtor and guarantor have a sexual
relationship or the relationship is one where the law presumes the existence of
trust and confidence. That would be an arbitrary boundary, and the law has
already moved beyond this, in the decision in Burch. As noted
earlier, the reality of life is that relationships in which undue influence can
be exercised are infinitely various. They cannot be exhaustively defined. Nor is
it possible to produce a comprehensive list of relationships where there is a
substantial risk of the exercise of undue influence, all others being excluded
from the ambit of the O'Brien principle. Human affairs do not lend
themselves to categorisations of this sort. The older generation of a family may
exercise undue influence over a younger member, as in parent-child cases such as
Bainbrigge v Browne, 18 Ch D 188 and Powell v Powell [1900] 1 Ch 243. Sometimes it is the other way round, as with a nephew and his elderly aunt
in Inche Noriah v Shaik Allie Bin Omar [1929] AC 127. An employer may
take advantage of his employee, as in Credit Lyonnais Bank Nederland NV v
Burch [1997] 1 All ER 144. But it may be the other way round, with an
employee taking advantage of her employer, as happened with the
secretary-companion and her elderly employer in In re Craig, Decd [1971]
Ch 95. The list could go on.
These considerations point forcibly to the
conclusion that there is no rational cut-off point, with certain types of
relationship being susceptible to the O'Brien principle and others not.
Further, if a bank is not to be required to evaluate the extent to which its
customer has influence over a proposed guarantor, the only practical way forward
is to regard banks as 'put on inquiry' in every case where the relationship
between the surety and the debtor is non-commercial. The creditor must always
take reasonable steps to bring home to the individual guarantor the risks he is
running by standing as surety. As a measure of protection, this is valuable.
But, in all conscience, it is a modest burden for banks and other lenders. It is
no more than is reasonably to be expected of a creditor who is taking a
guarantee from an individual. If the bank or other creditor does not take these
steps, it is deemed to have notice of any claim the guarantor may have that the
transaction was procured by undue influence or misrepresentation on the part of
the debtor.
Different considerations apply where the
relationship between the debtor and guarantor is commercial, as where a
guarantor is being paid a fee, or a company is guaranteeing the debts of another
company in the same group. Those engaged in business can be regarded as capable
of looking after themselves and understanding the risks involved in the giving
of guarantees.
By the decisions of this House in O'Brien
and the Court of Appeal in Credit Lyonnais Bank Nederland NV v Burch
[1997] 1 All ER 144, English law has taken its first strides in the development
of some such general principle. It is a workable principle. It is also simple,
coherent and eminently desirable. I venture to think this is the way the law is
moving, and should continue to move. Equity, it is said, is not past the age of
child-bearing. In the present context the equitable concept of being 'put on
inquiry' is the parent of a principle of general application, a principle which
imposes no more than a modest obligation on banks and other creditors. The
existence of this obligation in all non-commercial cases does not go beyond the
reasonable requirements of the present times. In future, banks and other
creditors should regulate their affairs accordingly.
The particular cases
I have had the advantage of reading in draft a
copy of the speech of my noble and learned friend Lord Scott of Foscote. He has
summarised the facts in the eight appeals. My views on the particular cases are
as follows.
(1) Midland Bank Plc v Wallace
I would allow this appeal. The bank was put on inquiry, because
this was a case of a wife standing as surety for her husband's debts. As the
evidence stands at present, Mr Samson's participation in the transaction does
not assist the bank. He was not Mrs Wallace's solicitor. Deficiencies in the
advice given by a solicitor do not normally concern the bank. That is the
position where the solicitor is acting for the wife, or where the solicitor has
been held out by the wife to the bank as her solicitor. But where the solicitor
was not acting for the wife, the bank is in the same position as any person who
deals with another in the belief that the latter is acting on behalf of a third
party principal when in truth he is not. Leaving aside questions of ostensible
authority or the like, the alleged principal is not bound or affected by the
acts of such a stranger. The remedy of the bank lies against the (unauthorised)
'agent'. If the bank has suffered provable loss, it has a claim for damages for
breach of implied warranty of authority. This action should go to trial.
(2) Barclays Bank Plc v Harris
This is another interlocutory appeal, against an order striking out Mrs
Harris' defence. It is common ground that for striking out purposes Mrs Harris
has an arguable case on undue influence. The bank was put on inquiry, because
Mrs Harris was standing as surety for the debts of the company, S T Harris
(Powder Coatings Consultant) Ltd. I consider Mrs Harris has an arguable case
that Wragge & Co never acted for her. In this respect the case is similar to
Wallace. This case should go to trial.
(3) UCB Home Loans Corporation Ltd v Moore
This is another interlocutory appeal. For the reasons given by my
noble and learned friend Lord Hobhouse of Woodborough, I would allow this
appeal.
(4) Royal Bank of Scotland v Etridge, (5) National Westminster Bank Plc v
Gill, (6) Barclays Bank Plc v Coleman, (7) Bank of Scotland v Bennett, and (8)
Kenyon-Brown v Desmond Banks & Co.
I agree with Lord Scott that, for the reasons he gives, the
appeals of Mrs Bennett and Desmond Banks & Co should be allowed. The appeals
of Mrs Etridge, Mrs Gill and Mrs Coleman should be dismissed.
LORD CLYDE
My Lords,
I have had the opportunity of reading in draft
the speech of my noble and learned friend Lord Nicholls of Birkenhead and agree
with it. I add a few observations of my own because of the importance of the
appeals which we have heard.
I question the wisdom of the practice which has
grown up, particularly since Bank of Credit and Commerce International SA v
Aboody [1990] 1 QB 923 of attempting to make classifications of cases of
undue influence. That concept is in any event not easy to define. It was
observed in Allcard v Skinner (1887) 36 Ch D 145 that "no court has ever
attempted to define undue influence" (Lindley LJ, at p 183). It is something
which can be more easily recognised when found than exhaustively analysed in the
abstract. Correspondingly the attempt to build up classes or categories may lead
to confusion. The confusion is aggravated if the names used to identify the
classes do not bear their actual meaning. Thus on the face of it a division into
cases of "actual" and "presumed" undue influence appears illogical. It appears
to confuse definition and proof. There is also room for uncertainty whether the
presumption is of the existence of an influence or of its quality as being
undue. I would also dispute the utility of the further sophistication of
subdividing "presumed undue influence" into further categories. All these
classifications to my mind add mystery rather than illumination.
There is a considerable variety in the particular
methods by which undue influence may be brought to bear on the grantor of a
deed. They include cases of coercion, domination, victimisation and all the
insidious techniques of persuasion. Certainly it can be recognised that in the
case of certain relationships it will be relatively easier to establish that
undue influence has been at work than in other cases where that sinister
conclusion is not necessarily to be drawn with such ease. English law has
identified certain relationships where the conclusion can prima facie be drawn
so easily as to establish a presumption of undue influence. But this is simply a
matter of evidence and proof. In other cases the grantor of the deed will
require to fortify the case by evidence, for example, of the pressure which was
unfairly applied by the stronger party to the relationship, or the abuse of a
trusting and confidential relationship resulting in for the one party a
disadvantage and for the other a collateral benefit beyond what might be
expected from the relationship of the parties. At the end of the day, after
trial, there will either be proof of undue influence or that proof will fail.
and it will be found that there was no undue influence. In the former case,
whatever the relationship of the parties and however the influence was exerted,
there will be found to have been an actual case of undue influence. In the
latter there will be none.
The second point relates to the steps which were
suggested in Barclays Bank plc v O'Brien [1994] 1 AC 180 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
1997 SC(HL) 110, 122 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 of
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 "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
should 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 Plc
2000 SLT 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 open to challenge.
Thirdly, I agree that it is not fatal that the
solicitor is also the solicitor who acts for the party for whose benefit the
guarantee or the charge is being effected, that is to say the husband in cases
where the wife is granting the deed in question. If there is any question of any
conflict of interest arising, or if the solicitor feels that he cannot properly
act for the wife in the matter of giving the advice, then he will be perfectly
able to identify the difficulty and withdraw. Again it should be stressed that
the wife's consultation with her solicitor is a serious step which is not to be
brushed off as a mere formality or a charade. It is in the interests of all the
parties involved that the wife should appreciate the significance of what she
has been asked to sign so that the transaction may not only appear to be fair
but also in fact to be freely and voluntarily undertaken.
I agree that the appeals in the cases of Mrs
Wallace, Mrs Bennett, Mrs Moore and Desmond Banks & Co be allowed. I have
had some hesitation about the case of Mrs Harris but following in particular the
view expressed by Lord Scott of Foscote I consider that the appeal in her case
should also be allowed. I consider that the other appeals should be
dismissed.
LORD HOBHOUSE OF WOODBOROUGH
My Lords,
Introduction:
These appeals have come before your Lordships in
order to enable the workings of the judgments of your Lordships' House in
Barclays Bank Plc v O'Brien [1994] 1 AC 180 and CIBC Mortgages Plc v
Pitt [1994] 1 AC 200 to be considered. The leading speech in both of those
cases was, with the agreement of the House, that of Lord Browne-Wilkinson. His
speeches are in my respectful opinion a masterly exposition of principles
designed to give structure to this difficult corner of the law and to provide
practical solutions to the problems to which it gives rise whilst recognising
the conflict between the interests of the commercial community and the need to
protect vulnerable members of society from oppression or exploitation. These
problems and conflicts are real and should not be ignored. The value of the
transactions takes them outside the scope of the existing statutory protection
and the solution therefore has to be found in the application of equitable
principles formulated by judges. Experience in litigation since 1993 has not
been encouraging. Disputes have continued to come before the courts; the
determination of those disputes has not always carried conviction. Before your
Lordships no party has sought to challenge the authority of Lord
Browne-Wilkinson's speeches, subject to the criticism of one point of
categorisation derived from BCCI v Aboody [1990] 1 QB 923, criticism
which I, like the rest of your Lordships, consider to be justified; the point of
categorisation has been the source of much of the confusion which has
ensued.
I therefore propose to take the speech of Lord
Browne-Wilkinson in O'Brien as my starting point. Some of what he said
was novel. Some has been criticised as departing from fully conventional
equitable principle. It is true that other approaches had been adopted in other
cases, including in the Court of Appeal in that case. But the purpose of such
judgments of this House is to settle the law and enable certainty to be
re-established. That should again be the objective of your Lordships on these
appeals. Doubt should not be cast upon the authority of O'Brien. There is
a need for some clarification and for the problem areas to be resolved as far as
possible. But the essential structure of O'Brien is in my view sound and
Lord Browne-Wilkinson fully took into account the practical implications.
To the end that lenders, those advising parties
and, indeed, judges should have clear statements of the law on which to base
themselves, I will state at the outset that in this speech I shall agree with my
noble and learned friend Lord Nicholls and, specifically, the guidance which he
gives concerning the role of the burden of proof, the duties of solicitors
towards their clients (paragraphs 64-68, and paragraph 74), and the steps which
a lender which has been put on enquiry should take paragraph 79). I would stress
that this guidance should not be treated as optional, to be watered down when it
proves inconvenient (as may be thought to have been the fate of Lord
Browne-Wilkinson's equally carefully crafted scheme). Nor should it be regarded
as something which will only apply to future transactions; it has represented,
and continues to represent, the reasonable response to being put on enquiry. The
purpose of guidance is to provide certainty for those who rely upon and conform
to the requirements of that guidance: it is not a licence to excuse unreasonable
conduct on the ground that no judge had previously told them in express terms
what was not an adequate response. If the relevant solicitor was not in fact
acting for the wife and had not been held out by the wife as doing so, the
conduct of that solicitor will not avail the lender. Once a lender has been put
on enquiry, mere assumptions on the part of the lender will not assist him. I
will, in the course of this speech and without qualifying the scope of my
agreement with Lord Nicholls, mention certain points in the hope that it will
add to the clarity and accuracy of the analysis. I must also express my
gratitude to my noble and learned friend Lord Scott of Foscote, whose speech I
have read in draft, for his summary of the facts of the eight individual cases
before the House.
O'Brien:
The speech of Lord Browne-Wilkinson followed a
four part scheme. First, he characterised the law of the enforceability of
suretyship contracts and security as between lenders to a husband or his company
and a wife as being an application of the equitable principle of undue
influence. Secondly, he sought to categorise the undue influence into classes
drawn from Allcard v Skinner (1887) 36 Ch D 145, Turnbull & Co v
Duval [1902] AC 429 and BCCI v Aboody (v.s.) giving rise to
presumptions. Thirdly, he provided a formulation to answer the question whether
the lender had been put on enquiry as to the risk of undue influence:
"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." (p.196)
Fourthly, he laid down steps which if taken would enable the lender to say
that he had taken reasonable steps to satisfy himself that the "surety entered
into the obligation freely and in knowledge of the true fact". (p.198) His
speech thus provides a structured scheme for the decision of cases raising the
issue of enforceability as between a lender and a wife. It can be expressed by
answering 3 questions:
(1) Has the wife proved what
is necessary for the court to be satisfied that the transaction was affected by
the undue influence of the husband?
(2) Was the lender put on
enquiry?
(3) If so, did the lender take reasonable steps to satisfy itself
that there was no undue influence?
It will be appreciated that unless the first question is answered in
favour of the wife neither of the later questions arise. The wife has no
defence and is liable. It will likewise be appreciated that the second and
third questions arise from the fact that the wife is seeking to use the undue
influence of her husband as a defence against the lender and therefore has to
show that the lender should be affected by the equity - that it is
unconscionable that the lender should enforce the secured contractual right
against her.
Difficulties have arisen in relation to each of
these three questions. I will take the questions in turn. The most important
difficulties relate to the first and third questions.
(1) Presumed Undue Influence:
The division between presumed and actual undue
influence derives from the judgments in Allcard v Skinner. Actual undue
influence presents no relevant problem. It is an equitable wrong committed by
the dominant party against the other which makes it unconscionable for the
dominant party to enforce his legal rights against the other. It is typically
some express conduct overbearing the other party's will. It is capable of
including conduct which might give a defence at law, for example, duress and
misrepresentation. Indeed many of the cases relating to wives who have given
guarantees and charges for their husband's debts involve allegations of
misrepresentation. (O'Brien was such a case.) Actual undue influence does
not depend upon some preexisting relationship between the two parties though it
is most commonly associated with and derives from such a relationship. He who
alleges actual undue influence must prove it
Presumed undue influence is different in that it
necessarily involves some legally recognised relationship between the two
parties. As a result of that relationship one party is treated as owing a
special duty to deal fairly with the other. It is not necessary for present
purposes to define the limits of the relationships which give rise to this duty.
Typically they are fiduciary or closely analogous relationships. A solicitor
owes a legal duty to deal fairly with his client and he must, if challenged, be
prepared to show that he has done so. In Pitt at p.209, Lord
Browne-Wilkinson referred to
"the long standing principle laid down in the abuse of confidence cases
viz the law requires those in a fiduciary position who enter into transactions
with those to whom they owe fiduciary duties to establish affirmatively that
the transaction was a fair one."
Such legal relationships can be described as relationships where one party is
legally presumed to repose trust and confidence in the other - the other side of
the coin to the duty not to abuse that confidence. But there is no presumption
properly so called that the confidence has been abused. It is a matter of
evidence. If all that has happened is that, say, a client has left a small
bequest to his family solicitor or that a solicitor has made a reasonable charge
for professional services rendered to the client, no inference of abuse or
unfair dealing will arise. But if a solicitor has bought property from his
client and it is properly put in issue that the purchase was at an under-value
or that the client's consent may have been improperly obtained, the solicitor
will have to show that the price was fair and that the client's consent to the
transaction was freely given in knowledge of the true facts. The solicitor has
to justify what he has done. He has a burden of proof to discharge and if he
fails to discharge it he will not have succeeded in justifying his conduct.
Thus, at the trial the judge will decide on the evidence whether he is in fact
satisfied that there was no abuse of confidence. It will be appreciated that the
relevance of the concept of "manifest disadvantage" is evidential. It is
relevant to the question whether there is any issue of abuse which can properly
be raised. It is relevant to the determination whether in fact abuse did or did
not occur. It is a fallacy to argue from the terminology normally used,
"presumed undue influence", to the position, not of presuming that one party
reposed trust and confidence in the other, but of presuming that an abuse
of that relationship has occurred; factual inference, yes, once the issue has
been properly raised, but not a presumption.
The Court of Appeal in Aboody and Lord
Browne-Wilkinson classified cases where there was a legal relationship between
the parties which the law presumed to be one of trust and confidence as
"presumed undue influence: class 2(A)". They then made the logical extrapolation
that there should be a class 2(B) to cover those cases where it was proved by
evidence that one party had in fact reposed trust and confidence in the other.
It was then said that the same consequences flowed from this factual
relationship as from the legal class 2(A) relationship. Lord Browne-Wilkinson
said at pp.189-190
"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."
There are difficulties in the literal application of this statement. It
describes the other party as a "wrongdoer" without saying why when it is
expressly postulated that no wrongdoing may have occurred. He treats trust and
confidence as indivisible. His actual words are: "a relationship under which the
complainant generally reposed trust and confidence in the wrongdoer"
(emphasis supplied). But a wife may be happy to trust her husband to make
the right decision in relation to some matters but not others; she may leave a
particular decision to him but not other decisions. Nor is it clear why the mere
"existence of such relationship raises the presumption of undue influence".
Where the relevant question is one of fact and degree and of the evaluation of
evidence, the language of presumption is likely to confuse rather than assist
and this is borne out by experience.
That there is room for an analogous approach to
cases concerning a wife's guarantee of her husband's debts is clear and no doubt
led to Lord Browne-Wilkinson saying what he did. The guarantee is given by the
wife at the request of the husband. The guarantee is not on its face
advantageous to the wife, doubly so where her liability is secured upon her
home. The wife may well have trusted the husband to take for her the decision
whether she should give the guarantee. If he takes the decision in these
circumstances, he owes her a duty to have regard to her interests before
deciding. He is under a duty to deal fairly with her. He should make sure that
she is entering into the obligation freely and in knowledge of the true facts.
His duty may thus be analogous to that of a class 2(A) fiduciary so that it
would be appropriate to require him to justify the decision. If no adequate
justification is then provided, the conclusion would be that there had been an
abuse of confidence. But any conclusion will only be reached after having
received evidence. This evidence will inevitably cover as well whether there has
in fact been an abuse of confidence or any other undue influence. The judge may
have to draw inferences. He may have to decide whether he accepts the evidence
of the wife and, if so, what it really amounts to, particularly if it is
uncontradicted. Since there is no legal relationship of trust and confidence,
the general burden of proving some form of wrongdoing remains with the wife, but
the evidence which she has adduced may suffice to raise an inference of
wrongdoing which the opposite party may find itself having to adduce evidence to
rebut. If at the end of the trial the wife succeeds on the issue of undue
influence, it will be because that is the right conclusion of fact on the state
of the evidence at the end of the trial, not because of some artificial legal
presumption that there must have been undue influence.
In agreement with what I understand to be the
view of your Lordships, I consider that the so-called class 2(B) presumption
should not be adopted. It is not a useful forensic tool. The wife or other
person alleging that the relevant agreement or charge is not enforceable must
prove her case. She can do this by proving that she was the victim of an
equitable wrong. This wrong may be an overt wrong, such as oppression; or it may
be the failure to perform an equitable duty, such as a failure by one in whom
trust and confidence is reposed not to abuse that trust by failing to deal
fairly with her and have proper regard to her interests. Although the general
burden of proof is, and remains, upon her, she can discharge that burden of
proof by establishing a sufficient prima facie case to justify a decision
in her favour on the balance of probabilities, the court drawing appropriate
inferences from the primary facts proved. Evidentially the opposite party will
then be faced with the necessity to adduce evidence sufficient to displace that
conclusion. Provided it is remembered that the burden is an evidential one, the
comparison with the operation of the doctrine res ipsa loquitur is
useful.
(2) Put on Enquiry:
However described, this is an essential step in
the reasoning of Lord Browne-Wilkinson. The wife becomes involved at the request
of her husband. It is he who, in these types of case, is the source of the undue
influence and commits the equitable wrong against her. But the party with whom
the wife contracts and to whom the wife accepts obligations is the lender. It is
the lender who is seeking to enforce those obligations. Therefore there has to
be some additional factor before the lender's conscience is affected and he is
to be restrained from enforcing his legal rights. The solution adopted by Lord
Browne-Wilkinson was to formulate a principle of constructive notice. He did so
in terms which were not as restrictive as the established principles of
constructive knowledge. However, there is a structural difficulty in his
approach. Notice of the risk of undue influence is not an all or nothing
question. Situations will differ across a spectrum from a very small risk to a
serious risk verging on a probability. There has to be a proportionality between
the degree of risk and the requisite response to it. Lord Browne-Wilkinson
expressed it in terms of a "substantial risk" (p.196). But, then, in describing
the requisite response he stated (p.197) that he had been considering "the
ordinary case where the creditor knows only that the wife is to stand surety for
her husband's debts". This is, as my noble and learned friend Lord Nicholls has
said, a low threshold. There are arguments which would favour a higher
threshold. It would enable a more positive approach to be taken to the response.
It would avoid calling for a response when the level of risk did not really
justify it. But the advantage of this low threshold is that it assists banks to
put in place procedures which do not require an exercise of judgment by their
officials and I accept Lord Nicholls's affirmation of the low threshold. This,
however, is not to say that banks are at liberty to close their eyes to evidence
of higher levels of risk or fail to respond appropriately to higher risks of
which they have notice.
Needless to say the question whether the bank
has been put on enquiry has to be answered upon the basis of the facts available
to the bank. Does the bank know that the wife is standing surety for her
husband's debts? This should be an easy question for the bank to answer. The
bank should know who the principal debtor is and what is the purpose of the
facility. Likewise the bank should know of any factors which are likely to
aggravate the risk of undue influence. Paradoxically the best place at which to
start to assess the risk of undue influence is to consider the true nature of
the transaction and examine the financial position of the principal debtor and
the proposal which he is making to the bank. These are the facts which the bank
has most readily to hand and, if it finds that it lacks relevant information, it
is in a position to get it and has the expertise to assess it. A loan
application backed by a viable business plan or to acquire a worthwhile asset is
very different from a loan to postpone the collapse of an already failing
business or to refinance with additional security loans which have fallen into
arrear. The former would not aggravate the risk; the latter most certainly would
do so. The bank is as well placed as anyone to assess the underlying rationality
of the debtor's proposal. It will be the bank that will have formed the view
that it is not satisfied with the debtor's covenant and the security he can
provide and it will be the bank that has called for additional security. The
bank will also probably be aware what has been the previous involvement, if any,
of the wife in the husband's business affairs.
The position therefore is that in relation to
any guarantee by a wife of her husband's debts (or those of his company) the
bank is put on enquiry and accordingly will have to respond unless it is to run
the risk of finding that the guarantee and other security provided by the wife
are unenforceable. If it becomes aware of any aggravation of the risk of undue
influence, its response must take that into account. More will be required to
satisfy it that the wife's agreement has been properly obtained.
The Practical Situation:
Before turning to discuss what are the
reasonable steps to be taken by a lender who had been put on enquiry, I will
pause to look at some of the practical aspects. Lord Browne-Wilkinson clearly
regarded these as important (pp.197-8). He drew attention to the Report of the
Review Committee on Banking Services under the chairmanship of Professor Jack
which reported in 1989 (Cm.622) which noted that "there are cases of guarantors
losing their houses because of open ended commitments that they entered into,
without understanding or advice" (?13.22) and recommended that banks should
adopt a standard of best practice which would require them to "ensure that
prospective guarantors, whether or not they are customers, are adequately warned
about the legal effects and possible consequences of guarantees, and about the
importance of receiving independent advice" (recommendation 13.5). The Committee
was concerned with the lack of the understanding on the part of guarantors of
the onerous contractual obligations arising from the signature of the forms used
by banks for guarantees or charges. The printed documentation used by banks is
of such length, complexity and obscurity that it is unlikely to be read let
alone understood by private guarantors who lack legal training or appropriate
business experience. They are treated by banks as contracts of adhesion
discouraging any attempt to modify any of their terms. They are often unduly
favourable to the bank and excessively onerous to the surety. The surety will
probably be made a principal debtor and liable without limit for very onerous
rates of interest and charges. The liability may be an "all moneys" guarantee
covering without limit any future advances not merely the advances intended to
be guaranteed. Thus, quite apart from the question of undue influence, the
signature of such documents may not represent any reality of informed consent.
The need to guard against lack of comprehension is important and applies in any
event to a non-business surety. But it is not the same as guarding against undue
influence. It may be a first step but it is a fallacy to confuse the two.
Comprehension is essential for any legal documents of this complexity and
obscurity. But for the purpose of negativing undue influence it is necessary to
be satisfied that the agreement was, also, given freely in knowledge of the true
facts. It must be remembered that the equitable doctrine of undue influence has
been created for the protection of those who are sui juris and competent
to undertake legal obligations but are nevertheless vulnerable and liable to
have their will unduly influenced. It is their weakness which is being protected
not their inability to comprehend. I regret that I must specifically disagree
with my noble and learned friend Lord Scott when (in his summary) he treats a
belief on the part of a lender that the wife has understood the nature and
effect of the transaction as sufficient to exonerate the lender from enquiry or
as treating this as the effect of the scheme laid out by Lord Nicholls in the
paragraphs to which I have referred earlier.
A further point of relevance which has been
commented on in the past and should be commented upon again has been the use by
banks of forms under which the surety gives an unlimited guarantee or charge.
This was what banks ordinarily asked for. Indeed, the guarantees obtained in the
cases from which these appeals arise, are unlimited. Banks have acknowledged
that such guarantees are likely to be unnecessary and unjustifiable where
private sureties are sought. They should be subject to a stated monetary limit
on the surety's liability and any legal adviser should so advise a private
client. Where a bank has nevertheless obtained an unlimited guarantee from a
wife, it should ask itself how that can be if the wife has in truth been
independently advised. Would anyone who had a proper regard to the wife's
interests ask her to sign an unlimited guarantee or charge?
Lord Browne-Wilkinson stressed the need for the
wife to be seen and communicated with separately from her husband. This
was clearly appropriate since, if the purpose is to satisfy oneself that the
wife is acting freely in knowledge of the true facts, an interview in the
presence of the husband is unlikely to achieve this objective if she has been
improperly influenced by him. Lord Browne-Wilkinson concluded that the
requirement of a personal interview did not impose such an additional
administrative burden as to make the bank's position unworkable (p.198). What
the banks appear to find difficult is entrusting the conduct of such an
interview to one of their own officers as opposed to entrusting it to an outside
agent. This is sad but probably derives from a wish to avoid getting directly
involved in imparting information and maybe opinions to an individual whose
interests are likely to conflict with their own and with whom they may
subsequently be in dispute. Lord Browne-Wilkinson contemplated that the banks
might use a representative to do what he considered necessary and this would
imply that they would be responsible for their representative. The banks have
not done this. They have used solicitors. They have denied any responsibility
even for a complete failure of the solicitor whom they have instructed to carry
out their instructions and have nevertheless sought to hold the wife to her
signature so obtained. I doubt that this is what Lord Browne-Wilkinson had in
mind.
The use of solicitors has given rise to further
practical (and, to a limited extent, legal) problems. The first is ensuring that
the solicitor is in possession of the relevant facts as known to the bank. The
advantage of an officer of the bank conducting the interview with the wife is
that he has the file and access to the relevant facts. The solicitor on the
other hand may have nothing except the documents which are to be signed. It is
within the control of the bank what it sends to the solicitor. If the solicitor
is to conduct the interview with the wife, the bank must give him the
information. The next difficulty is that the bank's information about the
affairs of its customer is confidential and the bank may need to obtain the
husband's consent to give this information to the solicitor and the wife.
However, if the husband refuses to give his consent, this would be a clear
indication to the bank and the solicitor that something may be amiss and that it
ought not to rely upon the wife being bound. A further point is that contracts
of suretyship are not contracts of the utmost good faith. There is no general
duty of disclosure: see the authorities cited by my noble and learned friends in
their speeches, to which I would add the speech of Lord Clyde in Smith v Bank
of Scotland 1997 SLT 1061. Seeing that the solicitor is adequately informed
is not the performance of a duty owed by the bank to the wife. It is
simply a necessary step to be taken by the bank so that it may be satisfied that
the wife entered into the obligation freely and in knowledge of the true
facts.
Another consequence of using solicitors is the
risk of confusion about what the solicitor's role is to be. The solicitor will
normally have been instructed by the bank to act for it. The solicitor will
often already be acting for the husband. The solicitor may not be acting for the
wife at all, let alone separately and independently from the solicitor's other
clients. Similarly, the solicitor's instructions may simply be to explain to the
signatories the character and legal effect of the documents. This is a low order
of advice which can be given solely by reference to the formal documents to be
signed. It is also important to appreciate that the solicitor's role may simply
be to witness a signature. Such a role involves no necessary relationship
whatsoever between the solicitor and the signatory. Indeed they may have or
represent conflicting interests. The solicitor may simply have been instructed
by one party to see and be prepared to provide evidence that the relevant
document was signed and delivered by the other party. Seeing that a solicitor
has witnessed a signature itself means nothing. Even when a solicitor is
instructed to explain the character and legal effect of a document, he will not
without more concern himself at all with the interests of the wife or whether
she is accepting the obligations freely and with knowledge of the true facts.
Under these circumstances it is scarcely surprising, as the facts of these cases
and many others show, that wives are still signing documents as a result of
undue influence. The involvement of a solicitor has too often been a formality
or merely served to reinforce the husband's wishes and undermine any scope for
the wife to exercise an independent judgment whether to comply. Lord
Browne-Wilkinson observed at [1994] 1 AC p.188,
"The number of recent cases in this field shows that in practice many
wives are still subjected to, and yield to, undue influence by their husbands.
Such wives can reasonably look to the law for some protection when their
husbands have abused the trust and confidence reposed in them."
The result of the practice of relying upon
solicitors' certificates has been described by Sir Peter Millett (as he then
was) in his lecture to the Chancery Bar Association (114 LQR 214 at p.220),
referring to an article by Sir Anthony Mason (110 LQR 238),
"What Sir Anthony Mason has described as 'ritual reliance on the provision
of legal advice' is foreign to the traditional approach of a court of equity
and is manifestly failing to give adequate protection to the wife or
cohabitant who acts as surety. We have substituted an inappropriate bright
line rule for a proper investigation of the facts and have failed the
vulnerable in the process. The Australians are turning to the jurisdiction to
relieve against harsh and unconscionable bargains as an alternative, and there
is much merit in this approach. It is certainly better than allowing the bank
to assume that the surety has received adequate legal advice, an assumption
which the bank almost always knows to be false."
The crux of this situation is that the bank requests the solicitor to give a
certificate which the bank then treats as conclusive evidence that it has no
notice of any undue influence which has occurred. But the wife may have no
knowledge that this certificate is to be given and will not have authorised the
solicitor to give it and, what is more, the solicitor will deny that he is under
any obligation to the wife (or the bank) to satisfy himself that the wife is
entering into the obligations freely and in knowledge of the true facts. The law
has, in order to accommodate the commercial lenders, adopted a fiction which
nullifies the equitable principle and deprives vulnerable members of the public
of the protection which equity gives them.
Lord Browne-Wilkinson contemplated a two stage
exercise, the first stage being an interview between the lender and the wife
(for which the lender would be responsible) and the second being the wife taking
independent advice from a solicitor (for which the lender would not be
responsible). The practice of banks has been to run these two stages together
thus creating confusion about the role of the solicitor. I accept that the best
solution is that adopted by Lord Nicholls in his speech. The solicitor in
communicating with and advising the wife should be doing so solely as her
solicitor. The solicitor's certificate which the bank asks for is something
which the bank is asking the wife to procure and which the solicitor is
providing as her solicitor. I am satisfied that, provided that the guidance
which Lord Nicholls gives (in the paragraphs which I have identified at the
outset of this speech) is complied with, the wife will have a reasonable chance
of receiving the protection she may need. But it will be appreciated that an
essential feature of the scheme is that the wife has to be aware of what is
going on, that the bank is asking for the certificate and why, that she is being
asked to instruct a solicitor to advise her and that she is being asked to
authorise the solicitor to provide the certificate. This is a far cry from the
situation which has been tolerated in the past where the wife has not
appreciated that she had any solicitor or was being advised and did not know of
the existence of the certificate or its significance; indeed it has been that
type of situation which has given rise to the most scandalous cases.
Illuminating evidence was given at the trial of
the Gill action relevant to what was practical from the bank's point of
view. The bank there was the National Westminster Bank. The bank manager gave
evidence. In answer to direct questions he accepted without qualification that
he foresaw the potential for undue influence by a husband where his wife is
being asked to stand surety for the debts of her husband's business. His
solution was to procure that the wife received separate legal advice. In
saying this he was following the practice of his bank as set out in a document
(which he produced during his evidence in chief) with which he said he was
already familiar in December 1988 (that is to say well before O'Brien in
the House of Lords) headed "Charged Security - Separate Legal Advice - Action
Sheet". It includes the following passages -
"The security may be voidable if undue influence can be established.
Therefore, great care is needed when there is any likelihood that a potential
guarantor or third-party chargor may be unduly influenced by a borrower.
Undue influence may exist where there is a special relationship
between the parties, eg: husband and wife ... Do not regard the above list as
exhaustive. The background always requires careful thought ...
... where the guarantor/chargor is a customer of the
Bank ... - the Bank has a duty, where any doubts exist, to INSIST that
independent legal advice is given regarding: (a) the nature of the
guarantee/charge, (b) the viability of the underlying proposition - advise the
guarantor/chargor to obtain full details from the principal debtor, whose
consent is required before disclosures, as to the underlying transaction, can be
made to the grantor/chargor or legal advisor. Always consider, in detail, the
circumstances surrounding a transaction, as undue influence may arise where
direct security is taken for joint borrowing, eg (i) joint borrowing for
purposes ostensibly in the interest of only one of the borrowers ...
Where there is any suspicion of undue influence, the
Manager must ensure that all guarantors/third-party chargors take separate legal
advice from a firm of solicitors nominated by the guarantor/chargor.
Send the charge form directly to the solicitor
concerned ... - To avoid a conflict of interest, ensure that the witnessing
solicitor is not also acting for the borrower. In such circumstances another
solicitor, who may be a partner in the same firm, must be used." (emphasis as in
the original)
My Lords I have quoted from this document
because it discloses the response of a major high street bank to the question of
undue influence. It does not seek to play down the risk. It puts husbands and
wives at the top of the list. It requires that independent/separate legal advice
be taken by the guarantor/chargor. It stresses the importance of having regard
to the viability of the underlying proposition or transaction and where
necessary obtaining full details from the principal debtor. It requires that the
solicitor be the solicitor nominated by the guarantor/chargor and that the
actual solicitor must not be acting for the borrower as well. These points are
all of practical as well as legal importance. Banks were prepared to accommodate
them. They did not need to be told that they had to by Lord Browne-Wilkinson. It
represented a pragmatic response to the practical as well as the legal
questions. In some respects, the National Westminster Bank "action sheet" goes
quite a bit further than what is required by Lord Nicholls. It shows that the
speech of Lord Nicholls does not require banks to go further than they had
already been prepared to go before O'Brien and that what Lord Nicholls
requires is and was in fact reasonable and practical.
(3) Reasonable Steps:
Lord Browne-Wilkinson favoured a personal
interview with the wife conducted in the absence of the husband by a
representative of the bank. The wife would then be urged to take
independent/separate legal advice. It followed that the bank would be
responsible for the first of these steps but not the second. The banks were not
following this course. They were not doing anything themselves. They were
instructing a solicitor, asking him to supply a formal certificate limited to
comprehension and that is all. This is what had given rise to the fiction of
free and informed consent where none existed and no steps had been taken to
discover the true position.
Given the state of the authorities since the
speeches in O'Brien and Pitt were delivered and the need to
provide fresh guidance, I agree that your Lordships should adopt the scheme
spelled out by Lord Nicholls. The central feature is that the wife will be put
into a proper relationship with a solicitor who is acting for her and accepts
appropriate duties towards her. Likewise the bank or other lender must
communicate directly with the wife to the end that that relationship is
established and that any certificate upon which it may seek to rely is the fruit
of such a professional relationship.
If the bank follows this procedure then the
fiction of independent advice and consent should be replaced by true independent
advice and real consent. It will probably be less onerous for the lender than
what was required by Lord Browne-Wilkinson and the National Westminster "action
sheet". It will also be observed that it is consistent with the duty of the
solicitor towards his client, the wife. He will appreciate that he cannot give
the statement and certificate unless it conforms to the reality. Similarly, the
wife will not be left in ignorance of what has been going on and will know what
she is entitled to get from the solicitor.
It also resolves the question of what knowledge
of the solicitor will affect the bank either under the common law or under s.199
of the Law of Property Act 1925. The solicitor in question will not be acting
for the bank. Any knowledge the solicitor acquires from the wife will be
confidential as between the two of them. If it renders untruthful the statement
or certificate, the solicitor cannot sign them without being in breach of his
professional obligation to the wife and committing a fraud on the bank. The
wife's remedy will be against the solicitor and not against the bank. If the
solicitor does not provide the statement and certificate for which the bank has
asked, then the bank will not, in the absence of other evidence, have reasonable
grounds for being satisfied that the wife's agreement has been properly
obtained. Its legal rights will be subject to any equity existing in favour of
the wife.
INDIVIDUAL CASES
Turning to the individual appeals, the cases
fall into 3 different categories. There are three cases - Harris,
Wallace and Moore - which have not got beyond the interlocutory
stage, the wives' pleadings having been struck out as disclosing no defence to
the banks' claims for possession. There are four cases - Etridge,
Gill, Coleman and Bennett - which have proceeded to trial
and in which, at trial and/or on appeal, the wife has been unsuccessful. Finally
there is a single case - Kenyon-Brown - in which the wife was suing her
solicitor for damages for breach of duty. Your Lordships are in favour of
allowing the appeals in Kenyon-Brown, Harris, Wallace,
Moore and Bennett: I agree. I also agree that the appeals in
Etridge, Gill and Coleman should be dismissed. There is an
important distinction to be drawn between cases which have been tried where the
parties have been able to test the opposing case and the trial judge was able to
make findings of fact having seen the critical witnesses and evaluated the
evidence. By contrast, in those cases where the lender is applying for an
immediate possession order without a trial or to have the defence struck out,
the court is being asked to hold that, even if the wife's allegations of fact be
accepted, the wife's case is hopeless and bound to fail and that there is no
reason why the case should go to trial. This conclusion is not to be arrived at
lightly nor should such an order be made simply on the basis that the lender is
more likely to succeed. Once it is accepted that the wife has raised an arguable
case that she was in fact the victim of undue influence and that the bank had
been put on enquiry, it will have to be a very clear case before one can say
that the bank should not have to justify its conduct at a trial.
Kenyon-Brown:
I take this case first because it falls into a
different category to the others. The wife was claiming damages against a firm
of solicitors on the basis that, under the undue influence of her husband, she
had entered into an adverse suretyship transaction for the benefit of her
husband, which also involved charging a cottage which they jointly owned, and
that the solicitors had failed to give her appropriate advice to prevent this
happening. The guarantee was unlimited. The wife was unable to give specific or
reliable evidence in support of her case against the solicitors but relied upon
the fact that the transaction was manifestly disadvantageous to her and upon the
duty of the solicitor, as stated by the Court of Appeal in Etridge No2
[1998] 4 All ER 705 at para 19, to satisfy himself that she was free from
improper influence. The certificate which the solicitor gave to the lender was
that he had given her legal advice. In Kenyon-Brown, the majority of the
Court of Appeal, in disagreement with the trial judge, considered that this led
inexorably to the conclusion that the solicitor must have been negligent. I
agree with your Lordships that the conclusion of the Court of Appeal was not
justified upon the evidence adduced at the trial. The burden of proof was upon
the wife to establish that the solicitor had been negligent. She could not say
that she had not been given comprehensive advice which included a full warning
of the consequences of her entering into the transaction. She could not
contradict that he had told her specifically that the mortgage would only
benefit her husband and was without limit. He was her solicitor and advised her
as his client. The judge was right: she failed to make out her case against the
solicitor on the facts. If she had been able to give reliable evidence and be
clearer about what she said had happened and had been in a position to challenge
the solicitor's attendance note, she might have succeeded. The solicitor's duty
towards her was as stated by my noble and learned friend Lord Nicholls. It seems
that it was substantially observed and in so far as the solicitor might be
criticised, no causative relevance was established.
Wallace:
This was an interlocutory case. The bank claimed
the possession of a flat in Priory Road, Hampstead, which was jointly owned by
Mr and Mrs Wallace. The bank claimed possession on the basis of an all monies
legal charge signed by the husband and the wife against which the bank had
advanced money to the husband. It was accepted that she had an arguable case
that she had been unduly influenced to sign by her husband. The bank did not at
any stage communicate with the wife or anyone acting for her. It sent the charge
to its own solicitor with instructions to attend to the necessary formalities in
the signing of the charge. The husband and wife went together to the bank's
solicitor's office. The wife's case was that she was there 3 or 4 minutes at
most; she signed as directed by the solicitor; there was no other discussion;
her impression was that the solicitor had been instructed by the bank merely to
take and witness her signature. On this case the bank had no basis for rebutting
the risk that her signature had not been properly obtained. It had no basis for
any belief that she had been separately advised by a solicitor who was acting
for her. The only solicitor of which the bank knew was a solicitor acting for
itself alone which had in a side letter to the bank, of which the wife knew
nothing, told the bank no more than that the documents had been explained. The
wife clearly had an arguable case for defending the possession action. The
reasoning of the Court of Appeal in arriving at the contrary conclusion was that
the bank was (or, perhaps, would have been) entitled to assume that the
solicitor had been acting as the wife's solicitor and had discharged his duty to
her as her solicitor. As stated, this assumption would have been without
foundation. I agree that this appeal should be allowed.
Harris:
This was also an interlocutory case. The judge
struck out her defence and counterclaim as disclosing no arguable defence to the
bank's action for the possession of the house owned jointly by the husband and
wife where they lived. The husband had, through the medium of two companies, two
businesses one of which had effectively failed leaving him with a heavy personal
liability. He consulted solicitors, Wragge & Co, to find a way of carrying
on his other business. They advised him to negotiate a new facility with the
bank with new security. The outcome was an offer from the bank of new finance
for the second company secured by unlimited guarantees from both the husband and
wife and a legal charge on their house. The bank was clearly put on enquiry. It
was accepted that for striking out purposes the wife had an arguable case on
undue influence. The relevant question was therefore whether the bank took
reasonable steps to satisfy itself that the wife's agreement had not been
improperly obtained. Wragge & Co were only known to the bank as the
husband's solicitors. The bank took no steps to communicate with the wife who
was allowed to remain in ignorance of what precisely was the position between
her husband and the bank. The wife was never told that she would be required to
be separately advised nor that she should instruct a solicitor to certify to the
bank that she had been so advised. In her pleading the wife had pleaded that the
solicitors were acting for the bank, her husband and herself. However before the
judge the affidavit sworn by her solicitor in the action (Mr Holt of Evans Derry
Binnion) in response to the bank's striking out application deposed (para 6)
-
"It is important to note that insofar as my client is concerned Wragge
& Co were not her solicitors. Wragge & Co were solicitors who had been
instructed by Mr Harris personally previously and he had a personal connection
with one of the partners at that [firm]."
The wife therefore has an arguable case that Wragge & Co were never her
solicitors and that the case is in this respect the same as the Wallace
case. There is however a further feature of this case. The bank wrote to Wragge
& Co, knowing them only as the husband's solicitors, asking them, among
other things, "to explain the nature of the document to both parties and confirm
to us that independent legal advice has been given". The letter in reply from
Wragge & Co did not give the bank that confirmation, a fact which the bank
did not pick up until about nine months later. The bank then wrote to Wragge
& Co pointing this out and asking for confirmation that independent legal
advice had nevertheless been given. On receiving this further letter, the
partner at Wragge & Co commented: "I do not think that independent legal
advice was given." On this, it would appear that the bank appreciated that it
needed confirmation that the wife had been independently advised. Patently it
did not get it. The bank realised that it had not got it and that she may well
never have been independently advised. This was clearly a case where the judge
should have allowed the case to go to trial. The wife had an arguable defence on
more than one ground. The Court of Appeal dismissed the wife's appeal giving
only brief reasons - "The solicitors were acting for Mrs Harris and the bank
were entitled to assume that they had given appropriate advice and were entitled
to accept the solicitors' letter as confirmation that this had been done." These
reasons fly in the face of the evidence and cannot be supported. This appeal
should be allowed.
Moore:
This is the third of the interlocutory cases. It
is less clear cut than the other two. But it is not a case in which it should be
said, in my judgment, that no trial is justified and that, on the basis of her
pleaded case, the wife is bound to fail in her defence of the possession action.
It is accepted for present purposes that she has an arguable case of undue
influence and misrepresentation by her husband. Her case is that she had in fact
instructed no solicitors to act for her and received no advice whatsoever. The
charge was unlimited in amount. The loan transaction was not wholly
straightforward in that, whilst it included the refinancing of indebtedness
which was already secured on the matrimonial home in Pangbourne, it was as to
3/5ths composed of a substantial additional advance to the company run by the
husband which was already in financial trouble (and was to fail within two
years). In this connection, the company and the husband used an independent
insurance broker, Mr Zerfahs and his brother (a credit broker), as a go-between
with the lender. The lender had no direct communication with the wife, nor did
Mr Zerfahs communicate with her. Were it not for one fact, this would be a case
which fell into the same category as Wallace. The potential saving fact
for the lender was that the husband had started his deception by persuading his
wife to sign the mortgage application form in blank. One of the boxes in the
form was "solicitor's details". The husband, who was the primary applicant,
filled this in with the name of the solicitors who had been instructed by Mr
Zerfahs without informing the wife or obtaining her authority: "Quiney &
Harris (Nigel Whittaker)" and their address in Wootton Bassett near Swindon. As
a result, on the face of the form sent to the lender there was a single
solicitor who was to act on behalf of both applicants. The wife says that the
husband had not obtained her authority to fill in the form in this way; it is
agreed that the husband undoubtedly filled in other parts of the form
fraudulently. Having received instructions from Mr Zerfahs, the solicitors,
without obtaining confiration from the wife, referred to her and her husband in
correspondence as "our clients". The lender did not obtain any assurance that
the wife had received independent advice before signing. It is the wife's case
that she received no advice at all. This is a disturbing case. It may turn out
(if there is a trial) that the wife is an unreliable witness and that her case
cannot be accepted. But, for present purposes, the lender's case has to depend
wholly upon an estoppel arising from her having signed the application form in
blank and, it is argued, an inference that she had been separately advised as an
independent client by the solicitor. I do not believe that this is a sound basis
for disposing of this case without a trial. The true facts need to be known. She
was the victim of misrepresentation; the solicitors purported to act on her
behalf without any authority to do so; the only document which the lender saw
did not suggest anything other than a joint retainer; the lender never checked
the position with the wife or sought any confirmation that she was being
separately advised. Discovery of documents and a morning in the County Court
would have sorted the matter out more expeditiously and cheaply. I agree that
this appeal should be allowed.
Royal Bank of Scotland v Etridge:
This is a case which, after some delay and
contested interlocutory proceedings, went to a trial before Judge Behrens. The
wife gave evidence. The judge found that, on the evidence, she had not been the
victim of any actual undue influence. However he went on to deal with the case
on the basis of presumed undue influence. On appeal, the Court of Appeal
upheld the Judge's finding of no actual undue influence; nor did she at either
level obtain a finding in her favour that she had been induced to sign by any
misrepresentation. Accordingly, on the correct view of the law, her case failed
in limine and none of the other points arose. Judgment was rightly
entered for the bank. On this ground, I agree that this appeal should be
dismissed. This case provides an object lesson in the dangers of attempting a
summary resolution of issues of mixed law and fact without having ascertained
the facts.
Gill:
This too is a case which went to trial. The
evidence discloses what might have been a case of misrepresentation which
possibly could have led to the wife succeeding. The transaction was presented in
a fashion which may have led the wife and the solicitors mistakenly to believe
that only an advance of £36,000 was involved, not a probable £100,000. However,
be that as it may, the case advanced by the wife at the trial was that she had
been the victim of actual undue influence. This case was rejected by the Judge
and, in any event, there was evidence that the extended scope of the transaction
is something which she would in fact have supported and was not causative.
Therefore this case is, in the critical respect, similar to the Etridge
case. She failed to prove the allegation necessary to found her case. I agree
that this appeal should be dismissed.
Coleman:
In this case there was a trial which was not
confined to a simple claim by the bank against the wife; it involved also her
husband (who in addition counterclaimed against the bank) and third parties
joined by the wife. With some reluctance I agree that the wife's appeal should
be dismissed. This is not because of any inherent lack of merit in her case; she
has been appallingly badly served. It is because to set aside the judgments
entered against her below would be contrary to the grounds upon which her case
was conducted at the trial and in the Court of Appeal. The wife and her husband
were members of the Hasidic Jewish community. This factually involved a
relationship of complete trust and confidence between the wife and her husband
in relation to financial matters. I agree with Lord Scott that it is a case
where, having drawn the appropriate inferences, actual undue influence was in
fact established. The wife was being asked to charge her home to secure advances
to her husband for the purpose of enabling him to engage in property
speculation, he being unable to offer the bank adequate other security. It was
also a case where the bank was clearly put on enquiry. The relevant point which
should have been considered was therefore whether the bank took steps of the
kind referred to by Lord Nicholls (para 79) (or in the National Westminster
document) in order to protect itself from being affected by any such undue
influence. But at the trial the dealings between the bank and the wife and the
solicitor were not covered by documentary evidence and seem not to have been the
subject of direct oral evidence either. The wife simply said that she went to
the solicitor's office at the request of her husband and that all the managing
clerk, whom they saw there, did before witnessing her signature was to ask her
in the presence of her husband if he, her husband, had explained the documents
to her. Her account (which the judge accepted) gives a pertinent reminder of the
gap between theory and reality and illustrates the type of charade which, as Sir
Peter Millett has observed (sup), lenders well know may occur and should
not be tolerated or sanctioned by equity. However, at the trial, the wife's case
was that the elderly solicitor for whom the managing clerk worked was acting as
her solicitor. She joined what she thought were the appropriate persons as third
parties suing them for breach of professional duty. The elderly solicitor had
died. The trial judge dismissed her claim against the third parties holding that
she had sued the wrong persons. There was a further unusual feature of the case.
The bank had asked for a certificate in the unusual terms: "I confirm that this
document was signed in my presence and that the full effect of its contents have
been explained to and were understood by Miriam Mara Coleman, and she has
signed this document of her own free will." (emphasis supplied.) It
was this certificate that the managing clerk signed. If the bank were entitled
to believe that this certificate was supplied by the wife's own solicitor
instructed by her, the bank might have had a basis for believing that the wife's
consent had been properly obtained. I venture to doubt whether any reasonable
banker would have put this construction upon the available evidence but in view
of the course of the proceedings before the trial judge and the basis upon which
the wife's case was then put it would not be permissible now to allow this
appeal upon an inconsistent and untested basis. The greater part of the time at
the trial seems to have been taken up with the dispute between the husband and
the bank. As between the wife and the bank, the judgments in the courts below
were primarily concerned with aspects of the problem of presumed undue
influence which do not now arise and with the question of the adequacy of a
certificate signed by a legal executive as opposed to a solicitor which must
depend on the facts of each case.
Bennett:
I agree that this appeal should be allowed. The
existence of the ranking agreement was important and qualified the transaction
as it was disclosed to the surety. I do not wish to add anything to what is to
be said about this point by Lord Scott. This suffices for the allowing of the
appeal. It is accordingly unnecessary to say anything about the undue influence
issues.
LORD SCOTT OF FOSCOTE
My Lords,
Introduction
Eight appeals have been heard together. In seven
of these appeals, the appellant is a wife who agreed to subject her property,
usually her interest in the matrimonial home, to a charge in favour of a bank in
order to provide security for the payment of her husband's debts, or the debts
of a company by means of which her husband carried on business. In each of these
cases the bank has commenced proceedings for possession of the mortgaged
property with a view to its sale and the wife has defended the claim by
alleging, first, that her agreement to grant the charge to the bank was brought
about by undue influence or misrepresentation, or both, on the part of her
husband, and, secondly, that, in the circumstances, the chargee bank ought not
to be allowed to enforce the charge against her. In each of these cases the
question has been raised whether the bank should be treated as having had notice
of the impropriety, or alleged impropriety, of the husband. In each of these
cases the bank has had some reason to believe that a solicitor had acted for the
wife in the transaction in question. So the question has arisen as to the extent
to which the solicitor's participation, or believed participation, has absolved
the bank of the need to make any further inquiries about the circumstances in
which the wife was persuaded to agree to grant the charge, or to take any
further steps to satisfy itself that her consent to do so was a true and
informed consent.
Four of these seven cases, Etridge, Gill,
Coleman and Bennett went to a full trial, with evidence and
cross-examination. The other three, Harris, Wallace and
Moore, have come to your Lordships' House as a result of interlocutory
applications; in Harris and in Moore, an application to strike-out
the relevant parts of the wife's defence; in Wallace, an application by
the bank for summary judgment for possession.
In each of these seven cases, the submissions on
behalf of the wife have been based upon the principles expressed by Lord
Browne-Wilkinson in Barclays Bank Plc v O'Brien [1994] 1 AC 180 and, to a
lesser extent, in CIBC Mortgages Plc v Pitt [1994] 1 AC 200.
The eighth appeal before the House,
Kenyon-Brown v Desmond Banks & Co, is a case in which the wife is
suing the solicitor who acted for her in such a transaction as I have described.
She alleges breach of duty by the solicitor. One of the issues in the seven
wife v bank appeals that your Lordships are invited to consider relates
to the extent of the duty lying upon a solicitor who acts for a wife who is
proposing to grant a charge over her property as security for her husband's, or
his company's, debts. It was, therefore, thought convenient to add the
Kenyon-Brown appeal to the seven other appeals so that all could be heard
together.
Five of the seven wife v bank appeals,
namely, Etridge, Harris, Moore, Wallace and
Gill, were heard together by the Court of Appeal (Stuart-Smith, Millett
and Morritt LJJ). In each, the Court of Appeal dismissed the wife's appeal
against the order for possession made by the Court below (see Royal Bank of
Scotland Plc v Etridge (No 2) [1998] 4 All ER 705). In Bennett, the
Court of Appeal (Auld, Chadwick LJJ and Sir Christopher Staughton) allowed the
bank's appeal against the judgment below in favour of the wife and made an order
for possession (see [1999] 1 FLR 1115). The Court of Appeal placed strong
reliance on passages in the judgment of the court given by Stuart-Smith LJ in
Etridge (No 2). In Coleman, the Court of Appeal (Nourse,
Pill and Mummery LJJ) [2001] QB 20 dismissed the wife's appeal against the
possession order made below.
In Kenyon-Brown v Desmond Banks & Co,
the Court of Appeal (Peter Gibson and Mance LJJ, Wilson J dissenting) [2000] PNLR 266 allowed the wife's appeal and, in expressing the extent of the
defendant solicitor's duty to her, placed strong reliance on Royal Bank of
Scotland Plc v Etridge (No 2).
In deciding these appeals it is necessary in my
opinion, first, to analyse and explain the principles formulated by Lord
Browne-Wilkinson in O'Brien. The case law since O'Brien has, in my
view, disclosed some misconceptions about these principles.
The O'Brien principles
It is convenient to start with a look at the
problems that had to be addressed in O'Brien and at Lord
Browne-Wilkinson's solution to them.
There had been an increasing number of cases in
which wives had sought to avoid the charges they had given to banks or finance
houses in support of their husbands' debts. In many, probably in most, of the
cases that had come to court, the wives had not read, or, if they had, had not
understood the document they had signed. Many of the wives protested that they
had signed because excessive pressure to do so had been brought to bear on them
by their husbands; others said that their husbands had misrepresented the amount
of the secured debts, the time during which the charge would remain in force or
some other material matter. In most cases the wife emphasised, in explaining her
willingness to sign the charge, the trust and confidence she had had in her
husband. This trust and confidence, it was said, had led her to succumb to his
pressure to sign and to be the more easily misled by his misrepresentations.
Lord Browne-Wilkinson in O'Brien said, at p 188:
"although the concept of the ignorant wife leaving all financial decisions
to the husband is outmoded, the practice does not yet coincide with the ideal.
In a substantial proportion of marriages it is still the husband who has the
business experience and the wife is willing to follow his advice without
bringing a truly independent mind and will to bear on financial decisions. The
number of recent cases in this field shows that in practice many wives are
still subjected to, and yield to, undue influence by their husbands. Such
wives can reasonably look to the law for some protection when their husbands
have abused the trust and confidence reposed in them."
Lord Browne-Wilkinson emphasised, however, the
importance of keeping a sense of balance in deciding what degree of protection
should be afforded. He pointed out that "a high proportion of privately owned
wealth is invested in the matrimonial home . . . ." and referred to "the need to
ensure that the wealth currently tied up in the matrimonial home does not become
economically sterile". He added, at p 188:
"If the rights secured to wives by the law renders vulnerable loans
granted on the security of matrimonial homes, institutions will be unwilling
to accept such security, thereby reducing the flow of loan capital to business
enterprises. It is therefore essential that a law designed to protect the
vulnerable does not render the matrimonial home unacceptable as security to
financial institutions."
Each of these considerations is as relevant and important today as it was
when O'Brien was decided.
One of the difficulties is that the protection
the wife needs in these cases is a remedy against the bank, or other lender, to
whom she is offering the suretyship security. It is not protection against her
husband, who has allegedly procured her to do so by some wrongdoing, that is the
problem. The law has no difficulty in providing an oppressed or deceived wife
with a remedy against the wrongdoing husband. But, in most of the cases with
which the House is now concerned, the husband is supporting his wife in her
attempt to prevent the bank from enforcing its security. They stand together in
attempting to save the family home. In these circumstances, Lord
Browne-Wilkinson held that the requisite protection for wives against the banks
should be provided by the application of the doctrine of constructive notice. He
had in mind that in certain circumstances constructive notice of the husband's
impropriety towards his wife could be imputed to the bank.
The doctrine of notice is a doctrine that
relates primarily and traditionally to the priority of competing property
rights. Lord Browne-Wilkinson described the operation of the doctrine in this
way, at pp 195-196:
"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 had he 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 to take such
other 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."
This is a classic statement of the operation of the doctrine of notice in
order to determine the priority of property rights.
Banks and other lenders who take charges from
surety wives are certainly purchasers of property rights. But they acquire their
rights by grant from the surety wives themselves. The issue between the banks
and the surety wives is not one of priority of competing interests. The issue is
whether or not the surety wife is to be bound by her apparent consent to the
grant of the security to the bank. If contractual consent has been procured by
undue influence or misrepresentation for which a party to the contract is
responsible, the other party, the victim, is entitled, subject to the usual
defences of change of position, affirmation, delay etc, to avoid the contract.
But the case is much more difficult if the undue influence has been exerted or
the misrepresentation has been made not by the party with whom the victim has
contracted, but by a third party. It is, in general, the objective manifestation
of contractual consent that is critical. Deficiencies in the quality of consent
to a contract by a contracting party, brought about by undue influence or
misrepresentation by a third party, do not, in general allow the victim to avoid
the contract. But if the other contracting party had had actual knowledge of the
undue influence or misrepresentation the victim would not, in my opinion, be
held to the contract (see Commission for the New Towns v Cooper (Great
Britain) Ltd [1995] Ch 259, 277-280 and Banco Exterior Internacional SA v
Thomas [1997] 1 WLR 221, 229). But what if there had been no actual knowledge of the third
party's undue influence or misrepresentation but merely knowledge of facts or
circumstances that, if investigated, might have led to actual knowledge? In what
circumstances does the law expect a contracting party to inquire into the
reasons why the other party is entering into the contract or to go behind the
other party's apparent agreement, objectively ascertained, to enter into the
contract? These are the questions that Lord Browne-Wilkinson had to answer in
O'Brien. They are contractual questions, not questions relating to
competing property interests.
Care must, in my opinion, be taken in applying
principles evolved in cases in which the issue has been whether a purchaser was
bound by some pre-existing equitable interest in the purchased property to cases
in which the issue is whether a contracting party can safely rely on the other
contracting party's apparent consent. Among other things, the onus is different.
If a purchaser acquires property over which there is an existing equitable
interest, for example, an equitable charge, it is up to the purchaser to show
that he is a purchaser without notice and so is not bound by the equitable
interest. He must show that his conscience is clear. But if a contracting party,
A, acquires an interest under a contract with another contracting party, B, and
B wishes to escape from the contract on the ground that his consent to it was
procured by the undue influence or a misrepresentation of a third party, A can
rely on B's apparent consent to the contract and it is for B to show that A had
actual or constructive notice of the undue influence or misrepresentation. It
is, in my opinion, important to recognise that constructive notice, in cases
such as those now before the House, is serving a different function from that
served by constructive notice in its traditional role and is not necessarily
subject to the same rules.
In particular, it must be recognised that in the
bank v surety wife cases the constructive notice that is sought to
be attributed to the bank is not constructive notice of any pre-existing prior
right or prior equity of the wife. The husband's impropriety, whether undue
influence or misrepresentation, in procuring his wife to enter into a suretyship
transaction with the bank would not entitle her to set it aside unless the bank
had had notice of the impropriety. It is notice of the husband's impropriety
that the bank must have, not notice of any prior rights of the wife. It is the
notice that the bank has of the impropriety that creates the wife's right to set
aside the transaction. The wife does not have any prior right or prior
equity.
In a case where the financial arrangements with
the bank had been negotiated by the husband, no part in the negotiations having
been played by the wife, and where the arrangements required the wife to become
surety for her husband's debts, the bank would, or should, have been aware of
the vulnerability of the wife and of the risk that her agreement might be
procured by undue influence or misrepresentation by the husband. In these
circumstances the bank would be "put on inquiry", as Lord Browne-Wilkinson put
it. But "on inquiry" about what? Not about the existence of undue influence, for
how could any inquiry reasonably to be expected of a bank satisfy the bank that
there was no undue influence? "On inquiry", in my opinion, as to whether the
wife understood the nature and effect of the transaction she was entering into.
This is not an "inquiry" in the traditional constructive notice sense. The bank
would not have to carry out any investigation or to ask any questions about the
reasons why the wife was agreeing to the transaction or about her relationship
with her husband. The bank would not, unless it had notice of additional facts
pointing to undue influence or misrepresentation, be on notice that undue
influence or misrepresentation was to be presumed. It would simply be on notice
of a risk of some such impropriety. What Lord Browne-Wilkinson had in mind was
that the bank should be expected to take reasonable steps to satisfy itself that
she understood the transaction she was entering into. If the bank did so, no
longer could constructive notice of any impropriety by the husband in procuring
his wife's consent be imputed to it. The original constructive notice would have
been shed. If, on the other hand, a bank with notice of the risk of some such
impropriety, failed to take the requisite reasonable steps, then, if it
transpired that the wife's consent had been procured by the husband's undue
influence or misrepresentation, constructive knowledge that that was so would be
imputed to the bank and the wife would have the same remedies as she would have
had if the bank had had actual knowledge of the impropriety.
Under Lord Browne-Wilkinson's scheme for the
protection of vulnerable wives it is the bank's perception of the risk that the
wife's consent may have been procured by the husband's misrepresentation or
undue influence that is central. The risk must be viewed through the eyes of the
bank. Some degree of risk can, usually, never be wholly eliminated. But it can
be reduced to a point at which it becomes reasonable for the bank to rely on the
apparent consent of the wife to enter into the transaction and to take no
further steps to satisfy itself that she understood the transaction she was
entering into. Lord Browne-Wilkinson thought that, in order to reach this point,
the bank should itself give the wife an explanation of the nature and effect of
the proposed transaction and should advise her to take independent legal advice.
The function of these steps would be to try and ensure that the wife understood
what she was doing in entering into the proposed transaction and that her
consent to do so was an informed consent. But whether these steps would always
be necessary, or would always be sufficient, would depend on the facts of the
particular case. Lord Browne-Wilkinson was not legislating; he was suggesting
steps that, if taken, would in the normal case entitle a bank to rely on the
wife's apparent consent, evidenced by her signature to the document or documents
in question.
In each of the wife v bank appeals now
before your Lordships, the transactions pre-dated O'Brien and the bank
did not have the advantage of the guidance provided by Lord Browne-Wilkinson.
The question to be asked in each of these cases, therefore, is whether at the
time the security was granted to the bank, the bank's perception of the risk
that the grant might have been procured by the husband's impropriety was such as
to have required the bank to take some additional steps to satisfy itself that
she understood the nature and effect of the transaction.
Since Lord Browne-Wilkinson's constructive
notice route for providing protection to vulnerable wives who agree to become
sureties for their husband's debts was substantially based on the risk that the
wife might have been subjected to undue influence by her husband, it is
necessary to review the principles of undue influence on which he built that
protection.
Undue influence
Undue influence cases have, traditionally, been
regarded as falling into two classes, cases where undue influence must be
affirmatively proved (Class 1) and cases where undue influence will be presumed
(Class 2). The nature of the two classes was described by Slade LJ in Bank of
Credit and Commerce International SA [1990] 1 QB 923, at p 953:
"Ever since the judgments of this court in Allcard v Skinner . . .
. a clear distinction has been drawn between (1) those cases in which the
court will uphold a plea of undue influence only if it is satisfied that such
influence has been affirmatively proved on the evidence (commonly referred to
as cases of 'actual undue influence . . . ' 'Class 1' cases); (2) those cases
(commonly referred to as cases of 'presumed undue influence . . . ' 'Class 2'
cases) in which the relationship between the parties will lead the court to
presume that undue influence has been exerted unless evidence is adduced
proving the contrary, eg by showing that the complaining party has had
independent advice".
This passage provides, if I may respectfully say
so, an accurate summary description of the two classes. But, like most
summaries, it requires some qualification.
First, the Class 2 presumption is an evidential
rebuttable presumption. It shifts the onus from the party who is alleging undue
influence to the party who is denying it. Second, the weight of the presumption
will vary from case to case and will depend both on the particular nature of the
relationship and on the particular nature of the impugned transaction. Third,
the type and weight of evidence needed to rebut the presumption will obviously
depend upon the weight of the presumption itself. In Allcard v Skinner
(1887) 36 Ch D 145 the presumption was a very heavy one. Correspondingly strong
evidence would have been needed to rebut it. Even independent legal advice would
not necessarily have sufficed. Lindley LJ, at p 184, made clear his view that
without legal independent advice the presumption could not have been rebutted
but went on to doubt whether independent legal advice would have sufficed
"unless there was also proof that she was free to act on the advice which might
be given to her". And in Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 Lord Hailsham LC said, at p 135:
"their Lordships are not prepared to accept the view that independent
legal advice is the only way in which the presumption can be rebutted . . ."
The onus will, of course, lie on the person
alleging the undue influence to prove in the first instance sufficient facts to
give rise to the presumption. The relationship relied on in support of the
presumption will have to be proved.
In National Westminster Bank v Morgan
[1985] AC 686, 704 Lord Scarman, referring to the character of the impugned
transaction in a Class 2 case, said:
"it must constitute a disadvantage sufficiently serious to require
evidence to rebut the presumption that in the circumstances of the
relationship between the parties it was procured by the exercise of undue
influence".
Lord Scarman went on:
"In my judgment, therefore, the Court of Appeal erred in law in holding
that the presumption of undue influence can arise from the evidence of the
relationship of the parties without also evidence that the transaction itself
was wrongful in that it constituted an advantage taken of the person subjected
to the influence which, failing proof to the contrary, was explicable only on
the basis that undue influence had been exercised to procure it."
With respect to Lord Scarman, the reasoning seems to me to be circular. The
transaction will not be "wrongful" unless it was procured by undue influence.
Its "wrongful" character is a conclusion, not a tool by which to detect the
presence of undue influence. On the other hand, the nature of the transaction,
its inexplicability by reference to the normal motives by which people act, may,
and usually will, constitute important evidential material.
Lord Browne-Wilkinson in CIBC Mortgages Plc v
Pitt [1994] 1 AC 200 pointed out, plainly correctly, that if undue influence
is proved, the victim's right to have the transaction set aside will not depend
upon the disadvantageous quality of the transaction. Where, however a Class 2
presumption of undue influence is said to arise, the nature of the impugned
transaction will always be material, no matter what the relationship between the
parties. Some transactions will be obviously innocuous and innocent. A moderate
gift as a Christmas or birthday present would be an example. A solicitor who is
appointed by a client as his executor and given a legacy of a moderate amount if
he consents to act, is not put to proof of the absence of undue influence before
he can take the legacy. If the nun/postulant/novice in Allcard v Skinner
had given moderate Christmas presents to the Mother Superior, or to the
Sisterhood, no inference that the gifts had been procured by undue influence
could be drawn and no presumption of undue influence would have arisen. It is,
in my opinion, the combination of relationship and the nature of the transaction
that gives rise to the presumption and, if the transaction is challenged, shifts
the onus to the transferee.
In Aboody [1990] 1 QB 923 Slade LJ split
the Class 2 cases into two sub-divisions. He categorised, at p 953, the "well
established categories of relationships, such as a religious superior and
inferior and doctor and patient where the relationship as such will give rise to
the presumption" as Class 2A cases, and confirmed that neither a husband/wife
relationship nor a banker/customer relationship would normally give rise to the
presumption. (See also National Westminster Bank Plc v Morgan [1985] AC 686, 703 and O'Brien [1994] 1 AC 180, 190). He continued, at p 953:
"Nevertheless, on particular facts (frequently referred to in argument as
'Class 2B' cases) relationships not falling within the 'Class 2A' category may
be shown to have become such as to justify the court in applying the same
presumption."
In O'Brien Lord Browne-Wilkinson adopted Slade LJ's Class 2B category
for the purpose of the surety wife cases that he was considering. He said, at pp
189-190:
"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."
In my respectful opinion, this passage, at least
in its application to the surety wife cases, has set the law on a wrong track.
First, it seems to me to lose sight of the evidential and rebuttable character
of the Class 2 presumption. The presumption arises where the combination of the
relationship and the nature of the transaction justify, in the absence of any
other evidence, a conclusion that the transaction was procured by the undue
influence of the dominant party. Such a conclusion, reached on a balance of
probabilities, is based upon inferences to be drawn from that combination. There
are some relationships, generally of a fiduciary character, where, as a matter
of policy, the law requires the dominant party to justify the righteousness of
the transaction. These relationships do not include the husband wife
relationship. In the surety wife cases, the complainant does have to prove undue
influence: the presumption, if it arises on the facts of a particular case, is a
tool to assist him or her in doing so. It shifts, for the moment, the onus of
proof to the other side.
Second, the passage cited appears to regard a
relationship of trust and confidence between a wife and husband as something
special rather than as the norm. For my part, I would assume in every case in
which a wife and husband are living together that there is a reciprocal trust
and confidence between them. In the fairly common circumstance that the
financial and business decisions of the family are primarily taken by the
husband, I would assume that the wife would have trust and confidence in his
ability to do so and would support his decisions. I would not expect evidence to
be necessary to establish the existence of that trust and confidence. I would
expect evidence to be necessary to demonstrate its absence. In cases where
experience, probably bitter, had led a wife to doubt the wisdom of her husband's
financial or business decisions, I still would not regard her willingness to
support those decisions with her own assets as an indication that he had exerted
undue influence over her to persuade her to do so. Rather I would regard her
support as a natural and admirable consequence of the relationship of a mutually
loyal married couple. The proposition that if a wife, who generally reposes
trust and confidence in her husband, agrees to become surety to support his
debts or his business enterprises a presumption of undue influence arises is one
that I am unable to accept. To regard the husband in such a case as a presumed
"wrongdoer" does not seem to me consistent with the relationship of trust and
confidence that is a part of every healthy marriage.
There are, of course, cases where a husband does
abuse that trust and confidence. He may do so by expressions of quite
unjustified over-optimistic enthusiasm about the prospects of success of his
business enterprises. He may do so by positive misrepresentation of his business
intentions, or of the nature of the security he is asking his wife to grant his
creditors, or of some other material matter. He may do so by subjecting her to
excessive pressure, emotional blackmail or bullying in order to persuade her to
sign. But none of these things should, in my opinion, be presumed merely from
the fact of the relationship of general trust and confidence. More is needed
before the stage is reached at which, in the absence of any other evidence, an
inference of undue influence can properly be drawn or a presumption of the
existence of undue influence can be said to arise.
For my part, I doubt the utility of the Class
2(B) classification. Class 2(A) is useful in identifying particular
relationships where the presumption arises. The presumption in Class 2(B) cases,
however, is doing no more than recognising that evidence of the relationship
between the dominant and subservient parties, coupled with whatever other
evidence is for the time being available, may be sufficient to justify a finding
of undue influence on the balance of probabilities. The onus shifts to the
defendant. Unless the defendant introduces evidence to counteract the inference
of undue influence that the complainant's evidence justifies, the complainant
will succeed. In my opinion, the presumption of undue influence in Class 2(B)
cases has the same function in undue influence cases as res ipsa loquitur
has in negligence cases. It recognises an evidential state of affairs in
which the onus has shifted.
In the surety wife cases it should, in my
opinion, be recognised that undue influence, though a possible explanation for
the wife's agreement to become surety, is a relatively unlikely one.
O'Brien itself was a misrepresentation case. Undue influence had been
alleged but the undoubted pressure which the husband had brought to bear to
persuade his reluctant wife to sign was not regarded by the judge or the Court
of Appeal as constituting undue influence. The wife's will had not been
overborne by her husband. Nor was O'Brien a case in which, in my opinion,
there would have been at any stage in the case a presumption of undue
influence.
The steps to be taken by the creditor bank
The protection that Lord Browne-Wilkinson
proposed for the vulnerable surety wives is based upon the undoubted risk that
in procuring his wife's consent to the transaction the husband might have used
undue influence or made some material misrepresentation and upon the proposition
that the bank must be taken to be aware of the existence of the risk. So the
bank should take reasonable steps to satisfy itself that the wife understands
what she is doing. The protection is not based upon the bank's knowledge of
facts from which a presumption of undue influence arises. If, of course, a bank
is aware of such facts, the steps the bank will then have to take in order to be
able with safety to rely on the wife's apparent consent to the transaction may
be considerable. In his dissenting judgment in Banco Exterior Internacional v
Mann [1995] 1 All ER 936 Hobhouse LJ (as he then was) said, at p 948:
"It must be remembered that the starting point of this exercise is that
the wife's will is being unduly and improperly influenced by the will of her
husband. The steps taken have to be directed to freeing her of that influence
or, at the least, providing some counterbalance."
I respectfully agree that if the bank is indeed
aware of facts from which undue influence is to be presumed, the steps to be
taken would be of the sort Hobhouse LJ describes. But in the ordinary case the
facts of which the bank is aware, or must be taken to be aware, point to no more
than the existence of the inevitable risk that there may have been undue
influence or some other impropriety and are not facts sufficient by themselves
to give rise to a presumption of undue influence. In such a case the bank does
not have to take steps to satisfy itself that there is no undue influence. It
must take steps to satisfy itself that the wife understands the nature and
effect of the transaction.
Lord Browne-Wilkinson made clear, at [1994] 1 AC 180, 197, that it would only be in exceptional cases "where a creditor has
knowledge of further facts which render the presence of undue influence not only
possible but probable" that a bank would, to be safe, have to insist that the
wife be separately advised. In other cases it would suffice if the bank took
steps "to bring home to the wife the risk she is running by standing as surety
and to advise her to take separate advice" (p 196). He added that, as to past
transactions - and each of the cases now before the House involves a past
transaction - it would depend on the facts of each case whether the bank had
satisfied the reasonable steps test. I would emphasise and repeat that the
purpose of the steps, in the ordinary surety wife case, would be to satisfy the
bank that the wife understood the nature and effect of the transaction she was
entering into.
The problems
The application of the O'Brien principles
has, in the appeals now before the House, given rise to some particular problems
which are to be found, also, in most of the post O'Brien reported
cases.
Solicitors' Advice
In a number of cases a firm of solicitors has
been acting for the husband in the transaction with the bank and has acted also
for the wife in connection with the grant of the security to the bank. In many
cases, the same solicitor acting for the husband and the wife has been asked by
the bank to act for it in connection with the completion of the security. A
number of questions arise: for instance
1. Does the fact that, to the knowledge of the bank, a
solicitor is acting for the wife in the security transaction entitle the bank
reasonably to believe that the solicitor will have given her an adequate
explanation of the nature and effect of the security document she is to sign?
2. If so, are there, in the ordinary case, ie where there is no
special reason for the bank to suspect undue influence or other impropriety,
any other steps that the bank ought reasonably to take?
3. If the answer to question 1 is 'yes' and to question 2 is
'No', does the fact that the solicitor is also the husband's solicitor and is
acting for the bank in arranging for completion of the security bar the bank
from relying on the solicitor's role in acting for the wife?
4. In many cases the solicitor in whose offices the wife has
signed the security document has confirmed, sometimes on the document itself
and sometimes in a covering letter to the bank, that the nature and effect of
the document has first been explained to the wife and that she has appeared to
understand it and to be entering freely into the transaction, or to that
effect. If in these cases the solicitor has in fact given no, or no adequate,
explanation of the document to the wife, in what circumstances can the
solicitor's knowledge of his failure be attributed to the bank?
As to question 1, the duty of a solicitor
towards his client is, in every case, dependent on the instructions, express or
implied, that he has received from his client. A solicitor acting for a client
in connection with a proposed transaction under which the client is to become
surety or give security for the debts of another will not necessarily have
instructions to advise the client about the nature and effect of the
transaction. In most cases such instructions, if not express, would, I think, be
implied; but it is at least possible that the circumstances of the solicitor's
retainer would not require him to give such advice. So, in my opinion, knowledge
by a bank that a solicitor is acting for a surety wife does not, without more,
justify the bank in assuming that the solicitor's instructions extend to
advising her about the nature and effect of the transaction.
Normally, however, a solicitor, instructed to
act for a surety wife in connection with a suretyship transaction would owe a
duty to the wife to explain to her the nature and effect of the document or
documents she was to sign. Exactly what the explanation should consist of would
obviously depend in each case on the facts of that case and on any particular
concerns that the wife might have communicated to the solicitor. In general,
however, the solicitor should, in my opinion:
(i) explain to the wife, on a worst case footing, the steps the bank
might take to enforce its security;
(ii) make sure the wife understands the extent of the liabilities that
may come to be secured under the security;
(iii) explain the likely duration of the security;
(iv) ascertain whether the wife is aware of any existing indebtedness
that will, if she grants the security, be secured under it;
(v) explain to the wife that he may need to give the bank a written
confirmation that he has advised her about the nature and effect of the
proposed transaction and obtain her consent to his doing so.
I think the solicitor should, probably, begin by
trying to discover from the wife her understanding of the proposed transaction.
He, the solicitor, may then be in a position to remedy any misapprehensions and
cure any misrepresentations.
A bank, proposing to take a security from a
surety wife for whom a solicitor is acting, requires, first, confirmation that
the solicitor's instructions do extend to advising her about the nature and
effect of the transaction. Subject to that confirmation, however, the bank is,
in my opinion, entitled reasonably to believe that the solicitor will have
advised her on the matters to which I have referred and, accordingly, that she
has had an adequate explanation and has an adequate understanding of the
transaction.
As to question 2, there are, in my opinion, in
the ordinary case and subject to the points about disclosure that I will make
later, no other steps that the bank can reasonably be required to take. In
particular the bank does not, in order to be able safely to rely on the security
being offered, have to advise the wife about the wisdom of her entry into the
transaction, or about the bank's opinion of the financial state or business
prospects of the principal debtor.
As to question 3, the fact that the solicitor is
acting also for the bank in arranging for completion of the security does not,
in my opinion, alter the answers to questions 1 and 2. The solicitor's role in
acting for the bank is essentially administrative. He must see that the security
document is validly executed and, if necessary, see to its registration. If
there are documents of title to whose custody the bank, as chargee, is entitled,
the solicitor will usually have to obtain them and hold them to the bank's
order. But he has no consultative role vis a vis the bank. His duties to the
bank do not, in my opinion, in the least prejudice his suitability to advise the
wife.
If the solicitor is acting also for the husband,
his role presents a little more difficulty. It is, after all, the existence of
the risk of undue influence or misrepresentation by the husband that requires
the bank to be reasonably satisfied that the wife understands the nature and
effect of the transaction. If there is some particular reason known to the bank
for suspecting undue influence or other impropriety by the husband, then, in my
view, the bank should insist on advice being given to the wife by a solicitor
independent of the husband (see Lord Browne-Wilkinson in O'Brien,
at p 197). But in a case in which there is no such particular reason, and
the risk is no more than the possibility, present in all surety wife cases, of
impropriety by the husband, there is no reason, in my opinion, why the solicitor
advising the wife should not also be the husband's solicitor. In the ordinary
case, in my opinion, the bank is entitled to rely on the professional competence
and propriety of the solicitor in providing proper and adequate advice to the
wife notwithstanding that he, the solicitor, is acting also for the husband.
As to question 4, if the bank knows or has
reason to suspect that the solicitor has not given the wife a proper explanation
of the nature and effect of the security document, the bank should take some
appropriate steps to remedy the failure. The failure of the solicitor to give
the bank written confirmation that he has given the wife such an explanation
will in many cases give the bank reason to suspect that he has not done so. In
general, however, it will be reasonable for the bank to believe that the
solicitor has properly discharged his professional duty.
Mr Sher QC, counsel for five of the wives,
placed some reliance on section 199(1)(ii)(b) of the Law of Property Act
1925:
"(1) A purchaser shall not be prejudicially affected by notice
of . . .
(ii) any . . . matter or any fact or thing unless
(b) in the same transaction with respect to which a question of
notice to the purchaser arises, it has come to the knowledge of his counsel,
as such, or of his solicitor or other agent, as such . . . ."
Mr Sher submitted that if a solicitor was
instructed by a bank to arrange on its behalf for completion of a security to be
granted by a surety wife, the solicitor was, for the purpose of any explanation
or advice to be given to the wife, acting not only as the wife's solicitor but
also as the bank's solicitor. That being so, the solicitor's knowledge of his
own failure should, Mr Sher submitted, be attributed to the bank. Particularly,
he submitted, this should be so if the solicitor's instructions from the bank
had included a request that the solicitor give appropriate advice to the
wife.
A distinction must, in my opinion, be drawn
between the case where the solicitor, as well as having instructions from the
bank, is solicitor for the wife and the case where the solicitor's only
instructions come from the bank and the bank is his only client. In the former
case, the solicitor' s duty, so far as advice to the wife is concerned, is owed
to her and her alone. The fact that a request for him to advise her may have
been made by the bank is immaterial on this point. It follows that in advising
her the solicitor is not acting as the bank's solicitor and section
199(1)(ii)(b) does not apply.
A different conclusion must, in my opinion, be
reached if the solicitor in question never does become the wife's solicitor. The
formation of a solicitor/client relationship may come about by express retainer
or the retainer may be implied by conduct. But whichever it is, it is not a
relationship which can be brought into existence by the solicitor unilaterally.
In making these comments I have in mind the assumed facts in Wallace that
are more fully set out below (see pp 92-94). Shortly stated, the bank asked the
solicitor to arrange for completion of the security and to advise the wife about
it, the solicitor represented to the bank that he had advised the wife, the bank
had no reason to doubt that that was so, but in fact the solicitor had given no
advice or tendered any other services to the wife, other than witnessing her
signature, a service for which he charged the bank, and she had had no reason to
and did not regard him as acting for her. In those circumstances, the solicitor
was, in my opinion, acting for the bank alone and his knowledge that no one had
given the wife any explanation or advice about the security document could
properly be attributed to the bank. But, as I have said, in cases where the
solicitor has become the wife's solicitor and owes her a duty to advise her
about the security document, his knowledge of his own failure to discharge that
duty cannot, in my view, be attributed to the bank.
In Etridge (No 2) [1998] 4 All ER 705,
721 Stuart-Smith LJ set out, in para 44, a number of propositions, (1) to (6),
relating to legal advice to a surety wife. I respectfully agree with all these
propositions, save that knowledge by a bank of special facts pointing to undue
influence might require a different approach and that where the solicitor was
acting only for the bank and had never become the solicitor for the wife, his
knowledge of what had or had not taken place regarding advice to the wife might
well be imputed to the bank.
At p 715, para 19 of the Etridge (No 2)
judgment Stuart-Smith LJ expressed the view of the court as to the duty owed by
a solicitor "instructed to advise a person who may be subject to the undue
influence of another". He said:
"It is not sufficient to explain the documentation and ensure that she
understands the nature of the transaction and wishes to carry it out."
and:
"His duty is to satisfy himself that his client is free from improper
influence, and the first step must be to ascertain whether it is one into
which she could sensibly be advised to enter if free from such influence."
These passages were cited and applied by Mance
LJ in Kenyon-Brown v Desmond Banks & Co [2000] PNLR 266, 273.
I must respectfully dissent. The duty thus described may be applicable in a
case in which the solicitor has had something or other drawn to his attention
which arouses suspicion that the wife may be the victim of undue influence. In
the ordinary case, however, where there is no more than a normal relationship of
trust and confidence, financial arrangements negotiated by the husband with the
bank and the wife proposing to become surety for her husband's, or his
company's, debts, there will be no presumption of undue influence and no
reasonable basis for suspicion of its existence. There will be a risk, a
possibility, of undue influence or misrepresentation, but no more than that. The
solicitor in such a case does not have a duty to satisfy himself of the absence
of undue influence. His duty is accurately described as a duty to satisfy
himself that his client understands the nature and effect of the transaction and
is willing to enter into it.
Disclosure
One of the issues that has arisen in several of
the cases is as to the extent of disclosure to the surety wife, or to the
solicitor acting for her, that is required of the bank.
As to this, the wife's understanding of the
nature and effect of the security document she is asked to sign should,
obviously, be an informed understanding. It is necessary, it seems to me, to
consider, first, the extent of the obligation of disclosure to a would-be surety
that lies generally upon the creditor and, secondly, to consider whether any
additional disclosure has to be made where a wife is proposing to stand surety
for her husband's debts.
The general law
A suretyship contract is not a contract
uberrimae fidei. In Seaton v Heath [1899] 1 QB 782 Romer LJ said,
at p 793:
"The risk undertaken is generally known to the surety and the
circumstances generally point to the view that as between the creditor and
surety it was contemplated and intended that the surety should take upon
himself to ascertain exactly what risk he was taking upon himself."
But although a would-be surety is, in general,
expected to acquaint himself with the risk he is undertaking, the creditor is
under an obligation to disclose to the intending surety
"anything which might not naturally be expected to take place between the
parties who are concerned in the transaction, that is, whether there be a
contract between the debtor and the creditor, to the effect that his position
shall be different from that which the surety might naturally expect" (per
Lord Campbell in Hamilton v Watson (1845) 12 Cl & F 109 at 119).
This passage from Lord Campbell's judgment in
Hamilton v Watson was cited by Vaughan Williams LJ in London General
Omnibus Co Ltd v Holloway [1912] 2 KB 72, 78. Vaughan Williams LJ continued,
at p 79:
"Lord Campbell, it is true, takes as his example of what might not be
naturally expected an unusual contract between creditor and debtor whose debt
the surety guarantees, but I take it this is only an example of the general
proposition that a creditor must reveal to the surety every fact which under
the circumstances the surety would expect not to exist, for the omission to
mention that such a fact does exist is an implied representation that it does
not."
The general proposition expressed by Vaughan
Williams LJ was somewhat extended by King CJ in Pooraka Holdings Pty Ltd v
Participation Nominees Pty Ltd (1991) 58 SASR 184. The duty of disclosure,
said King CJ, extends to any unusual feature surrounding the transaction between
the creditor and the surety (a) of which the creditor is or ought to be aware,
(b) of which the surety is unaware, and (c) which the creditor appreciates, or
in the circumstances ought to appreciate, might be unknown to the surety and
might affect the surety's decision to become a surety. This statement of the
extent of the disclosure obligation may be too wide. But at least, in my
opinion, the obligation should extend to unusual features of the contractual
relationship between the creditor and the principal debtor, or between the
creditor and other creditors of the principal debtor, that would or might affect
the rights of the surety (see generally the discussion of this topic in
O'Donovan & Phillips, The Modern Contract of Guarantee, 3rd ed
(1996), at pp 122-131).
Disclosure to surety wives
In general, in my opinion, there is no greater
obligation of disclosure owed by a bank, or other creditor, to a surety wife
than to any other surety. There is, however, a difference. Where a wife is
offering to stand as surety for her husband's, or his company's debts, the risk
that her consent to do so may have been improperly procured, requires the
creditor, if it is to be able safely to rely on her apparent consent, to take
reasonable steps to satisfy itself that she understands what she is doing. In
order to satisfy itself about this, and in order that her understanding may be
an informed understanding, it may be necessary for the creditor to disclose the
amount of any existing indebtedness that will be covered by the security. It may
for the same reason be necessary for the creditor to disclose the amount of new
money that is being made available to the principal debtor and will be covered
by the security. The financial details to which I have referred would not, under
the general law, have to be disclosed by a creditor to the would-be surety. They
are details that the creditor could expect the surety, as part of the surety's
risk assessment, to find out for himself. But the surety wife cases present
their own special problems, as was recognised in O'Brien. In the surety
wife cases, and in any other cases in which a creditor is placed on inquiry as
to whether the surety's apparent consent to the transaction may have been
procured by some impropriety of the principal debtor, the reasonable steps the
creditor should take would generally include, in my opinion, disclosing to the
surety the financial details to which I have referred. Failure to do so would
not matter, of course, if the surety already knew the details or if the creditor
had reason to believe that the surety knew. I should, perhaps, add that the
failure of a creditor to have disclosed these details should not, without more,
be taken, in relation to past transactions, to show that the creditor had failed
to take reasonable steps.
The financial details to which I have referred
would, if the creditor were a bank, normally be confidential. The bank would not
be entitled to disclose them without the consent of its client, the principal
debtor. However, in the surety wife cases I would regard the husband's proposal
that the wife stand surety for his, or his company's, debts as constituting an
implied authority to the bank to disclose those details to the wife. Express
instructions to the contrary, if given by the husband to the bank, would
constitute a warning to the bank of an extra risk that the husband might be
abusing his wife's trust and confidence in him. I think that the bank, before it
could safely rely on the wife's apparent consent to the suretyship, would then
need to insist that she receive legal advice from a solicitor independent of her
husband.
Summary
My Lords I think, given the regrettable length
of this opinion, I should try and summarise my views about the principles that
apply and the practice that should be followed in surety wife cases.
1. The issue as between the surety wife and the lender bank is
whether the bank may rely on the apparent consent of the wife to the suretyship
transaction.
2. If the bank knows that the surety wife's consent to the
transaction has been procured by undue influence or misrepresentation, or if it
has shut its eyes to the likelihood that that was so, it may not rely on her
apparent consent.
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 the 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 has 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.
6. If there are any facts known to the bank which increase the
inherent risk that the wife's consent to the transaction may have been procured
by the husband's undue influence or misrepresentation, it may be necessary for
the bank to be satisfied that the wife has received advice about the transaction
from a solicitor independent of the husband before the bank can reasonably rely
on the wife's apparent consent.
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 delay, acquiescence, change of position etc.,
be able to set aside the transaction if her consent was in fact procured by
undue influence or misrepresentation.
8. Subject to special instructions or special circumstances, the
duty of a solicitor instructed to act for a wife proposing to stand as surety,
or to give security, for her husband's debts is to try and make sure that she
understands the nature and effect of the transaction.
9. In all surety wife cases the bank should disclose to the surety
wife, or to the solicitor acting for her, the amount of the existing
indebtedness of the principal debtor to the bank and the amount of the proposed
new loan or drawing facility.
10. Subject to 9 above, a creditor has no greater duty of
disclosure to a surety wife than to any other intending surety.
I am in full agreement with the analysis of the
applicable principles of law and with the conclusions expressed in the opinion
of my noble and learned friend Lord Nicholls of Birkenhead. I believe the
analysis I have sought to give in this opinion and my conclusions are consistent
with them.
I must now turn to the individual cases.
Royal Bank of Scotland Plc v Etridge
This case comes to the House after a full trial
before Judge Behrens, sitting as a judge in the Queen's Bench Division.
Judge Behrens held that even if Mrs Etridge's
consent to the bank's charge had been procured by the undue influence of Mr
Etridge, the bank had had no notice, constructive or otherwise, of the undue
influence. The Court of Appeal upheld him.
The relevant facts were these:
In August 1988 Mr and Mrs Etridge were living in Harewood House, Longparish,
Hampshire. The property stood in Mrs Etridge's sole name. It was subject to a
charge to the bank to secure the indebtedness to the bank of Anthony Thomas
& Co, a company owned and controlled by Mr Etridge. A firm of solicitors,
Memery Crystal, had acted for Mr and Mrs Etridge in connection both with the
purchase and with the bank's charge.
By August 1988 Mr Etridge had an overdraft
facility with the bank of £100,000. He had also borrowed £195,000 from the
trustees of a private trust (the Ambetta trustees). This debt was not secured on
Harewood House.
In August 1988 Mr and Mrs Etridge decided to
sell Harewood House and purchase in its place The Old Rectory, Laverstoke,
Hampshire. Mr Etridge was the contracting purchaser of The Old Rectory. The
purchase price was £505,000. It was his and Mrs Etridge's intention that The Old
Rectory would, on completion of the purchase, be conveyed to Mrs Etridge alone.
Memery Crystal were instructed to act in the sale of Harewood House but another
firm, Robert Gore & Co, were instructed by Mr Etridge to act in the purchase
of The Old Rectory.
The purchase of The Old Rectory was to be
financed partly out of the proceeds of the sale of Harewood House and partly out
of new money to be advanced by the bank. In addition, money was to be advanced
by the Ambetta trustees. The financial arrangements were fairly complex and were
negotiated by Mr Etridge. Mrs Etridge played no part in the negotiations.
The sale price of Harewood House was £240,000.
The net proceeds, after the Anthony Thomas & Co overdraft charged on
Harewood House had been repaid, were £142,000 or thereabouts. On the day of
completion of the purchase of The Old Rectory, Mr Etridge drew £261,956 odd from
the bank, thereby creating an overdraft of £119,915 odd. The £261,956, plus a
further advance of £200,000 from the Ambetta trustees, enabled the amount due on
completion to be paid. The debts owing both to the bank and to the Ambetta
trustees were to be secured by charges over The Old Rectory. As between the two
chargees, it was agreed that the bank would have priority in respect of £100,000
and interest thereon. Next would come the debt owing to the Ambetta
trustees.
On 27 September 1988, the bank had instructed
Robert Gore & Co to act for the bank in connection with the charge that the
bank was to be granted over The Old Rectory. The letter of instructions
said:
Purchase of The Old Rectory, Laverstoke,
We understand you act for the above and would advise that as security for
existing facilities we require to take a First Legal Charge over the above
property. For Land Registry purposes we are relying on the Legal Charge to the
extent of £100,000.
We enclose the documents detailed below and would ask that you act on our
behalf in the completion of our security.
Prior to execution, please ensure the property details are correct and
inserting further details as may be required. Please explain the contents and
effects of the document to Mrs Etridge, confirming she understands the same by
signing the legal advice clause prior to witnessing her signature."
Similar instructions were given to Robert Gore
& Co by the Ambetta trustees.
On 3 October 1988 Mr and Mrs Etridge attended
the offices of Robert Gore & Co and saw Mr Ellis, an employed solicitor with
the firm. Mrs Etridge signed all the documents relating to the acquisition of
The Old Rectory, including the bank's charge and the Ambetta trustees' charge.
The bank's charge was expressed to be a security for Mr Etridge's liabilities to
the bank and was unlimited in amount. The Ambetta trustees' charge was expressed
to be a security for Mr Etridge's liabilities to the trustees subject to a limit
of £395,000. Mrs Etridge's signature was witnessed by Mr Ellis who endorsed the
bank's charge with the words:
"I hereby confirm that prior to the execution of this document I explained
the contents and effect thereof to [Mrs Etridge] who informed me that he/she
understood the same."
The Ambetta charge was endorsed with words to the same effect.
In fact, Mr Ellis gave Mrs Etridge no advice of
any kind as to the nature or content of the documents she was signing. She
signed the documents without reading them or seeking any explanation of them.
Her evidence to Judge Behrens was that she did so, trusting her husband and
quite unaware that she was creating charges over The Old Rectory. She said that
she was wholly unaware of the extent of Mr Etridge's borrowings. Judge Behrens
accepted this evidence.
The transfer of The Old Rectory to Mrs Etridge
and the two charges were completed on 4 October 1988.
In April 1990 the bank, and in August 1991 the
Ambetta trustees, demanded repayment of their respective secured loans. Both
then commenced proceedings for, among other things, possession of The Old
Rectory with a view to its sale.
Mrs Etridge's defence was that her signature to
the charges had been procured by the undue influence of her husband, that the
bank and the Ambetta trustees must be taken to have had constructive notice that
that was so and that in consequence she was not bound by the charges. She
contended, also, that the bank had constituted Robert Gore & Co its agents
for the purpose of giving her advice about the charges and that Mr Ellis'
knowledge that he had not done so should, therefore, be attributed to the
bank.
As well as defending the proceedings brought
against her by the bank and the Ambetta trustees, Mrs Etridge sued Robert Gore
& Co for negligence. The three claims were tried together.
Judge Behrens held that even if there had been
undue influence by Mr Etridge in procuring Mrs Etridge to agree to the grant of
the two charges, notice of that impropriety could not be attributed either to
the bank or to the Ambetta trustees. He held that both the bank and the Ambetta
trustees had been entitled to rely on the confirmation, given by Mr Ellis by
means of the endorsements on the charges, that Mrs Etridge had had the effect
and contents of the charges explained to her (see p 19 of his judgment).
The judge held, also, that "on the evidence
before me there was no actual undue influence . . . . ". He followed this
finding, however, by holding that "subject to the manifest disadvantage point
there was presumed undue influence within category 2B". As to manifest
disadvantage, he held that there was no manifest disadvantage to Mrs Etridge in
the charge granted to the bank. This was because the liabilities secured by the
charge included £100,000 advanced by the bank to Mr Etridge to enable the
purchase of The Old Rectory to be completed.
The judge held, however, that there was manifest
disadvantage to Mrs Etridge in the charge granted to the Ambetta trustees
because only £200,000 of the £395,000 secured by the charge had been advanced to
enable the purchase of The Old Rectory to be completed.
It appears, therefore, that, subject to the
judge's conclusion on constructive notice, he would have held that Mrs Etridge
was bound by the bank charge but not bound by the Ambetta trustees' charge.
As to Mrs Etridge's breach of duty claim against
Robert Gore & Co the firm admitted liability to Mrs Etridge for breach of
duty but was satisfied on the evidence of Mrs Etridge herself that she would
have signed the two charges even if she had had a complete and full explanation
of their contents and effect. So he awarded her only £2 nominal damages.
On Mrs Etridge's appeal, the Court of Appeal
rejected her challenge to the judge's finding that there had been no actual
undue influence but agreed that, subject to manifest disadvantage, there was
presumed undue influence within category 2B. The Court of Appeal agreed, also,
that notwithstanding that the bank charge secured Mr Etridge's indebtedness to
an unlimited amount, the charge was not to Mrs Etridge's manifest disadvantage.
The Ambetta trustees did not challenge the judge's conclusion that their charge
was to the manifest disadvantage of Mrs Etridge.
On the constructive notice issue, too, the Court
of Appeal agreed with the judge.
Mrs Etridge appealed against the judge's
conclusion that she was entitled only to nominal damages against Robert Gore
& Co. The Court of Appeal dismissed her appeal on 28 April 1999 [1999] PNLR 839.
In the period during which the appeal to this
House has been pending, terms of settlement have been reached between Mrs
Etridge and the Ambetta trustees. So it is only her appeal in the bank's
proceedings that is before the House for decision.
My Lords, the manner which first Judge Behrens
and then the Court of Appeal dealt with the presumption of undue influence and
with the part to be played by manifest disadvantage demonstrates, in my opinion,
the tangle that the case law in this area has got into.
The presumption of undue influence, whether in a
category 2A case, or in a category 2B case, is a rebuttable evidential
presumption. It is a presumption which arises if the nature of the relationship
between two parties coupled with the nature of the transaction between them is
such as justifies, in the absence of any other evidence, an inference that the
transaction was procured by the undue influence of one party over the other.
This evidential presumption shifts the onus to the dominant party and requires
the dominant party, if he is to avoid a finding of undue influence, to adduce
some sufficient additional evidence to rebut the presumption. In a case where
there has been a full trial, however, the judge must decide on the totality of
the evidence before the court whether or not the allegation of undue influence
has been proved. In an appropriate case the presumption may carry the
complainant home. But it makes no sense to find, on the one hand, that there was
no undue influence but, on the other hand, that the presumption applies. If the
presumption does, after all the evidence has been heard, still apply, then a
finding of undue influence is justified. If, on the other hand, the judge,
having heard the evidence, concludes that there was no undue influence, the
presumption stands rebutted. A finding of actual undue influence and a finding
that there is a presumption of undue influence are not alternatives to one
another. The presumption is, I repeat, an evidential presumption. If it applies,
and the evidence is not sufficient to rebut it, an allegation of undue influence
succeeds.
As to manifest disadvantage, the expression is
no more than shorthand for the proposition that the nature and ingredients of
the impugned transaction are essential factors in deciding whether the
evidential presumption has arisen and in determining the strength of that
presumption. It is not a divining-rod by means of which the presence of undue
influence in the procuring of a transaction can be identified. It is merely a
description of a transaction which cannot be explained by reference to the
ordinary motives by which people are accustomed to act.
In the present case, the judge's conclusion that
there had been no actual undue influence was reached after considering all the
evidence. There was evidence of the relationship between Mr and Mrs Etridge.
Their relationship was, as one would expect of a married couple living together
with the family income being provided by the husband's business activities and
with financial decisions affecting the family being taken by the husband, a
relationship of trust and confidence by her in him. But there was no evidence of
abuse by Mr Etridge of that relationship, or of any bullying of Mrs Etridge in
order to persuade her to support his decisions. Both the transactions under
attack had been entered into in part in order to provide finance for the
purchase of The Old Rectory and in part to obtain financial support for Mr
Etridge in his business enterprises. Both had elements disadvantageous to her
and elements that were to her advantage. To draw a distinction between the two
charges as to inferences of undue influence that might be drawn was, in my
opinion, unreal. In my view, the judge's conclusion that there had been no undue
influence was well justified on the evidence. That conclusion should have been
an end of the case.
Before your Lordships Mr Mawrey QC, counsel for
Mrs Etridge, argued that Mrs Etridge's ignorance of the nature or contents of
the documents she was signing and, in particular, her ignorance that she was
charging The Old Rectory as a security for her husband's debts, enabled her to
contend that she had been induced to sign by her husband's misrepresentation. Mr
Etridge had had a duty to explain to her the nature of the transaction. His
failure to do so constituted a misrepresentation by silence.
Mr Mawrey told us that misrepresentation had
always been part of Mrs Etridge's case, and indeed it figures in her pleading.
But there is no reference to it in Judge Behrens' judgment. He made no finding
on misrepresentation. Nor did the Court of Appeal comment on the point. It is
fair to conclude, therefore, that if the misrepresentation point was argued at
all below, it could only have been very faintly. This is not surprising for the
point is not sustainable. First, a misrepresentation must, if it is to lead to
an equitable or legal remedy, have led to a false impression about some material
matter being held by the victim. In the present case Mrs Etridge had no
impression at all as to the nature of the documents she was signing. No false
impression had been planted on her by Mr Etridge. Mr Etridge's silence did not
lead her to form, or to continue to hold, any false impression. She did not
bother to read the documents that were placed before her for signature, and no
one explained them to her, so she did not know what she was signing. But she was
not persuaded to sign by any misrepresentation. Second, Judge Behrens found as a
fact that if the nature and content of the documents had been explained to her,
she would still have signed. So, if there had been any misrepresentation as to
the nature and content of the documents, it had no relevant causative effect.
The misrepresentation contention is, in my opinion, for both these reasons a
hopeless one.
There was, therefore, nothing, no undue
influence and no misrepresentation, to which constructive notice could
attach.
As to constructive notice, the bank was of
course aware that Mrs Etridge was offering her property, The Old Rectory, to
secure her husband's indebtedness. The bank was, therefore, on notice of a risk
that her consent to grant the security might have been improperly obtained by
her husband. The bank had no particular reason to suspect either undue influence
or misrepresentation but the risk, attendant in every case where a wife is being
asked to stand surety for her husband's debts, was present.
But Mrs Etridge was, to the knowledge of the
bank, being advised by Robert Gore & Co, solicitors. The solicitors
confirmed to the bank, in the event falsely but the bank was not to know that
that was so, that they had advised Mrs Etridge about the content and effect of
the charge. That confirmation, from the bank's point of view, reduced the risk
that Mrs Etridge's consent to grant the charge might have been improperly
obtained. The possibility that there might have been some such impropriety could
never be wholly eliminated. But the fact that to the bank's knowledge there were
solicitors acting for Mrs Etridge, and the fact that they had told the bank that
they had advised her about the content and effect of the charge, entitled the
bank, in my opinion, to be satisfied that it was safe in relying on her apparent
consent. There were no further steps that the bank could reasonably have been
required to take.
Nor, in my opinion, can Robert Gore & Co's
knowledge that they had failed to give Mrs Etridge the requisite advice be
imputed to the bank. The solicitors were not the bank's agents for the purpose
of advising Mrs Etridge.
In my opinion, therefore, Mrs Etridge's appeal
fails and should be dismissed.
Barclays Bank plc v Harris
In this case there has not yet been a trial. Mrs
Harris' appeal to your Lordships' House is against an interlocutory order
striking-out her Defence and Counterclaim and giving judgment for the bank on
its claim for possession. It must, therefore, be assumed that the primary
allegations of fact pleaded by Mrs Harris are true.
Mr and Mrs Harris were in 1988 joint owners of
The Old Rectory, Nether Whitacre, Coleshill, Warwickshire. They had purchased
the property in 1976 for £39,000. By 1988 its value was in the region of
£200,000. There were two mortgages on the property securing in total about
£28,000.
Mr Harris was an industrial chemist. He carried
on business through the medium of two companies. One, High Tec Powder Coatings
Ltd (High Tec), carried on the business of industrial powder coatings producers
and finishers. High Tec had an issued share capital of £10,000 divided into
10,000 £1 shares of which 2,499 were held by Mr Harris and 2,499 by Mrs Harris.
Mr and Mrs Harris and their son, Peter, were directors of High Tec. But Mrs
Harris took no actual part in the conduct of High Tec's business and is
described in the company documents as "Housewife". Mr Harris had given
guarantees of High Tec's liabilities to the company's bankers and to its
landlords. These guarantees were not secured on The Old Rectory.
Mr Harris' other company was S T Harris (Powder
Coatings Consultant) Ltd (PCC). Mr Harris' services as a powder coatings
consultant were made available to clients through the medium of PCC. PCC had an
issued share capital of £2, of which one £1 share was held by Mr Harris and the
other by Mrs Harris. They were the directors of PCC and Mrs Harris was the
company secretary. As with High Tec, she took no part in PCC's business and was
described in the company documents as "Housewife".
By 1988 High Tec was in serious financial
difficulties. Mr Harris' potential liability under the guarantee he had given
was £120,000. He consulted solicitors, Wragge & Co, about how to manage his
personal liabilities arising from the failure of High Tec in a way that would
enable him to continue to carry on business through PCC.
Acting on the advice of Wragge & Co, he
arranged banking facilities with Barclays Bank under which the bank would
refinance the £28,000 secured under the existing mortgages on The Old Rectory
and would provid
e a loan facility of £100,000 to PCC. These
details were not known to Mrs Harris. In return the bank required that a
guarantee, unlimited in amount, of PCC's liabilities to the bank be given by
both Mr and Mrs Harris and that their liability to the bank under this guarantee
be secured by a first charge over The Old Rectory. Mr Harris agreed to this.
On 26 October 1988 the bank wrote to Mr Hamlett
of Wragge & Co, who the bank knew to be acting for Mr Harris, enclosing the
bank's standard form of legal charge and asking Mr Hamlett to arrange to have it
signed by Mr and Mrs Harris. The letter asked Mr Hamlett to confirm that the
title deeds to The Old Rectory would be held to the bank's order upon repayment
of the existing mortgages and added: "under the circumstances, it would probably
be easiest if you arrange to redeem the outstanding mortgages and register our
charge in the usual fashion". The letter then referred to the guarantee that Mr
and Mrs Harris were to give and continued:
"I would ask you to explain the nature of the document to both parties and
confirm to us that independent legal advice has been given . . ."
On 27 October 1988 Mr and Mrs Harris went to
Wragge & Co's offices and had a meeting with Mr Hamlett. Mrs Harris' pleaded
case is that her husband had told her that the bank had agreed to lend PCC some
money temporarily, so that he could trade his way out of his financial
predicament, that she attended the solicitors' offices at the request of her
husband, that Mr Hamlett interviewed them together and showed them a number of
legal documents and that her husband told her he wanted her to sign, asking her
to trust him. She pleads that after some discussion between Mr Hamlett and her
husband that she did not understand, each of them signed the legal documents.
The legal documents included a guarantee and a legal charge of The Old Rectory.
The legal charge secured Mr and Mrs Harris' liabilities to the bank under the
guarantee.
Mrs Harris alleges in her pleading that Mr
Hamlett was acting for the bank, Mr Harris and for herself (para 3(5) of her
defence and counterclaim). But, as my noble and learned friend, Lord Hobhouse of
Woodborough, has pointed out, her solicitor in these proceedings, Mr Holt of
Evans Derry Binnion has stated in an affidavit of 28 May 1997 that "insofar as
my client is concerned Wragge & Co were not her solicitors" (paragraph 6).
Your Lordships should assume, in my opinion, that Mrs Harris' defence will be
amended so as to become consistent with that statement.
On 27 October 1988, Mr Hamlett wrote to the bank
a letter which said, among other things:
"I have explained to Mr & Mrs Harris in detail this morning the effect
of the first charge over the property and of the unlimited personal
guarantee."
It appears, however, that Mr Hamlett's 27
October letter may not have been received by the bank, or, after receipt, may
have gone astray. On 29 June 1989 the bank wrote to him saying that they did not
appear to have received from him the confirmation that they had asked for in
their letter of 26 October 1988.
In her defence and counterclaim, Mrs Harris
pleaded that her agreement to sign the guarantee and the legal charge had been
obtained "in the premises" by her husband's undue influence, or, alternatively,
that it was to be presumed that it had been so obtained. She pleaded that the
bank was, or should have been, aware that the transactions were manifestly
disadvantageous to her and that the bank had actual or constructive notice of
the undue influence. She pleaded that, in the circumstances, the guarantee and
the legal charge were not binding on her.
As I have said, Mrs Harris' defence and
counterclaim were struck out by the deputy district judge. She appealed. Her
appeal was heard by Judge Alton, in the Birmingham County Court, who dismissed
the appeal. The judge identified two issues, namely:
"whether the bank was potentially on constructive notice . . . of undue
influence, presumed or actual by Mr Harris. Secondly, if so, whether it took
reasonable steps to negative such notice."
It was conceded, for the purpose of the strike-out application , that the
relationship of trust and confidence between Mr Harris and Mrs Harris brought
the case into category 2B where undue influence was to be presumed. I doubt
whether this concession was sound, for there was, I think, also a third issue
that arose on the pleadings, namely, whether the facts and matters pleaded by
Mrs Harris, "the premises" referred to in her defence and counterclaim, raised
any presumption at all or could sustain any arguable case of undue influence. I
will return to this issue.
On the first of the two issues she had
identified, the judge concluded that Mrs Harris had pleaded an arguable case
that the bank had had constructive notice of the presumed undue influence. But
as to the second issue, she concluded that on the facts, either pleaded or not
in dispute, the bank, in asking Wragge & Co to give appropriate advice to
Mrs Harris, had taken reasonable steps to negative the constructive notice. She
held, also, that Wragge & Co were not the bank's agents for any purpose
other than to register the charge on the bank's behalf.
The Court of Appeal agreed with the judge on
both the two issues, per Stuart Smith LJ:
"The solicitors were acting for Mrs Harris in the transaction and the bank
were entitled to assume that they had given appropriate advice and were
entitled to accept the solicitors' letter as confirmation that this had been
done." [1998] 4 All ER 705, 730).
In my opinion, on the premise that the
solicitors were indeed Mrs Harris' solicitors, the Court of Appeal came to the
correct conclusion. In reviewing their decision, however, I would start with the
third issue. Was this a case in which, on Mrs Harris' pleading, there was an
arguable case of undue influence? The relationship of trust or confidence was
certainly present. Mr Harris conducted the businesses from which the family
income was derived. It was he who negotiated the financial arrangements with
Barclays Bank. He did not explain the arrangements to his wife. He simply asked
her to sign the legal documentation. But there is no pleaded allegation of
misrepresentation. His statement, express or implied, that he would be able to
trade his way out of his financial difficulties may have been an expression of
over optimism but cannot be, and has not been, suggested to be a
misrepresentation. There was no allegation of any bullying of Mrs Harris or of
any pressure on her to sign that could be characterized as excessive. She
signed, without knowing what she was signing, because she trusted him. This
pleaded story does not, in my opinion, raise any presumption of undue influence.
It does not, in the absence of any other evidence, justify an inference that Mr
Harris brought undue influence to bear in order to persuade her to sign. Her
agreement to do so is consistent with a normal, trusting, relationship between a
married couple. Since, however, it was accepted below that, for striking-out
purposes, Mrs Harris could rely on there being a presumption of undue influence,
it would not be right to uphold the striking-out on this ground. The critical
issue is the constructive notice issue.
As to constructive notice, the bank knew that
Mrs Harris was agreeing to become surety for the debts of her husband's company,
PCC. As in all such cases the bank was, or ought to have been, aware that there
was a risk of misrepresentation or of undue influence. On the pleaded facts, the
extent of the risk was not, in my opinion, very great. There were no special
features to put the bank on inquiry. But the bank did, in order to protect
itself against that risk, have to take reasonable steps to satisfy itself that
the nature and effect of the documents she was to sign were properly explained
to Mrs Harris.
The bank believed that Wragge & Co were
acting not only for Mr Harris but also for Mrs Harris and would give Mrs Harris
the requisite legal advice about the documents. Mr Hamlett's letter of 27
October, if the bank received it, would have confirmed that belief. But it does
not appear that the bank's belief was derived from anything said or done by Mrs
Harris. And Mrs Harris contends that Mr Hamlett was not her solicitor and in any
event gave her no explanation about the nature and effect of the documents. If
these contentions can be made good and if Mrs Harris does succeed in
establishing undue influence it is at least arguable that she will succeed on
the constructive notice issue. In my opinion, therefore, Mrs Harris' case must
be allowed to go to trial. I would allow her appeal.
There is a further complication to which I
should refer. Mrs Harris died on 22 March 2001 while the appeal to this House
was pending. Her appeal abated in accordance with Standing Order X but a
Petition for Reviver presented by Mr Harris, her executor, was granted as of
course on 9 May 2001. In the hearing of the appeal before your Lordships no
point was made as to any effect her death or Mr Harris' executorship might have
on the bank's claim for possession of the Old Rectory or on the future course of
the litigation. It may seem somewhat incongruous for Mr Harris to be relying on
his own undue influence over his wife in order to defeat the bank's possession
claim, but any difficulties or problems must be sorted out at trial or by
applications made at first instance.
Midland Bank Plc v Wallace
In this case, too, there has not been a full
trial. The bank, having commenced proceedings for possession of the mortgaged
property, made an application for summary judgment. Master Barratt gave Mrs
Wallace leave to defend, but Lloyd J allowed the bank's appeal and made an order
for possession. Mrs Wallace appealed. The Court of Appeal dismissed her
appeal.
The property in question was a leasehold flat,
Flat 1, 91, Priory Road, Hampstead. Mr and Mrs Wallace were the joint registered
proprietors of the flat which was held for a term of 125 years from 25 December
1986.
The flat had been acquired by Mr and Mrs Wallace
without the aid of a mortgage, but subsequently had been charged to Northern
Rock Building Society to secure an £80,000 advance to Mr Wallace partly to pay
off a previous loan from Coutts Bank and partly for his business purposes. By
1988 the Northern Rock money had been fully utilised and Mr Wallace wanted to
raise more money. The bank agreed to advance £120,000. The advance was to be
repayable on demand and was to be secured by an "all monies" legal charge over
the flat. Mr Wallace accepted the bank's offer on 1 December 1988.
By a letter dated 13 December 1988 the bank
asked a solicitor, Mr Sidney Samson, to "attend to the necessary formalities for
us in the signing of the enclosed legal charge form by [Mr and Mrs Wallace]."
The legal charge form enclosed with the letter contained, immediately above the
space for the chargors' signatures, the following words in bold type:
"This is an important legal document. The bank recommends that before
signing it you should seriously consider seeking the advice of a solicitor or
other professional adviser."
There was no evidence that Mr Samson had
previously acted for Mr or Mrs Wallace. The inference was that Mr Samson was on
the Bank's panel of local solicitors willing to accept instructions to act in
connection with conveyancing transactions between the Bank and its
customers.
Mr and Mrs Wallace went together to a meeting
with Mr Samson in his offices. In her affidavit sworn on 13 February 1996 Mrs
Wallace gave her evidence of what happened at that meeting. The relevant
passages were set out in paragraph 5 of the judgment of Stuart-Smith LJ in the
Court of Appeal [1998] 4 All ER 705, 735. It is not necessary for me to repeat
the whole of the passages but the gist appears from the following excerpts:
"12. As for the business loan itself, I was not involved at all
. . . Eventually I was told that I had to go to a solicitor's office to
execute the charge. I was directed to the office of Sidney Samson & Co.
The firm had no connection with me . . . I was there three or four minutes at
most. . . . I signed the document as directed by a solicitor. There was no
other discussion. He did not begin to tell me what I was signing or to explain
to me the consequences.
13. My impression in retrospect is that the solicitor had been
instructed merely to take and witness my signature
I certainly did not regard
the solicitor as independent as he was instructed by the bank."
Mr and Mrs Wallace signed the legal charge at
their meeting with Mr Samson in his offices. He witnessed their signatures.
Beneath Mrs Wallace's signature, Mr Samson wrote:
"The same having first been explained to her and she appearing perfectly
to understand it."
On Mrs Wallace's evidence this endorsement was
untrue.
On 16 December 1988 Mr Samson wrote to the bank
in the following terms:
"In accordance with your instructions of the 13th instant, I have now seen
Mr and Mrs Wallace. They have executed the documents and I have attested them
stating that the documents have been explained. I enclose herewith a note of
my fees."
The legal charge was dated 30 December 1988. The
£120,000 was drawn down over a period between January and August 1989. The
£120,000 was a loan to Mr Wallace alone. It was used by him to inject capital
into the company, Capital Clinics Ltd, through which he ran private clinics.
Later in 1989 the bank made a further loan of
£106,065 to Mr and Mrs Wallace jointly. The purpose of this loan was to enable
the Northern Rock's prior charge to be redeemed. In March 1994 the bank
commenced proceedings for recovery of the sums due in respect of the two loans
and for possession of the flat and applied for summary judgment.
The question for the court was whether Mrs
Wallace's affidavit disclosed an arguable defence to the bank's claim. Both
before Lloyd J and before the Court of Appeal, and again before your Lordships,
counsel for the bank conceded that Mrs Wallace had shown an arguable case of
undue influence. For my part, I would agree that Mrs Wallace's affidavit, and in
particular paragraph 11, disclosed a sufficiently arguable case that in
persuading her to sign the legal charge and in overriding her reluctance to do
so Mr Wallace had abused the trust and confidence that she had in him.
Accordingly, the summary judgment application turned on the constructive notice
issue.
As to constructive notice, the bank knew that Mr
and Mrs Wallace were a married couple living together in the jointly owned flat
that was to be charged to the bank. The bank knew that the £120,000 advance to
Mr Wallace was to be used for his business purposes. The bank knew that the
proposed charge was an "all monies" charge which would secure any further
advances that the bank might make to Mr Wallace. In these circumstances, in my
opinion, the bank was on notice of the existence of a risk that Mrs Wallace's
consent to grant the charge might have been brought about by some impropriety,
whether excessive pressure or misrepresentation, by Mr Wallace. The bank needed,
therefore, to take reasonable steps to satisfy itself that Mrs Wallace was
entering into the transaction "freely and in knowledge of the true facts" (see
O'Brien [1994] 1 AC 180, 198).
Lloyd J decided the constructive notice issue in
favour of the bank. He took the view that although Mr Samson, having accepted
the instructions given him by the bank's letter of 13 December 1988, owed the
bank a duty, that duty was to witness the signature of Mrs Wallace and to return
to the bank the signed document, or, if she did not sign, the unsigned document.
But the judge said "It was not, I think, any part of his function to inform the
bank as to what passed between him and her by way of advice or indeed
communications on her part seeking advice." As to the endorsement that Mr Samson
had written under Mrs Wallace's signature, Lloyd J said that it "carries with it
a sufficient representation that he [ie Mr Samson] had given all necessary
explanation and advice to her", and added:
"in this situation the risk of her not being properly advised is one which
lies between her and Mr Samson and which cannot be passed on to the bank."
The Court of Appeal agreed.
I would agree that if Mr Samson had indeed been
acting as Mrs Wallace's solicitor these conclusions and the reasons for them
would have been unassailable. But Mrs Wallace's criticism of these conclusions
has been based mainly on the proposition that Mr Samson was not her solicitor.
She did not instruct him to give her any advice about the legal charge and he
did not in fact give her any advice. Nor had the bank in its letter of 13
December 1988 asked Mr Samson to give her any advice about the legal charge. It
had simply asked him to "attend to the necessary formalities for us". It is
true, as the evidence stands, that Mrs Wallace never did instruct Mr Samson to
give her advice and that he gave her none. It seems also to be true that Mr
Samson never held himself out to Mrs Wallace as her solicitor with a duty to
advise her. On her evidence, he simply witnessed her signature. Whether she
noticed the endorsement he wrote beneath her signature is not clear. In my
opinion, for summary judgment purposes, your Lordships must proceed on the
footing that Mr Samson was not Mrs Wallace's solicitor. On whose behalf then was
he acting? The answer must, in my opinion, be that he was acting on behalf of
the bank from whom he received his instructions and to whom he submitted his fee
note.
The issue of constructive notice depends not on
how Mr Samson's role appeared to Mrs Wallace, but on how his role appeared to
the bank. If Mr Samson had not added the endorsement below Mrs Wallace's
signature, the bank would, as I read the evidence, have had no reason to believe
she had received any explanation about the legal charge. In that case the bank,
on notice of the risk that Mrs Wallace's consent to the legal charge might have
been improperly obtained by undue influence or misrepresentation by her husband,
would have taken no steps at all to satisfy itself that her consent to the legal
charge had been given "freely and in knowledge of the true facts"
(O'Brien, at p 198).
Mr Samson's endorsement was, I would agree, a
clear representation by him to the bank that he had acted as Mrs Wallace's
solicitor for the purpose of giving her advice about the contents and effect of
the legal charge. In the face of that representation, I would accept that the
bank would ordinarily have been entitled to be satisfied that it could
reasonably rely on Mrs Wallace's apparent consent to the transaction, evidenced
by her signing of the legal charge.
But Mr Samson, on the occasion when Mr and Mrs
Wallace attended at his offices in order to sign the legal charge, was acting as
the bank's solicitor on the bank's instructions. He was not acting as Mrs
Wallace's solicitor, nor, for that matter, as Mr Wallace's. In these
circumstances, in my opinion, section 199(1)(ii)(b) of the Law of Property Act,
1925, comes into play. I have already set out the text of this statutory
provision and discussed its implications in the type of cases that your
Lordships are dealing with. On the evidence as it now stands Mr Samson knew that
he had given no explanation to Mrs Wallace of the nature and effect of the legal
charge. His failure was, since he was acting for the bank, the bank's
failure.
Accordingly, in my opinion, if the facts alleged
by Mrs Wallace in her affidavit are correct the bank never shed the constructive
notice imputed to it.
I would, therefore, allow Mrs Wallace's appeal.
The case must go to trial.
National Westminster Bank Plc v Gill
This is another case that comes to your
Lordships' House after a full trial.
Mr and Mrs Gill were, in 1988, the joint owners
of 60A, Queen's Park Avenue, Bournemouth, their matrimonial home. On 20 February
1989 they executed a legal charge under which the property was charged with
payment of all Mr Gill's liabilities to the bank.
In December 1995, after demands by the bank for
repayment of sums it had advanced to Mr Gill were not met, the bank commenced
proceedings for possession of the property with a view to its sale. Mrs Gill's
defence to the claim was that her consent to the legal charge had been procured
by Mr Gill's undue influence and that the bank had had constructive notice of
the impropriety. Both the trial judge, Mr Recorder Paulusz, and the Court of
Appeal rejected the constructive notice allegation.
Mr Gill was a second hand car dealer carrying on
business from home. In December 1988 he had the opportunity to acquire a garage
business carried on from leasehold premises known as Gresham Garage. The
purchase price was £40,000. He applied to the bank for a loan of £100,000 partly
to fund the acquisition and partly to finance the garage and car sales business
that he hoped to carry on from Gresham Garage.
On 19 December 1988 the bank made Mr Gill a
written offer of the £100,000 loan. One of the terms of the offer was that the
loan be secured by a second charge of 60A, Queen's Park Avenue. The bank did not
have any communication with Mrs Gill about the proposed loan.
On 14 February 1989 Mr Gill contracted to
purchase Gresham Garage for £40,000. He paid a £4,000 deposit. Completion was
due on 20 February 1989. The sum due on completion was £36,799. Solicitors,
Matthew & Matthew, were acting for Mr Gill in the transaction.
On 16 February 1989 the bank wrote to Matthew
& Matthew and enclosed the form of legal charge, charging the matrimonial
home as security for Mr Gill's liabilities to the bank, that they required Mr
and Mrs Gill to sign. The letter said:
"As [the document] is in relation to the sole liabilities of Mr Gill it
will be necessary for Mrs Gill to receive separate legal advice as to the
nature of the document and perhaps you would confirm that this is done prior
to the signing of the form".
On Monday 20 February 1989, Mr Gill told Mrs
Gill that she had to go with him to Matthew & Matthew for the purpose of
having their signature to documents witnessed. At the solicitors' offices they
saw Mr West, a legal executive, and Mr Richard Matthew, a partner. Important
evidence of what happened on this occasion was given by Mrs Gill and by Mr West
and Mr Matthew. Mr Gill was not called to give evidence. Where the evidence of
Mrs Gill and that of Mr West and Mr Matthew conflicted, the Recorder preferred
the evidence of the latter.
Mrs Gill gave evidence that there had been a
heated altercation between herself and her husband when she discovered that she
was being asked to sign a mortgage of the matrimonial home. She said that when
the document was placed before her for signature she had asked what it was and
that her husband had told her he needed her signature to be able to buy the
garage. She said he had told her that the bank was lending him £36,000. She
disputed Mr West's evidence that he had explained the document to her and said
that neither Mr West nor Mr Matthew, with whom she had a conversation in a
separate room in the absence of her husband, had given her any explanation about
the nature of the document that was offered for her signature. Nonetheless, the
Recorder found that Mr Matthew did, while he was alone with her, give her "a
full and adequate explanation of the meaning of the document" and expressed
himself as being "satisfied that Mrs Gill did receive proper and adequate
advice". Mrs Gill told the Recorder that she had had no alternative but to sign.
The Recorder did not accept that evidence. He did find, on the contrary, that Mr
Gill had spoken enthusiastically to her about the garage and its prospects and
that she shared his enthusiasm.
It was, however, clear that neither Mr West nor
Mr Matthew had known that the amount the bank had agreed to advance was
£100,000. The amount secured by the legal charge was not expressed to be subject
to any limit but the purchase price of Gresham Garage was only £40,000. So it is
believable that Mrs Gill was under the misapprehension that the bank loan was to
be £36,000 (£4,000 having already been paid as a deposit). It is believable also
that Mrs Gill had obtained this misapprehension from what her husband had told
her. The advice that, as the Recorder found, Mr West and Mr Matthew gave Mrs
Gill did not go beyond explaining the nature and effect of the legal charge that
she was being asked to sign. Neither was in a position to offer any advice about
the commercial advantages or disadvantages of the purchase of the garage
premises and business or about the wisdom of Mrs Gill agreeing to charge the
matrimonial home with her husband's indebtedness to the bank.
Mr and Mrs Gill signed the legal charge on 20
February at Matthew & Matthew's offices and the solicitors then wrote to the
bank in the following terms:
"We confirm that the mortgage documentation supplied has been executed by
Mr and Mrs Gill in accordance with your requirements, and we confirm that Mrs
Gill was separately advised."
On this evidence Mr Recorder Paulusz, although he held that the case was one
in which there was a presumption of undue influence, rejected the contention
that the bank should be taken to have had constructive notice of the undue
influence. The Court of Appeal agreed.
On the constructive notice point, I am in
agreement with the Recorder and the Court of Appeal. The case was one in which
the natural trust and confidence that the bank would have expected Mrs Gill to
have, and that she did in fact have, in her husband, coupled with the nature of
the transaction, namely, a charge over her property as security for his debts,
raised the risk that her consent to the transaction might have been obtained by
undue influence or misrepresentation. But the confirmation to the bank, that
before signing the legal charge Mrs Gill had been separately advised by
solicitors, as indeed she had been, and, by implication, that the advice had
related to the nature and effect of the legal charge, entitled the bank to be
satisfied that it could safely rely on her apparent consent to the transaction
as being a true consent.
There is some basis in the evidence for thinking
that Mrs Gill may have been induced to sign by her husband's misrepresentation
that the loan agreed to be made by the bank was only £36,000. It does not
appear, however, that any weight at the trial or in the Court of Appeal was
sought to be placed on this misrepresentation. The emphasis seems to have been
all on undue influence. Whatever may have been the reason for this, it cannot,
in my opinion, affect the conclusion on the constructive notice issue. The legal
charge secured Mr Gill's indebtedness to the bank whatever the amount of the
indebtedness might be. Matthew & Matthew's confirmation to the bank that Mrs
Gill had received separate advice was an implicit confirmation that she had been
advised about the meaning and effect of the document - as, indeed, the Recorder
found she had. That advice would have included advice that the amount of the
current loan might in the future be increased.
I have earlier in this opinion expressed the
view that in all cases the lender bank should inform the surety wife, or her
solicitors, of the amount of the agreed facility and of any existing
indebtedness that would be secured under the proposed charge. If that had been
done in the present case, it would have guarded Mrs Gill against a
misapprehension about the amount of the agreed loan. But in the circumstances of
this case, and in particular in view of the fact that no limit on the amount of
the secured liability was expressed in the legal charge, the fact that the bank
did not disclose this information does not, in my opinion, constitute a failure
by the bank to take reasonable steps to satisfy itself that Mrs Gill's consent
had not been improperly procured.
Finally, a comment on undue influence is
prompted by the facts of this case. The Recorder held that although there was no
actual undue influence, there was a presumption of undue influence since the
case fell within category 2B. The Court of Appeal recorded these findings
without comment. In my opinion, these findings disclose the same error to which
I have referred previously in this opinion. By the end of the trial the
Recorder, having heard all the evidence, had to decide whether or not undue
influence had been established. Either the evidence did justify a finding of
undue influence or it did not. On the evidence in the case a finding of undue
influence would, in my opinion, have been unthinkable. Mrs Gill had been
enthusiastic about the purchase of Gresham Garage. She knew she was signing a
legal charge under which her home became security for her husband's debts to the
bank incurred in acquiring the premises and business. She had been separately
advised by a solicitor about the nature and effect of the document she was to
sign. The highest her case can be put is that she would have liked more time to
consider whether or not to sign. She said in evidence:
"I did sign the documents put in front of me but with time for more
reflection, and in less urgent circumstances, with proper advice to think
about it, and time to consult a solicitor of my own, I would never have done
so."
This is a quite inadequate basis, in my opinion, for a finding of undue
influence. I do not think this was a case in which there was ever any evidence
giving rise to the presumption of undue influence. But, if there was, by the end
of the trial the presumption had been rebutted. In my opinion, Mrs Gill's appeal
must be dismissed.
Barclays Bank Plc v Coleman
This, too, is a case where there has been a full
trial. The mortgaged property, 52, Ashtead Road, Clapton, London E5, was
purchased by Mr and Mrs Coleman on 9 July 1986 in their joint names. It was
their matrimonial home. By a legal charge signed on 30 January 1991 they charged
the property with the repayment of sums advanced by the bank for the purpose of
enabling Mr Coleman to make some speculative property acquisitions in Uxbridge
Road, Hayes, Middlesex and in Brooklyn, New York. In 1995, after the bank's
demand for payment of the outstanding debt had not been met, the bank commenced
proceedings for, among other things, possession of the property with a view to
its sale. Mrs Coleman defended the proceedings by alleging that she had
consented to the legal charge under the undue influence of her husband and that
the bank had had constructive notice of that impropriety. The trial judge, Judge
Wakefield, took the view that the legal charge was not to the manifest
disadvantage of Mrs Coleman, that there was no presumption of undue influence
and that undue influence had not been established. He expressed the view, also,
that the bank had not taken reasonable steps to avoid constructive notice if
there had been any undue influence. The Court of Appeal disagreed with the judge
on both points, and therefore concurred with the judge in the result. First, the
court held that the transaction was to Mrs Coleman's material disadvantage and
that, in the circumstances, undue influence was to be presumed. But they held,
secondly, that constructive notice should not be imputed to the bank. Before
your Lordships Mr Jarvis QC, for the bank, has not argued against the Court of
Appeal's conclusion on the undue influence issue. He accepts that if the bank
had constructive notice that Mrs Coleman's consent may have been improperly
obtained, her appeal is entitled to succeed.
The relationship between Mr Coleman and Mrs
Coleman is of significance. They are Hassidic Jews. Mrs Coleman's upbringing and
education in a Hassidic community in the United States prepared her to expect
and to accept a position of subservience and obedience to the wishes of her
husband. The judge put it thus, at p 24 of his judgment:
"The upbringing and education of Mrs Coleman prepared her principally for
marriage within her own religious community and for a life of subservience to
the wishes of her husband. I do not mean this in any derogatory sense. Hers
may well have been a happy state, but it was one in which her husband's wishes
and judgment in matters of finance and business were to be followed without
question."
So it seems that the trust and confidence of a wife in her husband, which,
notably in relation to family finances and family business matters, is a feature
of very many marriages, is accentuated in a Hassidic marriage. It would, it
seems, have been very difficult for Mrs Coleman to have questioned her husband's
business or financial decisions or to have declined to comply with his wishes on
such matters.
In 1989 Mr Coleman, having been made redundant
from his job as a diamond cutter, began to carry on business on his own account
as a property broker. Towards the end of 1990 he approached the bank for a loan
to enable him to purchase two commercial properties in Uxbridge Road, Hayes. He
already had some £200,000 on deposit with the bank and sought a loan from the
bank to assist him in funding a purchase price of £250,000 for the Hayes
properties. At about the same Mr Coleman became interested in buying a
half-share in an apartment building in Brooklyn, New York. He wanted a US$ loan
from the bank to assist him in financing this acquisition. The bank agreed in
principle to make the loans but required a charge over 52, Ashtead Road as
security.
In January 1991 the bank's security department
prepared the form of legal charge and a certificate of occupancy that Mr and Mrs
Coleman would be asked to sign. Mr Coleman informed the bank that Reuben Gale
& Co would be the solicitors for them acting in the transaction. So the bank
sent the documents to Reuben Gale & Co and Mr Coleman made an appointment
for himself and his wife to attend at Reuben Gale & Co's offices. They went
to the offices on a date somewhere between 9 and 15 January 1991. They were
attended to not by a solicitor but by a legal executive, Mr David Spring, an
employee of the firm. The legal charge was ready to be signed. Each of them
signed it and Mr Spring witnessed each of their signatures. Mr Spring, in
witnessing the signatures, signed above a stamp bearing the legend "D. Spring,
Legal Executive, 240 Stamford Hill, London N16." On the page following the
signature page there was a typed endorsement which read:
"I confirm that this document was signed in my presence and that the full
effect of its contents have been explained to and were understood by Miriam
Mara Coleman, and she has signed this document of her own free will."
Mr Spring signed his name below this typed endorsement. Beneath his signature
was placed the same stamp as had appeared beneath the signatures on the previous
page. Below this stamp Mr Spring wrote "with R. Gale, 240 Stamford Hill, London
N16. Solicitor."
The significance of these details is threefold.
First, it would have been clear to the bank that Mr Spring was a legal executive
and not a qualified solicitor. Second, it was clear that Mr Spring was
purporting to act on behalf of Reuben Gale & Co, the firm of solicitors
whose name had been given to the bank by Mr Coleman. Third, the endorsement
entitled the bank to believe that a sufficiently qualified person had explained
the contents of the legal charge to Mrs Coleman and that there had been no
apparent reluctance on her part to sign.
Mr and Mrs Coleman also signed the certificate
of occupancy, showing themselves as the only occupiers of the property. Here,
too, Mr Spring counter-signed the document in confirmation that Mr and Mrs
Coleman had signed in his presence.
In fact, Mr Spring had given Mrs Coleman no
explanation whatever of the contents of the legal charge. The evidence at trial
was that he had simply asked Mr Coleman if he, Mr Coleman, had explained the
documents to his wife. The meeting had lasted only a few minutes. The bank's
internal notes disclose the bank's own understanding of what had taken place at
the meeting with Mr Spring. The relevant note reads:
"Prior to the signing of the
documentation with regard to [the mortgaged
property] Mrs Coleman attended a local firm of independent solicitors, whereby
she received legal advice, as to the bank's Charge Forms content. Her
signature was witnessed by those solicitors who confirmed that the document
was signed of her own free will."
Mr Coleman's property speculations for which he
had sought the bank's assistance turned out to be financially disastrous. He was
unable to repay his borrowing from the Bank and proceedings by the Bank for
possession of 52, Ashtead Road with a view to its sale followed.
Notwithstanding Mr Jarvis' concession to which I
have already referred, I should, I think, make one or two comments about the
undue influence issue. First, I agree that this was a case in which the
relationship between Mr Coleman and Mrs Coleman, in the cultural context of the
Hassidic community of which they formed a part, raised a serious question
whether Mrs Coleman's consent to the granting of the legal charge was a true
consent. She gave evidence that if she had had the content and effect of the
legal charge explained to her, she might have declined to sign it. I doubt this.
The thrust of her evidence as to her relationship with her husband was that she
was bound to defer to him in the judgment of what should or should not be done
about family finances or with family assets. It is not consistent with that
evidence to suppose that a better understanding of the nature and effect of the
legal charge would have brought her to refuse to comply with her husband's
request that she sign.
I think the Court of Appeal was quite right in
regarding this as a case in which there was a presumption of undue influence.
But the presumption was not, in my opinion, attributable to the "manifest
disadvantage" to Mrs Coleman of the legal charge. The legal charge, supporting
her husband's business ventures on which he engaged in order to support his
family, was no more disadvantageous to her than any transaction in which a wife
agrees to become surety in order to support her husband's commercial activities.
The presumption arose, in my opinion, out of their relationship, in which Mrs
Coleman was not merely disinclined to second-guess her husband on matters of
business, but appears to have regarded herself as obliged not to do so. In such
a case, in my opinion, the rebuttal of the presumption would have needed legal
advice from someone independent of the husband who could have impressed upon her
that she should not sign unless she truly wanted to do so. In the circumstances,
I agree with the Court of Appeal that a presumption, or inference, of undue
influence arose and was not rebutted.
But in considering the issue of constructive
notice, the question is not how the case appeared to Mrs Coleman, or to the
person purporting to have given her the legal advice; it is how the case
appeared to the bank. There was no evidence to show that the bank had knowledge
of any greater risk of undue influence than might be present in any case in
which a wife was apparently agreeing to become surety, or give security, for her
husband's business debts. It would reasonably have appeared to the bank, from
the typed endorsement on the legal charge, that Mrs Coleman had received advice
from a legally qualified person acting for her, so as to enable her to
understand the contents and effect of the document she was signing. The fact
that the advice had been given by a legal executive and not by a qualified
solicitor is not, in my opinion, material. An experienced legal executive in a
firm with a conveyancing practice is well able to give full and adequate advice
as to the contents and effect of a straightforward legal charge. The bank were
entitled to believe that Reuben Gale & Co would not entrust such a task to a
legal executive with insufficient experience to carry out the task properly. The
bank had no reason to think that any special precautions needed to be taken in
Mrs Coleman's case than would be requisite in any other case of a wife giving
security for her husband's debts. In my opinion, the bank, having read the
endorsement on the legal charge, was entitled to hold the reasonable belief that
Mrs Coleman's consent to the granting of the legal charge had not been
improperly obtained. There were no other steps that the bank could reasonably be
required to have taken. Constructive notice of Mr Coleman's undue influence
cannot, in my opinion, be imputed to the bank.
I would, therefore, dismiss Mrs Coleman's
appeal.
UCB Home Loans Corporation Ltd v Moore
This case comes to your Lordships' House on an
appeal by Mrs Moore against an order striking-out her Defence to UCB's claim to
possession of Pangbourne Lodge, Tidmarsh Road, Pangbourne, Berkshire. The
relevant facts, therefore, must be taken to be those pleaded by Mrs Moore,
supplemented by such facts as are common ground between the parties. Mrs Moore
and her husband, Mr Moore, were, in 1988, the joint owners of Pangbourne Lodge,
their matrimonial home. Mr Moore carried on business through the medium of a
company, Corporate Software Ltd. The company had 5000 issued shares of which
2557 were held by Mr Moore and 2443 by Mrs Moore. They were both directors. The
conduct of the business, however, was under his control and although Mrs Moore
worked for the company in a secretarial and administrative capacity, she did so
under her husband's direction. Mrs Moore has pleaded that she was "accustomed to
obey [Mr Moore's] directions in relation to the company's affairs . . . ." It is
implicit in her pleading that she reposed trust and confidence in her husband in
relation to financial and business matters.
In 1988 Mr Moore was seeking additional finance
for the company and for that purpose enlisted the services of a Mr Zerfahs. Mr
Zerfahs, who traded as Southern Assurance Services, was a registered insurance
broker and had been the company's pension adviser for the past four years.
At the insistence of Mr Moore, and induced by
his representations that the proposed mortgage transaction related to a "risk
free" loan to the company, Mrs Moore signed in blank a mortgage application
form. The details in this form were added without her knowledge and after she
had signed. So she has pleaded.
The details contained in, or added to, the
signed form included the following:
(i) The amount of the desired
loan was £300,000;
(ii) The
solicitors acting for Mr and Mrs Moore would be Quiney & Harris of 117 High
Street, Wootton Bassett, Swindon; Mr Nigel Whittaker was named as the member of
the firm who would be dealing with the
matter;
(iii) Pangbourne
Lodge would be offered as security for the
loan;
(iv) The loan was
required partly to re-finance existing borrowings charged on Pangbourne Lodge
and partly for the business purposes of Corporate Software
Ltd;
(v) Mr Moore was
managing director of Corporate Software Ltd. His annual income was
£106,000.
(vi) Mrs Moore was
"Secretary/PA" of Corporate Software Ltd. Her annual income was £18,000.
The original amount entered on the form as Mr Moore's annual income appears
to have been £36,000. The £36,000 had been altered to £106,000, a grossly
inflated figure. That there had been some alteration to the original figure was
apparent.
The mortgage application form, carrying both Mr
and Mrs Moore's signatures, was sent to UCB. UCB agreed to make the loan on the
security of a first charge over Pangbourne Lodge.
On 14 March 1989 Mr Zerfahs told Quiney &
Harris that Mr and Mrs Moore wanted the firm to act for them in connection with
the proposed transaction. Mr Zerfahs had no authority from Mrs Moore to do so.
She never instructed the firm to act for her and at no stage did she meet or
speak to any member of the firm about the proposed transaction.
On 14 March Quiney & Harris wrote to
Southern Assurance Services saying, amongst other things, that they had written
to Mr and Mrs Moore thanking them for their instructions. Mrs Moore's case is
that she never saw any such letter. Quiney & Harris corresponded directly
with Mr Moore and had several telephone conversations with him about the
proposed transaction. They never received any confirmation from Mrs Moore of
their instructions to act for her.
UCB, of course, believed from the contents of
the mortgage application form that Quiney & Harris had been instructed by,
and were acting for, both Mr and Mrs Moore. So, in a letter dated 5 May 1989,
UCB asked Quiney & Harris to act for UCB in arranging for the legal charge
to be executed. UCB did not ask the solicitors to give any advice to Mrs Moore.
Quiney & Harris' letter to UCB in response referred to Mr and Mrs Moore as
"our clients".
The legal charge was in due course executed and
the £300,000 loan was made. £154,338 odd was applied in redeeming an existing
first charge over Pangbourne Lodge held by BNP Mortgages Ltd. £52,925 odd was
applied in discharging the company's overdraft liability to National Westminster
Bank. The overdraft had been secured by a second charge over Pangbourne Lodge.
The balance of the £300,000 loan was paid to the company.
The company was unsuccessful and went into
liquidation in January 1992. In February 1994 UCB brought possession proceedings
in the Reading County Court. Mrs Moore's defence alleged that her signature to
the mortgage application form and her consent to the grant of the legal charge
to UCB had been obtained by the undue influence of and misrepresentations made
by Mr Moore. She gave further and better particulars of these allegations. UCB
applied, on 30 May 1996, to strike-out those parts of the defence that resisted
a possession order.
UCB contended that even if there had been undue
influence or misrepresentation they had had no notice of it. The district judge
dismissed the strike-out application. UCB appealed and Judge Holden allowed the
appeal. He accepted, for the purposes of the strike-out, that Quiney &
Harris had never been instructed by Mrs Moore and had given her no advice. He
said:
"For the purposes of the appeal before me I must accept [Mrs Moore's]
version of the facts and assume that there was undue influence and that she
received no advice from the solicitors and did not instruct them."
But he accepted UCB's case that they had had the reasonable belief, via the
mortgage application form signed by Mrs Moore, that Quiney & Harris were
acting for her and would give her whatever advice she needed. He said:
"[UCB] reasonably believed that [Mr and Mrs Moore] had their own
solicitors who were dealing with the transaction and it was quite reasonable
for them to assume that in carrying out that function those solicitors would
give proper advice to [Mrs Moore]."
In effect, he held that constructive notice of Mr Moore's undue influence or
misrepresentation could not be imputed to UCB.
The Court of Appeal agreed with Judge Holden
that Quiney & Harris' knowledge that they had given Mrs Moore no advice
about or explanation of the legal charge could not be imputed to UCB. They
agreed that there was nothing, in the circumstances, to put UCB on enquiry : per
Stuart-Smith LJ [1998] 4 All ER 705, 731:
"It was not necessary for [UCB] to give instructions to the solicitors to
do what was already their duty; nor was it necessary to require certification
that that has been done."
I have some sympathy with these conclusions but
I do not think they could safely be reached on the striking out application. UCB
knew that Mrs Moore was offering her share in the matrimonial home, Pangbourne
Lodge, as security for the £300,000 loan to the company. But over two-thirds of
the loan was to be applied in discharging existing indebtedness charged on
Pangbourne Lodge. The balance was to go to the company in whose business Mrs
Moore, as well as Mr Moore, played a part. UCB was, or should have been, aware
of a risk that Mrs Moore's apparent consent might be tainted by undue influence
or misrepresentation, but the risk would not have appeared to be a very great
one. And the information that Mr and Mrs Moore had solicitors acting for them
reduced the risk. It is not to the point that Mrs Moore had never instructed
Quiney & Harris. UCB were not to know that that was so. They had been misled
by the contents of the mortgage application form that Mrs Moore had signed in
blank. It would be possible to argue that Mrs Moore, by signing in blank, had
given an implied authority to her husband, or to his agent Mr Zerfahs, to
complete the form on her behalf. It is enough, however, to conclude that UCB
were entitled to take the mortgage application at its face value.
But the problem is that UCB did not know what
Quiney & Harris' instructions were and had no reason to assume that their
instructions extended to giving Mrs Moore advice about the nature and effect of
the legal charge. The instructions may have been no more than to agree the form
of the security documents and make arrangements for them to be executed. Quiney
& Harris gave UCB no indication that they had given Mrs Moore any such
advice and in fact they had not done so. In my opinion, therefore, on the
evidence as it now stands UCB failed to take reasonable steps to satisfy itself
that Mrs Moore understood the nature and effect of the legal charge.
Mr Sher QC, counsel for Mrs Moore, suggested
that UCB should have been put on enquiry by the apparent alteration to the
stated amount of Mr Moore's annual income. This, to my mind, is very much an
after-the-event point. If there had been some other reason to question the
genuineness of the mortgage application, the alteration of the annual amount
would, I agree, have added to the suspicion. But there was no other reason and
the alteration was, in my opinion, a long way below the threshold at which an
intending lender is put on enquiry.
In my opinion, however, for the reason I have
given Mrs Moore's appeal should be allowed. This case must go to trial.
The Bank of Scotland v Bennett
This is another case which comes to the House
after a full trial. The bank is seeking to enforce its charge over the
matrimonial home, 15, Elthiron Road, Fulham. The property was acquired by Mr and
Mrs Bennett in May 1986 and transferred into their joint names. At all material
times it has been subject to a first charge in favour of Halifax Building
Society. On 5 September 1990, the property was transferred into Mrs Bennett's
sole name. The bank's charge, a second charge, was dated 1 October 1991. The
purpose of the charge was to secure the liabilities of Mr and Mrs Bennett under
a guarantee dated 12 August 1991. The guarantee guaranteed payment to the bank,
up to a limit of £150,000, of the sums owing to the bank by Galloway Seafood Co
Ltd (the company).
In October 1993 the bank made a formal demand
for payment by the company of the sums it owed the bank and, on failing to
receive payment, appointed receivers of the company. The sum owed by the company
to the bank was £270,000 or thereabouts. The bank followed up these steps by
calling on Mr and Mrs Bennett for payment under the guarantee of the £150,000
with interest of £3,522 odd. Payment was not made and on 11 April 1994 the bank
commenced proceedings for payment and for possession of 15, Elthiron Road with a
view to its sale.
Mrs Bennett's defence to the bank's claims was
that her signature, both to the guarantee and to the legal charge, had been
procured by her husband's undue influence and that, in the circumstances, the
bank must be taken to have had constructive notice of that impropriety. The
trial judge, Mr James Munby QC, sitting as a deputy judge in the Chancery
Division, found in Mrs Bennett's favour on the undue influence issue. He found,
first, that Mrs Bennett had established actual undue influence [1997] 1 FLR 801,
827:
"In my judgment the pressure and influence which, as I have found, Mr
Bennett exerted on his wife both to procure her signature to the guarantee and
to procure her signature to the charge was undue. This is a case in which, in
my judgment, there was moral blackmail amounting to coercion and
victimisation. Mrs Bennett was not, it seems to me, acting as a free and
voluntary agent".
On appeal, the Court of Appeal refused to disturb the deputy judge's
conclusion on undue influence [1999] 1 FLR 1115, 1134. Chadwick LJ said that to
reverse the judge's conclusion "would . . . be to give insufficient weight to
the advantage which the judge had (and which this court does not have) of
hearing the evidence given by the witness in person".
The deputy judge went on to consider, as an
alternative to actual undue influence, Mrs Bennett's case based on presumed
undue influence. He held that both the guarantee and the legal charge were
manifestly disadvantageous to Mrs Bennett and that the relationship between her
and her husband was one of sufficient trust and confidence to raise a
presumption of undue influence in relation to both transactions ([1997] 1 FLR
801, 828-830). He held that the presumption had not been rebutted.
On this aspect of the case, Chadwick LJ
commented, at [1999] 1 FLR 1115, 1135, on the paradox that Mrs Bennett was
contending, on the one hand, that she had signed the two documents because her
will to resist had been overborne by her husband but, on the other hand, that
her trust and confidence in her husband was such that if he asked her to sign
she would do so. The point is the same as that to which I have referred in
Coleman (see para 290 above).
The discussion about the presumption of undue
influence was unnecessary. Once actual undue influence has been found at trial,
the question whether, if the evidence had been confined to the relationship
between the parties and the nature of the impugned transaction, undue influence
would have been presumed and, if it would, whether it had been rebutted, becomes
irrelevant. And if, after a full trial, the judge concludes that undue influence
has not been established, that conclusion means either that there never was a
presumption of undue influence or, if there was, that it has been rebutted.
The deputy judge's and the Court of Appeal's
conclusions on the undue influence issue had the result that the outcome of the
case appeared to depend on the constructive notice issue. It was accepted that
the bank had had no actual notice of the undue influence. Should constructive
notice be imputed to the bank? The deputy judge, after considering the facts of
the case, concluded that the bank had been put on enquiry as to the
circumstances in which Mrs Bennett had agreed to sign the guarantee and the
legal charge and had failed to take reasonable steps "to satisfy itself that Mrs
Bennett's agreement . . . was properly obtained" ([1997] 1 FLR 801, 807).
On this issue the Court of Appeal disagreed.
Chadwick LJ said:
"I am satisfied that the bank was entitled to take the view, on the
totality of the facts known to it, that there was no real risk that Mrs
Bennett's apparent consent to the transaction and, in particular, to the
charge had been obtained by improper conduct on the part of her husband."
([1999] 1 FLR 1115, 1143).
Mrs Bennett's appeal to the House challenges this
conclusion.
I must now refer to the facts of the case
relevant to the constructive notice issue. They are set out in detail in the
judgments below. It is not necessary for present purposes to refer to more than
the most important of them.
In 1990 Mr Bennett decided to purchase a fish
processing business in south-west Scotland. He caused the company, Galloway
Seafood Co Ltd, to be incorporated for that purpose. The initial capital of the
company was £150,000, provided as to £50,000 by Mr Bennett and £100,000 by South
West Scotland Investment Fund Ltd (SWIFT). Shares in the company were issued to
SWIFT, Mr Bennett and Mrs Bennett.
Additional capital was needed in order to
finance the purchase of the fish processing business and to provide the company
with working capital. The bank agreed to allow the company overdraft facilities
up to £100,000, supported by a guarantee from Mr Bennett. This guarantee, and Mr
Bennett's potential liability under it, was the reason why the matrimonial home,
formerly in joint names, was transferred into Mrs Bennett's sole name.
Mr Bennett had solicitors acting for him in
connection with the transfer of the property to Mrs Bennett. They were
Dickinson, Manser & Co of Poole. Mr Parkyn, a partner, dealt with the
matter. The deputy judge's judgment records telephone conversations between Mr
Parkyn and Mrs Bennett regarding the transfer.
Over a period from the end of 1990 to July 1991
Mr Bennett negotiated an arrangement with the bank under which the bank would
increase the company's overdraft facility to £380,000. Mr Bennett intended that
the money would be used to build a new factory on land which the company was to
purchase or lease from Dumfries and Galloway Regional Council. The company's
bank overdraft was to be secured by a fixed and floating charge over the
company's new factory and business and by a joint and several guarantee of the
company's debts to the bank, up to a limit of £150,000, to be given by Mr and
Mrs Bennett. Their liability under this guarantee was to be secured by a second
charge over 15, Elthiron Road. In addition, SWIFT agreed to advance £275,000 to
the company. The advance was to be secured by a fixed charge over the company's
new factory. Mr Bennett, SWIFT and the bank agreed that SWIFT's charge was to
rank ahead of the bank's fixed and floating charges for a sum not exceeding
£250,000.
Mr Bennett instructed Mr Parkyn to act in
connection with the grant by Mrs Bennett of the second charge over 15, Elthiron
Road. The instructions were given by telephone. Mr Parkyn's attendance note
records:
"(3) The seafood company in Scotland is on the threshold of
building a new factory.
(4) We can expect to hear from the Bank of Scotland in Dumfries
(John Martin) who are looking for additional security of £150,000 on their
home.
(5) Confirm we would be willing to act."
It is to be noted that Mr Parkyn did not receive instructions to act in
connection with the guarantee to be given by Mr and Mrs Bennett. It appears that
he knew nothing about that transaction. Nor did he know anything about the
financial arrangements between the company, the bank and SWIFT.
On 8 August 1991 Mr Parkyn received a standard
form letter from the bank asking for confirmation that Mr Parkyn would act for
the bank in connection with the second charge that the bank were to be granted
by Mrs Bennett over 15, Elthiron Road to secure the liabilities to the bank of
Mr and Mrs Bennett. The letter did not indicate the
nature of those liabilities. The letter said, also,
this:
"As your firm already acts for the mortgagor, the bank expects that you
will advise the mortgagor on the nature and effect of the legal charge. . . .
. Please also stress to the mortgagor that the legal charge is for all sums
due by our aforesaid customers."
On 13 August 1991, Dickinson Manser & Co
confirmed they were willing to act for the bank.
It had been arranged that Mr and Mrs Bennett
would attend at the bank's Dumfries branch in order to sign the guarantee. But,
in the event, Mrs Bennett was unable to keep the appointment and, instead, it
was agreed that the guarantee would be sent to the bank's branch in the
Haymarket, London, and would be signed there. It was signed there on 12 August
1991. Mrs Bennett received no legal advice regarding the guarantee, nor was she
advised by the bank to take legal advice about it before she signed, nor did the
bank have any reason to suppose that she had received any legal advice about
it.
On 14 August 1991 Mr Parkyn wrote to Mr Bennett
about the instructions he had received from the bank regarding the second charge
over 15, Elthiron Road. His letter said:
"I confirm I have now received mortgage instructions from [the bank] for
an advance of £150,000 to be secured by way of a second charge over the above
property . . ."
The letter reveals a misunderstanding on Mr
Parkyn's part of the nature of the liabilities to be secured by the second
charge. The purpose of the charge was to secure the liabilities of Mr and Mrs
Bennett under the guarantee, which Mr Parkyn had not seen and knew nothing
about. The guarantee secured payment, up to a limit of £150,000, of the
company's indebtedness to the bank.
On 17 September 1991, Mr Parkyn wrote to Mr and
Mrs Bennett enclosing for their signature three documents, namely, the legal
charge, a declaration of occupancy, and a consent to mortgage. Presumably Mr
Parkyn had been sent these documents by the bank. He gave an explanation of
these documents in his letter. As to the legal charge, the letter said:
"the charge is intended to secure both your liabilities to the bank
however they are incurred. I would point out that whilst the facility is for
£150,000, the charge covers all liabilities to the bank whatsoever the amount
. . . ."
There was, as Chadwick LJ pointed out ([1999] 1
FLR 1115, 1124) nothing in the letter to suggest that Mr Parkyn was aware that
the charge was to secure his clients' liabilities as guarantors of the company's
indebtedness to the bank. The judge accepted Mrs Bennett's evidence that she
never saw this letter.
The three documents were signed by the requisite
signatories on 1 October 1991. The deputy judge accepted Mrs Bennett's evidence
that she did not receive any legal advice about the nature or effect of the
documents and that, save as contained in the letter of 17 August 1991 that Mrs
Bennett did not see, Mr Parkyn did not give any.
On 1 October 1991, Dickinson Manser & Co
wrote to the bank as follows:
"We write to advise you that completion . . . took place on 1 October
1991, and your instructions have been complied with . . . Except as noted
below, there is no matter not already disclosed to you which we should draw to
your attention in connection with this matter."
Nothing at all was "noted below".
This letter of 1 October 1991, read in the
context of the bank's letter of 8 August 1991 (referred to in para 324 above),
entitled the bank to suppose that Dickinson Manser & Co had advised Mrs
Bennett on the nature and effect of the legal charge.
After completion of the legal charge the bank
allowed the company to draw down on the £380,000 overdraft facility.
It is, in my opinion, important to emphasise
that there was no evidence that Mr Parkyn knew about the guarantee that Mr and
Mrs Bennett had signed. Nor, therefore, was there any reason for him to be aware
that the second charge of 15, Elthiron Road was securing their liabilities as
guarantors of the company's debts to the bank. The evidence justifies the
inference that he thought they were principal debtors. Nor was there any
evidence that Mr Parkyn knew anything about the charges that the company had
given to the bank and to SWIFT respectively, securing the liabilities of the
company to them. And, in particular, there was no evidence that either Mr
Parkyn, or Mrs Bennett, knew about the ranking agreement under which SWIFT's
charge was to rank ahead of the bank's charges for an amount not exceeding
£250,000.
About seven months before taking the second
charge over 15, Elthiron Road, the bank had received a valuation of the
company's factory premises with the proposed new factory built thereon. The
valuation was well below the likely construction costs that the company would
incur in building the new factory. The bank did not disclose this information to
Mrs Bennett or to Mr Parkyn and there is no reason to suppose that either of
them was aware of it.
The bank had taken no steps at all to satisfy
itself that Mrs Bennett's consent to giving the guarantee had been properly
obtained. So the judge concluded that constructive notice of Mr Bennett's undue
influence in procuring her consent to the guarantee should be imputed to the
bank. He held that she was not bound by the guarantee.
The bank did not appeal against this conclusion.
The reason the bank did not do so was that Mr Bennett remained bound by the
guarantee. The legal charge secured his liabilities to the bank as well as those
of Mrs Bennett. So if the bank could uphold the legal charge against Mrs
Bennett, the company's debts for which Mr Bennett was liable under the guarantee
would be secured by the legal charge whether or not Mrs Bennett was bound by the
guarantee.
As to the question whether the bank had
constructive notice of Mr Bennett's undue influence in procuring Mrs Bennett to
consent to the legal charge, the deputy judge would, but for the bank's omission
to disclose to Mr Parkyn, or to Mrs Bennett, the existence of the ranking
agreement or the valuation of the company's factory premises, have regarded the
bank as protected by its reasonable belief that Mrs Bennett had received
appropriate legal advice about the nature and effect of the legal charge. He
cited passages from the judgments in Massey v Midland Bank Plc [1995] 1
All ER 929, Barclays Bank Plc v Thomson [1997] 4 All ER 816, Banco
Exterior Internacional v Mann [1995] 1 All ER 936 and Midland Bank Plc v
Serter [1995] 1 FLR 1034 and concluded, correctly in my opinion, that the
fact that Dickinson, Manser & Co had been acting not only for Mrs Bennett
but also for Mr Bennett and for the bank itself did not detract from the
reasonableness of the bank's expectation that the solicitors would have given
Mrs Bennett adequate advice about the legal charge. He said [1997] 1 FLR 801,
834:
"A bank is in no worse position merely because, to its knowledge, the
solicitor is acting both for the prospective surety and for the debtor."
and, at p 835:
"Unless a bank is put on notice by other matters within its knowledge that
the solicitors have not performed their duty to give independent advice to the
surety it is as much entitled [where the solicitor is acting also for the
creditor] as in any other case to assume that the solicitors have been acting
properly."
I agree with both those statements.
But the judge accepted, at p 840, the submission
made by counsel for Mrs Bennett that because the bank had failed to disclose to
Mr Parkyn, or to Mrs Bennett, the ranking agreement between the bank and SWIFT
and had failed to disclose the disparity between the development cost and the
ultimate value of the factory premises, the bank had failed "to show that it
took reasonable steps to bring home to Mrs Bennett the risks she was running".
The judge treated the non-disclosure as a
constructive notice point. His reasoning, I think, proceeded in this way:
1. The bank's knowledge of the relationship between Mr and Mrs
Bennett and of the nature of the transactions she was entering into, ie the
guarantee and the legal charge, put the bank on notice of the risk that her
agreement to the transactions might have been procured by the undue influence
of her husband.
2. The bank could avoid being on constructive notice of any
such impropriety by taking reasonable steps to satisfy itself that Mrs Bennett
understood the nature and effect of the transactions.
3. The bank's failure to disclose the material facts regarding
the SWIFT ranking agreement and the value of the factory premises was a
failure to take reasonable steps.
4. It was a failure to take reasonable steps because unless Mr
Parkyn was given this information he could not be expected to give Mrs Bennett
appropriate advice about the risks she was running.
The Court of Appeal disagreed. Chadwick LJ
[1999] 1 FLR 1115, 1142 accepted that the facts in question
"were facts which a competent adviser, advising Mrs Bennett as to the risk
that the bank would need to have recourse to the security which she was
providing, would need to know . . . . "
but held, at pp 1142-1143:
"the judge was wrong to hold that the bank was required to bring those
facts to the notice of Mr Parkyn or his client: or
to hold that
the bank
was not entitled to assume that Mr Parkyn would become aware of those facts in
the course of considering what advice he needed to give Mrs Bennett . . . . "
Chadwick LJ thought that the bank was entitled
to assume that Mr Parkyn would inform himself of the nature of the liabilities
secured by the legal charge, and, in doing so, would become aware that "those
liabilities are themselves liabilities under a guarantee for a company's
indebtedness to the bank" and that Mr Parkyn would then "inform himself as to
the company's financial position". He continued:
"That must, at the least, involve questioning the true value of the assets
in the balance sheet and understanding the ranking of whatever charges have
been created over those assets".
In my respectful opinion, this view of what a
solicitor in the position of Mr Parkyn would inquire into and discover is
unrealistic. Let it be supposed that Mr Parkyn had known about the guarantee. It
is to be expected that he would have advised Mrs Bennett that the risk of the
bank seeking to enforce the charge so as to recover the £150,000 would depend
upon the fortunes of the company. He might have asked her if she was satisfied
about the company's prospects. He probably would have asked her if she knew
anything about the company's existing indebtedness to the bank and the extent of
its overdraft facility. If she did not know these things, he might have advised
her to find out about them or have asked her if she wanted him to try and do so.
But it seems to me highly unlikely that he would on his own initiative have
examined the company's latest balance sheet which would probably have been
well out of date or have inquired into the balance sheet values of its assets.
I think it highly unlikely that, without special instructions to do so, he would
have carried out a search in order to discover what charges were registered
against the company. In the ordinary discharge of his duties as a solicitor
advising Mrs Bennett about the nature and effect of the legal charge I do not
believe he would have become aware either of the ranking agreement between the
bank and SWIFT or of the valuation of the factory premises that the bank had
obtained.
In my opinion, however, both the deputy judge
and the Court of Appeal approached this question of disclosure from the wrong
angle. The point was not, in my view, a constructive notice point. It was simply
a disclosure point. Did the bank have an obligation to the proposed surety to
disclose this information to the surety? If it did, what is the consequence of
the non-disclosure?
In my opinion, the ranking agreement between the
company, the bank and SWIFT falls within the general proposition expressed by
Vaughan Williams LJ in London General Omnibus Co Ltd v Holloway [1912] 2 KB 72, 79 (see para 186 above).
A surety who pays off the creditor is entitled to be subrogated to the rights
of the creditor in respect of the debt in question. And if the creditor, in
order to discharge the debt, has recourse to security provided by the surety,
the same applies. So, in the present case, if Mrs Bennett had paid the bank the
£150,000, or if the bank had obtained payment by realising its security over 15,
Elthiron Road, Mrs Bennett would have been entitled to the benefit of the Bank's
rights against the company in respect of the £150,000. These rights would have
included the bank's rights under its fixed and floating charges. But those
rights were subject to the ranking agreement.
Moreover the ranking agreement reduced the
amount of the company's assets that would be available for the payment of the
company's debts to the bank and correspondingly increased the likelihood that
the bank would make a call on Mr Bennett or Mrs Bennett, or both, under the
guarantee and would enforce its security over 15, Elthiron Road. The ranking
agreement did affect the rights of Mrs Bennett as surety.
In my opinion, the bank ought to have disclosed
to Mrs Bennett, or to the solicitor acting for her, the existence of the ranking
agreement.
The deputy judge thought that the facts
regarding the valuation of the factory premises should also have been disclosed
by the bank. Here, I do not agree. It is, I think, up to an intending surety to
satisfy himself about the value of the principal debtor's assets or the
principal debtor's credit worthiness.
The bank's obligation to disclose the existence
of the ranking agreement arose, in my opinion, under the general law applicable
to suretyship contracts. Mr Jarvis QC, counsel for the bank, accepted that if
the bank had an obligation to disclose the ranking agreement and if Mrs Bennett
and Mr Parkyn were on 1 October 1991 unaware of it, Mrs Bennett was entitled to
have the legal charge set aside.
I would allow her appeal on this ground.
Kenyon-Brown v Desmond Banks & Co
This is the solicitors' negligence case. The
solicitors, appellants before your Lordships, are Desmond Banks & Co. The
proprietor of the firm, Mr Desmond Banks, acted in the matters that have given
rise to this litigation.
Mrs Kenyon-Brown, the respondent before the
House, contends that Mr Banks acted negligently in failing to advise her
properly on 12 January 1993, when she and her husband attended at his offices to
sign a second legal charge of their jointly owned holiday cottage, Rock Cottage,
Melplash, Bridport, to National Westminster Bank Plc. The charge secured Mr
Kenyon-Brown's indebtedness to the bank.
In her statement of claim Mrs Kenyon-Brown
pleaded that Mr Banks owed her a duty to advise her, before she signed the legal
charge,
"(i) that there was a conflict of interest between the
plaintiff and Mr Kenyon-Brown in respect of the proposed mortgage; and/or
(ii) that the said conflict might prevent or inhibit the
defendants from disclosing or explaining all aspects of the transaction to the
plaintiff or from giving advice to the plaintiff which would conflict with Mr
Kenyon-Brown's interests; and/or
(iii) that she could and/or should obtain advice from an
independent solicitor in respect of the proposed mortgage; and/or
(iv) that the proposed mortgage would confer no benefit upon
her; and/or
(v) as to the nature and effect of the mortgage."
She pleaded that Mr Banks had failed to give her advice in respect of these
matters, or any advice about the proposed mortgage, and that in consequence she
had suffered loss.
She quantified her loss as being one half of the
sum of £55,000 then owing by Mr Kenyon-Brown to the bank.
Mr Banks accepted in his defence that he had
owed Mrs Kenyon-Brown a duty to advise her "as to the meaning and effect" of the
legal charge, but denied any breach of duty and denied, if there had been any
breach of duty, that the breach had caused any loss. Directions were given for
issues of liability to be tried before issues of damage. At trial, on the
liability issues, the familiar two issues arose. What was the extent of the duty
owed by Mr Banks? Had there been any breach of that duty?
The material facts can be quite shortly stated.
Mr and Mrs Kenyon-Brown were directors of and shareholders in KB Insurance
Brokers (London) Ltd (KB) and PM Insurance Services Ltd (PM). These companies
were controlled by Mr Kenyon-Brown but Mrs Kenyon-Brown did play some part in
the insurance businesses that they carried on.
In 1983 a controlling interest in each company
was sold to Crusader Insurance Company Ltd (Crusader).
In 1986 Mr and Mrs Kenyon-Brown purchased Rock
Cottage for £50,000 with the aid of a £30,000 advance from Nationwide Building
Society secured by a mortgage of Rock Cottage.
In 1988 they purchased 53, Dene Road, Northwood,
with the aid of a £30,000 advance from National Westminster Home Loans Ltd
secured by a mortgage of 53, Dene Road.
Both properties were in their joint names. 53,
Dene Road was their home. Rock Cottage was a holiday cottage.
In 1989 the opportunity to repurchase from
Crusader the shares in KB and PM arose. As the deputy judge, Mr Peter Leaver QC,
found:
"Mrs Kenyon-Brown was very much against doing so, but was overborne by her
husband and very reluctantly agreed to the repurchase."
Finance was needed for the repurchase of the
shares and a loan from National Westminster Bank Plc to be secured by a second
mortgage of 53, Dene Road was arranged. The loan was to be a loan to Mr
Kenyon-Brown alone, not to the two of them jointly.
Mr Banks, who had acted for Mr and Mrs
Kenyon-Brown in their purchase of 53, Dene Road, and had acted previously for KB
and for PM, acted for them in connection with the grant to the bank of the
second mortgage of 53, Dene Road.
By a letter of 13 November 1989 the bank asked
Mr Banks to arrange for the legal charge to be signed by Mr and Mrs Kenyon-Brown
and to confirm, when returning the signed document, that Mrs Kenyon-Brown had
received legal advice about it. So Mr Banks arranged a meeting with her at his
offices on 15 November 1989. His attendance note records the advice he gave
her.
Mr Banks pointed out to her that the advance was
to be to Mr Kenyon-Brown alone, not to the two of them jointly. Mrs Kenyon-Brown
responded that she trusted her husband. Mr Banks was instrumental in arranging
for the sum secured by the legal charge to be limited to £150,000. No allegation
has been made that in advising Mrs Kenyon-Brown on this occasion Mr Banks was in
breach of the duty he owed her.
The legal charge over 53, Dene Road was duly
completed. It secured the liabilities to the bank of Mr Kenyon-Brown, subject to
the agreed limit of £150,000.
By 1992, the bank was seeking further security
in respect of Mr Kenyon-Brown's indebtedness and agreement was apparently
reached between it and Mr Kenyon-Brown that it would be given a second charge
over Rock Cottage. By a letter of 15 December 1992 the bank sent Mr Banks the
proposed form of legal charge for signature by Mr and Mrs Kenyon-Brown. The
letter said:
"We shall be grateful if you will confirm that Legal Advice was given to
Mrs Kenyon-Brown when the charge form is returned."
On 12 January 1993 Mrs Kenyon-Brown had a
meeting with Mr Banks at his offices. His attendance note reads:
Jessica is happy to go along with it doesn't want me to go into it in
detail even if money is borrowed by N alone to buy shares in KB in his name.
Dene Road already mortgage. Copy mortgage to JKB. Mrs KB appeared to
understand it fully and despite the terms of my warning to be totally
unconcerned that the mortgage of property jointly owned by her would benefit
her husband alone and be without limit."
As indicated by the attendance note, the form of
legal charge contained no limit on the amount of Mr Kenyon-Brown's liabilities
to the bank that would be secured.
The legal charge was duly completed and dated 12
January 1993.
At the trial, Mrs Kenyon-Brown was the only
witness who gave oral evidence but the deputy judge said that he did not find
her evidence about the events of 15 November 1989 or 12 January 1993 persuasive.
He said:
"Ultimately, I came to the conclusion that her evidence could not be
relied upon."
He recorded, however, that she said that she could not contradict Mr Banks'
attendance note of the 12 January 1993 meeting. He expressed his conclusions in
the following passage:
"In my judgment the evidence in the present case comes nowhere near
proving that the defendant was negligent in the manner of which Mrs
Kenyon-Brown complains. It is for Mrs Kenyon-Brown to satisfy me, on the
balance of probabilities, that the defendant failed to discharge his duty to
her properly in the ways of which she complains. Mrs Kenyon-Brown has failed
to satisfy me that the defendant gave no advice. Indeed the attendance note .
. . . makes it plain that the defendant did give advice. On Miss Smith's
second submission, that the defendant should, in the light of the conflict of
interests, have told her to go to another solicitor, I hold that the law does
not require that she [sic] should do so. While it may, in some cases be
prudent for a solicitor so to advise, it will depend upon the facts of the
case as to whether it was negligent or not to do so. Although Mrs Kenyon-Brown
told me that she was sure that if she had been advised to go to another
solicitor she would have gone, I could not accept that evidence. I form the
view that Mrs Kenyon-Brown was quite clear as to what she was doing by
entering into the second mortgage, and wanted to do so notwithstanding the
defendant's 'warning'."
These conclusions might be thought to have made
the prospects of an appeal unpromising. But there was an appeal and the appeal
succeeded (although Wilson J dissented) [2000] PNLR 266. The main judgment was
given by Mance LJ. He based his reasoning substantially on the judgment of the
Court of Appeal in Etridge (No 2) [1998] 4 All ER 705. He cited
paragraphs 19 to 26 of Stuart-Smith LJ's judgment under the heading "Independent
legal advice". In these paragraphs Stuart-Smith LJ was considering the advice
that needs to be given where a solicitor is instructed to advise a person who
may be subject to the undue influence of another. I have criticised the contents
of these paragraphs in an earlier section of this opinion and shall not repeat
the criticism here. The duty of a solicitor always depends on the extent of the
instructions given to and accepted by him, either expressly or by implication,
by conduct or otherwise. The normal duty of a solicitor instructed to advise a
would-be surety, whether a wife of the principal debtor or anyone else, about
the document or documents the surety is being asked to sign, is to explain the
nature and effect of the document in order to try and make sure that the surety
knows what he or she is doing. The particular circumstances of a particular case
may add to or reduce the extent of the duty owed by the solicitor. There was, in
my opinion, nothing in the circumstances which resulted in Mr Banks advising Mrs
Kenyon-Brown about the proposed second mortgage of Rock Cottage to add to the
normal duty that I have described. Mance LJ said that since Mr Banks knew that
Mrs Kenyon-Brown reposed trust and confidence in her husband (see the contents
of the attendance note of the 15 November 1989 meeting) and that the second
mortgage of Rock Cottage appeared to be entirely in Mr Kenyon-Brown's interests
and was without limit of amount, he was on notice that "there might be undue
influence". This is something that was never pleaded. It may be right that a
solicitor who is advising a client about a transaction and has reason to suspect
that the client is the victim of undue influence is placed under a duty to the
client to try and protect her (see Bank of Montreal v Stuart [1911] AC 120, 138). But if a case of that sort is to be advanced against a solicitor, it
must be pleaded. A solicitor does not have reason to suspect undue influence
simply because he knows a wife has trust and confidence in her husband and is
proposing to give a charge over her property to support his financial position.
That she is willing to do so is consistent with a normal relationship between
spouses. Mance LJ said, at p 281:
"There is no suggestion, or likelihood in the light of Mr Banks'
attendance note, that Mr Banks ascertained the amount outstanding (well in
excess of the limit of liability in the second mortgage of 53, Dene Road), its
origin and the circumstances in which it came to be outstanding, let alone the
prospects of its repayment or of the additional security over Rock Cottage
being called upon. Nor did he ask why Mrs Kenyon-Brown was willing to grant
such additional security. Still less, therefore, did he know that her husband
had told her that she would be bankrupted if she did not enter into the
mortgage. Nor did he elicit the fact (about which she gave evidence) that she
did not consider the marriage to have any long term future but wished, on the
other hand, to avoid bringing it to an end until her son (aged 14 at the
beginning of 1983) was older and to maintain a tolerable atmosphere at home in
the meantime while she was living with Mr Kenyon-Brown. These are
considerations which would have been central to an evaluation whether it made
sense for the wife to enter into the mortgage and to a balanced decision
whether to do so, made free of any undue influence by Mr Kenyon-Brown. Mr
Banks did not know of them. Nor, therefore, could he either discuss them with
Mrs Kenyon-Brown or, if he concluded in their light that a conflict of
interest existed, suggest that she discuss them with another solicitor."
Save as to the amount of the then
current indebtedness of Mr Kenyon-Brown to the bank, Mr Banks had, in my
opinion, no duty or reason to make the enquiries referred to. Some of the
enquiries, eg eliciting the fact that Mrs Kenyon-Brown did not consider her
marriage to have a long term future, would have been an unpardonable
impertinence. Mr Banks was entitled to treat Mrs Kenyon-Brown as a mature lady
able to make up her own mind as to whether to allow her share in Rock Cottage to
become security for her husband's debts. What he did need to do, and, on the
judge's findings, did do, was to try and make sure that she understood the
nature and effect of the document she was being asked to sign. Wilson J, in his
dissenting judgment in the Court of Appeal, set out, at pp 288-289, in
paragraphs lettered (a) to (i) the circumstances that, in his view, determined
the extent of the duty owed by Mr Banks to his client. He concluded that Mr
Banks had discharged that duty. I agree and would allow this
appeal.