ROYAL BANK OF SCOTLAND PLC v ETRIDGE (NO.2) : BARCLAYS BANK PLC v HARRIS : MIDLAND BANK PLC v WALLACE : NATIONAL WESTMINSTER BANK PLC v GILL : BARCLAYS BANK PLC v COLEMAN : UCB HOME LOANS CORPORATION LTD v MOORE : BANK OF SCOTLAND v BENNETT : KENYON-BROWN v DESMOND BANKES & CO (2001)

[2001] UKHL 44

HL (Lords Bingham, Nicholls, Clyde, Hobhouse and Scott) 11/10/2001

BANKING - REAL PROPERTY - EQUITY - GUARANTEE AND INDEMNITY - PROFESSIONAL NEGLIGENCE - LEGAL PROFESSION - MISREPRESENTATION

MORTGAGES : WIFE OR COHABITEES : WIVES : UNDUE INFLUENCE : CONSTRUCTIVE NOTICE OF BANKS : ROLE OF SOLICITORS : MATRIMONIAL HOMES : COLLATERAL SECURITY : INDEPENDENT LEGAL ADVICE : BARCLAYS BANK PLC v O'BRIEN (1994) : ON NOTICE : DISADVANTAGEOUS : BUSINESS DEBTS : REASONABLE STEPS : PROTECTION : PRACTICAL CONSEQUENCES : LIABILITY : GUARANTEE : SURETY : CHOICES : NATURE OF DOCUMENTS

For the future, a bank seeking to enforce a charge against a surety wife satisfied the minimum requirements to ensure it was not affected by the wife's claim if it insisted that the wife attended a private meeting with a representative of the bank at which she was told of the extent of her liability as surety, warned of the risk she was running and urged to take independent legal advice. In exceptional cases, the bank, to be safe, had to insist that the wife was separately advised. Content of core minimum legal advice to be given to wives.

Appeals in eight cases, each arising 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. The wife later asserted that she signed the charge under the undue influence of her husband. The cases of Etridge, Harris, Wallace Gill and Moore are summarised at Royal Bank of Scotland v Etridge (No.2) & Other Cases (1998) 2 FLR 843. The other cases are reported at Barclays Bank plc v Coleman & Anor (2000) 3 WLR 405; Bank of Scotland v Bennett (1999) 1 FLR 1115; and Kenyon-Brown v Desmond Banks & Co (2000) PNLR 266. In seven of the appeals 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 (Kenyon-Brown) concerned a claim by a wife for damages from a solicitor who advised her before she entered into a guarantee obligation of this character. Their Lordships sought to indicate minimum requirements for the procedures followed when obtaining the security, with the aim that these requirements should be clear, simple and practically operable.

HELD: (1) Whether a transaction was brought about by the exercise of undue influence was a question of fact, where the burden of proof rested on the person who claimed to have been wronged. 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 called for explanation, would normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof. There was a rebuttable evidential presumption of undue influence. (2) The distinction between "presumed undue influence" and "actual undue influence" was confusing (see below and Bank of Credit & Commerce International SA v Aboody & Anor (1990) 1 QB 923). (3) This evidential presumption was to be distinguished sharply from the irrebuttable presumption arising from a special relationship (eg parent and child, solicitor and client) that one party had influence over the other. It was sufficient for the complainant to prove the existence of the type of relationship. It was well established that husband and wife was not one of the relationships to which the latter principle applied, as there were often good reasons for a wife to confer financial benefits on her husband. (4) The mere existence of the influence was not enough. The transaction must not be readily explainable by the relationship of the parties. The phrase "manifest disadvantage" had been interpreted in a narrow way in the context of wives guaranteeing payment of their husbands' business debts. Although such a transaction was in a narrow sense plainly disadvantageous to the wife, there were inherent reasons why such a transaction might well be for her benefit eg supporting the family business, ensuring the family income etc. The test in National Westminster Bank v Morgan (1985) AC 686) should be applied. (5) Undue influence had a connotation of impropriety and should only be applied to real misrepresentation or a husband who preferred his interests to those of his wife. (6) In Barclays Bank plc v O'Brien (1993) 4 All ER 417 the House of Lords decided where the balance should be held between the competing interests of the vulnerable spouse and commercial certainty, by setting out the steps a bank should take to ensure it was not affected by any claim the wife might have that her signature of the documents was procured by the undue influence or other wrong of her husband, by applying an unconventional use of the equitable concept of constructive notice. (7) A bank was put on inquiry whenever a wife offered to stand surety for her husband's debts. (8) For the future, a bank would satisfy the requirements to take steps to bring to the wife's attention the risks of standing as surety if it insisted that the wife attended a private meeting with a representative of the bank, at which she was told of the extent of her liability as surety, warned of the risk she was running and urged to take independent legal advice. In exceptional cases, the bank, to be safe, had to insist that the wife was separately advised. (9) The House of Lords set out the core minimum content of the legal advice that the solicitor advising the wife should give (para 65, Lord Nicholls). This should be in the context of a face-to-face meeting, in the absence of the husband, and in suitably non-technical language. The solicitor should obtain from the bank any information needed to give the advice. (10) It was not necessary that the solicitor should act only for the wife, as cost and the familiarity of the family solicitor were important factors. The solicitor's legal and professional duties, assumed when accepting instructions to advise the wife, were owed to her alone. He should consider whether there was any conflict of duty or interest and what the best interests of the wife were. (11) The solicitor was not the bank's agent and in the ordinary case the bank was entitled to proceed on the assumption that he had done his job properly. (12) There was no rational cut-off point to the type of relationship covered by the principle in O'Brien (supra). The only practical way forward was to regard banks as "put on inquiry" in every case where the relationship between the surety and the debtor was non-commercial. This was no more than a modest obligation on banks and other creditors.

Richard Mawrey QC and Simon Wheatley instructed by Collins (Watford) for Mrs Etridge. Michael Briggs QC and Amanda Harrington instructed by Fladgate Fielder for Royal Bank of Scotland. Jules Sher QC and Stephen Whitaker instructed by Evans Derry Binnion (Birmingham) for Mr Harris. John Jarvis QC and David Wolfson instructed by Salans Hertzfeld & Heilbronn HRK for Barclays Bank. Jules Sher QC and Mark Lyne instructed by Keppe Shaw (Twickenham) for Mrs Wallace. Michael Briggs QC and Clive Jones instructed by Tarlo Lyons for Midland Bank. Jules Sher QC and Teresa Rosen Peacocke instructed by Baxter & Co (Bournemouth) for Mrs Gill. Michael Lerego QC and Nicholas Briggs instructed by Osborne Clarke (Bristol) for National Westminster Bank. Jules Sher QC and Helene Pines-Richman instructed by Waller & Co for Mrs Coleman. John Jarvis QC and David Wolfson instructed by Nicholson Graham & Jones for Barclays Bank. Jules Sher QC and Bernard Devlin instructed by Richard Wilson & Co (Pangbourne) for Mrs Moore. Michael Briggs QC and Christopher Coney instructed by Copley Clark & Bennett for UCB Home Loans Corporation Ltd. Nicholas Yell instructed by Trevor Jenkin & Co for Mrs Bennett. John Jarvis QC instructed by Underwood & Co for Bank of Scotland. Jonathan Sumption QC and Ben Hubble instructed by Henmans for Desmond Banks & Co. Julia Smith instructed by Neilson & Co for Mrs Kenyon-Brown.

LTL 11/10/2001 : TLR 17/10/2001 : (2001) 43 EG 184 (CS) : (2001) 4 All ER 449 : (2001) 3 WLR 1021 : (2001) 2 All ER (Comm) 1061 : (2001) 2 FLR 1364 : (2002) HLR 4 : (2002) 1 Lloyd's Rep 343

Judgment Transcript

Document No. AC0102019

Individual appeals considered.

ROYAL BANK OF SCOTLAND v SUSAN ETRIDGE (No.2) (1998)

The Court of Appeal's treatment of the presumption of undue influence and the part to be played by manifest disadvantage demonstrated the tangle that the case law in this area was in. There was no evidence of undue influence or manifest disadvantage. The solicitors were not the banks agents for the purpose of advising Mrs Etridge and the bank was entitled to rely on the solicitors' assurances, even though those were false.

Appeal dismissed.

BARCLAYS BANK v BERYL HARRIS (1998)

On the premise that the solicitors were indeed Mrs Harris' solicitors, the Court of Appeal came to the correct conclusion. However, it was arguable that Mrs Harris would succeed on the issue of constructive notice.

Appeal allowed. Case to go to trial.

MIDLAND BANK PLC v ANNA WALLACE (1998)

The solicitor in this case was acting as the bank's solicitor on the bank's instructions. The bank therefore did not shed the constructive notice imputed to it.

Appeal allowed. Case to go to trial.

NATIONAL WESTMINSTER BANK v MARIE GILL (1998)

There was no evidence of undue influence in this case. Mrs Gill had been separately advised and the bank was entitled to be satisfied.

Appeal allowed.

BARCLAYS BANK PLC v COLEMAN (2000)

Although the particular relationship here gave rise to a presumption of undue influence, there was no evidence to show that the bank had knowledge of any greater risk of undue influence than might be present in any other case. The fact that the advice had been given by a legal executive rather than a solicitor was not material, as these were matters on which an experienced legal executive could advise. Constructive notice could not be imputed to the bank.

Appeal dismissed.

UCB HOME LOANS CORP LTD v JUDITH MOORE (1998)

On the evidence in this interlocutory appeal, UCB failed to take reasonable steps to satisfy itself that Mrs Moore understood the nature and effect of the legal charge.

Appeal allowed. Case to go to trial.

BANK OF SCOTLAND v BENNETT (1999)

The point in this case was not constructive notice, but disclosure. The bank ought to have disclosed to Mrs Bennett or to the solicitor acting for her, the existence of the ranking agreement, under the general law applicable to suretyship contracts.

Appeal allowed.

KENYON-BROWN v DESMOND BANKS & CO (1999)

Solicitors' negligence case. The solicitor had no duty to make any enquiries (eg as to the state of the parties' marriage) other than those outlined above. He had discharged the duty of ensuring that he understood the nature and effect of the document the wife had to sign and that was all that was required of him.

Appeal allowed.