Mortgage — Defence — Pleadings — Joint owners — Joint charge over matrimonial home — ‘All monies’ charge — Whether defence based on misrepresentation and undue influence must plead constructive notice by bank — Burden of proof — Constructive notice — Whether burden of proof in relation to constructive notice falls on mortgager or mortgagee
By a legal charge dated 24 September 1979 the
respondents, Mr and Mrs B, charged the matrimonial home to the appellant bank
as security for a loan of £36,000 to purchase the property. In fact the charge
secured the loan and all moneys which Mr and Mrs B might owe. Mr B later
borrowed more money and, following a demand for payment which he later failed
to satisfy, the bank commenced proceedings and obtained a possession order. Mrs
B applied to set aside the order on the ground that she had a separate defence,
in that she was induced to sign the charge by undue influence and
misrepresentation. Following the setting aside of the possession order, a
defence was served alleging misrepresentation and undue influence in relation
to Mr
constructive notice of the misrepresentation or the undue influence. At the commencement
of the hearing of the trial, the county court judge took the point that the
defence did not expressly plead constructive notice on the part of the bank and
said Mrs B could not rely upon it without an amendment to her pleading. An
application to amend was not sought; however the judge refused an application
on Mrs B’s behalf to appeal his decision. The Court of Appeal granted leave to
appeal and decided: (1)
that entitled Mrs B to argue that the bank had constructive notice of the undue
influence and misrepresentation; and (2) that, in any event, the matter could
be put on a wider ground, in that Mrs B did not have to plead the constructive
notice point because she did not have to prove that the bank had constructive
notice, as it was for the bank to prove that it did not. The bank appealed.
certain facts amounted to constructive notice of other facts is a question of
law. If, therefore, the pleadings alleged all the facts that would, as a matter
of law, give rise to constructive notice on the part of the bank of the alleged
undue influence and misrepresentation, that should technically be enough.
Concealed and referential allegations do not perform the function of defining
the issues and giving the other party fair notice of the case it has to meet.
The circumstances of this case were exceptional in that it had been made quite
clear at the hearing that Mrs B would be relying on constructive notice. (2)
However, the Court of Appeal was wrong in deciding that there was no burden of
proof on a defendant seeking to rely on a bank’s constructive notice of
misrepresentations or undue influence. In the case of undue influence exercised
by a husband over a wife, the burden of proof is prima facie very easily
discharged. The wife needs to show only that the bank knew that she was a wife
living with her husband and that the transaction on its face was not to her
financial advantage. The burden is then upon the bank to show that it took
reasonable steps to satisfy itself that her consent was properly obtained.
The following cases are
referred to in this report.
Bainbrigge v Browne
(1881) 18 ChD 188
Barclays Bank plc
v O’Brien [1994] AC 180; [1993] 3 WLR 786; [1993] 4 All ER 417; (1994)
26 HLR 75, HL
CIBC Mortgages plc v Pitt [1994] 1 AC 200; [1993] 3 WLR 802; [1993] 4 All ER
433; (1994) 26 HLR 90, HL
Independent Automatic Sales Ltd v Knowles & Foster [1962] 1 WLR 974; [1962] 3 All ER 27;
106 SJ 720
Nisbet and Potts’ Contract, Re [1906] 1 Ch 386
Whitehorn Brothers v Davison [1911] 1 KB 463
This was an appeal by the
appellant, Barclays Bank plc, against the decision of the Court of Appeal
allowing an appeal by the second respondent, Julie Boulter, against the
decision of the county court judge in respect of the conduct of the second
respondent’s defence to possession proceedings by the appellant.
Michael Brindle QC and Michael Sullivan
(instructed by Lovell White Durrant) appeared for the appellant; Terence
Etherton QC and Christopher Coney (instructed by Comptons) appeared for the
respondent; Stephen Moriarty (instructed by the Treasury Solicitor) appeared as
amicus curiae.
Giving his opinion, LORD SLYNN OF HADLEY said: My lords, I have had the
advantage of reading in draft the speech that has been prepared by my noble and
learned friend, Lord Hoffmann. For the reasons that he gives, I too would
dismiss the appeal. This conclusion is in no sense an encouragement to pleaders
to leave inferences to be drawn, thereby leading to the sort of arguments that
have been ventilated before your lordships’ house and for which, I have no
doubt, leave to appeal would not have been given if that had been the only or
the central issue. It is, however, plain that in this case the bank was fully
aware that Mrs
part of the bank.
LORDS NOLAN and STEYN both
agreed and did not add anything.
Giving his opinion, LORD HOFFMANN said: My lords, this is an unusual appeal
to come before your lordships’ house. It raises a point of pleading. In 1979 Mr
and Mrs
Bushey. They gave the bank a legal charge dated 24 September 1979. According to
its terms, it secured not only the loan for the house but all moneys that
either or both of them might owe to the bank. Mrs
personally to repay all such sums. Mr Boulter later borrowed more money. On
30
When he failed to pay, the bank commenced proceedings for possession in Watford
County Court. On 21 June 1994 it obtained a possession order, which was
suspended on condition that he paid off the debt by instalments. But he again
failed to pay and a warrant for possession was issued.
Just as she was about to be evicted, Mrs Boulter
applied to the county court to set aside the possession order on the ground
that she had a separate defence. She said that her husband had induced her to
sign the charge in 1979 by undue influence and misrepresentation. She trusted
him to deal with their financial affairs. He had told her that the charge was
to secure the money borrowed for the house. In fact it was an ‘all monies’
charge. No one had advised her that the charge would have this effect. The
district judge refused the application but it was granted on appeal by Mr
Recorder Breen.
The argument before the recorder involved a
detailed consideration of Barclays Bank plc v O’Brien [1994] AC
180. Before that case, a number of decisions had treated a husband, who had
procured his wife’s signature to a mortgage or guarantee that secured his
liabilities to a bank, as having acted as the bank’s agent. On this ground, the
bank was
influence he may have exercised. In Barclays Bank plc v O’Brien
Lord Browne-Wilkinson said that this was an artificial view of the situation.
The reality was that the husband obtained his wife’s signature for his own
purposes in borrowing money. Occasions on which he was acting as agent for the
bank would be very rare. The real question was whether the bank had actual or
constructive notice of any misrepresentations or undue influence that may have
occurred. He then set out the conditions on which a bank would be considered to
have constructive notice: see p196. In the case of husband and wife living
together, constructive notice would be presumed from the fact that the
transaction was on its face not to the financial advantage of the wife, unless
the bank had taken reasonable steps to satisfy itself that the wife’s agreement
had been properly obtained.
The recorder said that if Mrs Boulter was telling
the truth:
there may well have been undue influence on the
part of the husband and certainly a serious misrepresentation by him as to the
true nature and effect of the document. That being so, as I understand the
effect of the authorities, the [bank] was fixed with constructive knowledge of
those matters and of [Mrs Boulter’s] right to set aside the transaction.
He therefore set aside the order for possession
against her. She then served her defence. She referred to the terms of the
legal charge and admitted her signature. She said that she was the wife of Mr
Boulter and that they had been married since 1966. She pleaded the alleged
misrepresentation and undue influence, saying that at all material times she
reposed trust and confidence in Mr
charge as having been to secure the money borrowed to finance the purchase of
the matrimonial home. She then alleged in para
The plaintiffs procured the signature of the
second defendant through the first defendant and in the premises the first
defendant was acting as the plaintiffs’ agent in respect thereof.
But the pleading did not expressly say that the
bank had actual or constructive notice of the misrepresentation and undue
influence. On the other hand, it did allege facts that, according to Barclays
Bank plc v O’Brien could, if known to the bank, give rise to
constructive notice. They were that: (1) Mrs Boulter was at the material time
married to Mr
and (3) the charge was not on its face to her financial advantage. Of these
facts, (1) was pleaded expressly, (2) was a reasonable inference from the
allegation that the initial loan was to buy the matrimonial home and (3) was
open to argument on the construction of the legal charge but did not require
any further allegations of fact. The pleading did not allege that these facts
were known to the bank. But it did refer to the legal charge to which the bank
had been a party and which would have put the bank on notice of the relevant facts.
It appeared from the charge that Mr and Mrs Boulter had the same name and lived
at the same address. And of course it contained the terms that she claimed were
not to her financial advantage.
When the trial came on before Judge Simmons in the
county court, Mr Michael Sullivan opened the bank’s case. He took the point
that constructive notice had not been pleaded and said that Mrs Boulter could
not rely upon it without an amendment. The judge accepted this submission. He
allowed Mr Christopher Coney a short adjournment to decide whether to apply for
leave to amend. Mr
Leave to appeal was refused by the judge but granted by the Court of Appeal. At
the substantive hearing, Mummery LJ said that Mr Coney was right. He had
pleaded all the material facts that entitled him to argue that the bank had
constructive notice. No purpose would have been served by an additional
paragraph ‘expressly alleging constructive notice’: [1998] 1 WLR 1 at p8D.
I agree that the question of whether notice of
certain facts amounted to constructive notice of other facts is a question of
law. If, therefore, the pleading alleged all the facts that would, as a matter
of law, give rise to constructive notice on the part of the bank of the alleged
undue influence and misrepresentation, that should technically be enough. It
would enable Mrs Boulter to argue the legal consequences of the facts she had
alleged or proved: see Independent Automatic Sales Ltd v Knowles
& Foster [1962] 1 WLR 974 at p981. However, as Buckley
that case, this is ‘not… a convenient course normally to be followed’ because
it may result in the question of law taking the other side by surprise.
Mr
austere approach to the rules of pleading and said expressly that he was
alleging constructive notice on the part of the bank. In addition, the
deficiencies in the pleaded defence go further than the lack of an express
allegation of constructive notice. As I have already said, essential
allegations of fact have to be deduced inferentially from the contents of the
pleading. This is particularly true of the allegations about the bank’s notice
of the primary facts alleged to give rise to constructive notice. These have to
be deduced from the fact that the bank was party to documents in which they
were stated or could be implied.
Ordinarily, I would regard such a pleading as
inadequate. I certainly do not think that the mere fact that a reference to a
fact is tucked away in some pleaded document to which the bank was a party
should normally, without any express reference to that fact, be capable of
being taken as an allegation that the bank had notice of that fact. The purpose
of the pleadings is to define the issues and give the other party fair notice
of the case which he has to meet. Concealed and referential allegations do not
perform this function. But the circumstances of this case were exceptional in
that it had been made quite clear at the earlier hearing that Mrs
would be relying on constructive notice. In view of what Lord Browne-Wilkinson
had said in Barclays Bank plc v O’Brien [1994] AC 180 about the
difficulties facing an allegation of agency, such as was pleaded in para 7, the
bank cannot seriously have thought that Mrs Boulter was abandoning the defence
of constructive notice. It was in practical terms her only defence. So the
pleading point was, against that background, technical in the highest degree.
The bank knew perfectly well what case it had to meet. Its counsel made it
clear that, whether or not the pleadings were amended, he was ready to deal
with the question of constructive notice and would not require the trial to be
adjourned.
Equally, it may be said, counsel for Mrs Boulter had
only to make a formal amendment to satisfy the judge’s ruling. Why were both
sides reluctant simply to proceed to try the case on its merits? The reason is
the effect that an amendment might have had upon costs. Mr
concerned that even if he succeeded upon his amended defence, the bank might
ask that Mrs
the ground that she had succeeded upon a new point. The judge expressed doubt
about whether this would be the case, but the point was not argued and Mr
Sullivan for the bank said nothing to reassure Mr
took their stand upon the formal rules of pleading. In my view, reading the
pleadings against the background known to the parties and having regard to
their purpose, no amendment was required.
Mr Michael Brindle QC, who appeared for the bank,
also relied upon two provisions in the former Rules of the Supreme Court. The
first was Ord 18 r 8(2), which provides that a defendant to an action for
possession of land ‘must plead specifically every ground of defence on which he
relies, and a plea that he is in possession of the land by himself or his
tenant is not sufficient.’ This abolished the old rule that the defendant in an
action for possession of land could plead the general issue by alleging simply
that he was in possession, in the way that a defendant to the actions of
trespass and assumpsit could formerly plead ‘not guilty’. It required
him to specify what his defence was in the same way as in any other action. But
it did not require him to plead more than he would have been required to plead
in any other action.
The other provision relied upon was Ord 18 r
12(4), which provides that where a party ‘alleges as a fact’ that a person had
notice of some fact, the court may order service of particulars of the facts
relied upon. I do not think that this provision assists the bank. The matters
of which it is alleged to have had notice ‘as a fact’ have been pleaded. The
conclusion that it therefore had constructive notice of other facts is one of
law.
For these reasons I would dismiss the appeal. And
if this had been the only question, I am sure that your lordships would not
have given the bank leave to appeal. But the Court of Appeal also put the
matter upon a wider ground. It said that Mrs Boulter did not have to plead
constructive notice because she did not have to prove that the bank had
constructive notice. It was for the bank to prove that it did not. This means
that Mrs
induced to execute an instrument in favour of a bank by the misrepresentation
or undue influence of a third party, need allege only the misrepresentation or
undue influence. Nothing need be said about the facts which are relied upon as
giving rise to an inference of constructive notice. It was to challenge this
far-reaching proposition that the bank sought leave to appeal to your lordships
and for that reason only that leave was given.
Mummery LJ relied upon the analogy of the defence
of purchaser in good faith for value without notice which may be relied upon by
a purchaser of a legal estate to defeat a prior equitable interest or estate.
In such a case, it is well established that the burden of proving all the
elements of the defence is upon the purchaser: see Re Nisbet and Potts’
Contract [1906] 1 Ch 386 at p398. But that rule depends upon the fact that
the land is burdened with an equitable proprietary interest. Prima facie,
a purchaser cannot obtain a better title than his vendor was able to convey.
The defence of purchaser in good faith for value without notice enables the
purchaser to defeat a prior interest which burdened the title. It is therefore
for him to establish that defence.
In the present case, however, the bank took a
charge directly from Mrs Boulter. She had the necessary title to grant it.
There was no prior interest that the bank needed to defeat. Likewise, the legal
charge was an agreement under seal between Mrs Boulter and the bank. She
covenanted directly with the bank. What she claims is that the bank cannot rely
upon the charge and the covenant because they were vitiated by the undue
influence and misrepresentations of her husband. But in my opinion, it is for
her to show why these acts of a third party should make the charge and covenant
invalid as against the bank. In my opinion, a better analogy is the case of the
purchaser of a chattel whose vendor’s title is vitiated by fraud. In such a
case, the defrauded owner retains no proprietary interest in the chattel and it
is therefore not for the purchaser to establish a defence that would defeat it.
Instead, it is for the owner to prove that the purchaser had actual or
constructive knowledge of the fraud: see Whitehorn Brothers v Davison
[1911] 1 KB 463. Likewise in Bainbrigge v Browne (1881) 18 ChD
188, which was the case principally relied upon by Lord Browne-Wilkinson in Barclays
Bank plc v O’Brien [1994] AC 180 for the doctrine of vitiation by
notice of the misrepresentation or undue influence of a third party, Fry
said at p197 that the vitiating circumstances would operate:
against every volunteer who claimed under [the
person who had exercised undue influence], and also against every person who
claimed under him with notice of the equity thereby created, or with notice of
the circumstances from which the court infers the equity. But, in my judgment,
it would operate against no others; it would not operate against a person who
is not shown to have taken with such notice of the circumstances under which
the deed was executed.
It seems to me that Fry J, who was a most exact
and learned equity judge, clearly contemplated by the words ‘person who is not
shown to have taken with such notice’ that the burden of proving notice is upon
the person who claims that the vitiating circumstances affect a person who was
not party to the undue influence or misrepresentation. Likewise, in CIBC
Mortgages plc v Pitt [1994] 1 AC 200 at p210 Lord Browne-Wilkinson
said:
Even though, in my view, Mrs Pitt is entitled to
set aside the transaction as against Mr Pitt, she has to establish that in some
way the plaintiff is affected by the wrongdoing of Mr Pitt so as to be entitled
to set aside the legal charge as against the plaintiff.
I respectfully think that these statements of the
law are in accordance with principle.
In the case of undue influence exercised by a
husband over a wife, the burden is prima facie very easily discharged.
The wife needs to show only that the bank knew that she was a wife living with
her husband and that the transaction was not on its face to her financial
advantage. The burden is then upon the bank to show that it took reasonable
steps to satisfy itself that her consent was properly obtained. But a rule that
generally put the burden upon the bank to show that it had no notice of
vitiating circumstances could operate very unreasonably. It would mean that
even when the relationship between the parties, as known to the bank, gave rise
to no apparent risk of undue influence, the bank would have to prove that it
had no notice of any that may in fact have been exercised. The defendant would
not have to plead any of the facts upon which it intended to rely as giving
rise to an inference of such notice, and the bank would, under the former Rules
of the Supreme Court and County Court Rules, not have been entitled to ask for
particulars. In my opinion, therefore, the wider reasons given by the Court of
Appeal were wrong, but on the narrow pleading point I would dismiss the appeal.
LORD HUTTON agreed and did not add anything.
Appeal dismissed
