Mortgage – Undue influence — House of Lords refining principles enunciated in Barclays Bank plc v O’Brien [1994] AC 180 — Wife consenting to unlimited charge by bank on jointly owned home to secure husband’s indebtedness — Wife contending that consent vitiated by husband’s undue influence — Circumstances in which bank should be seen as put on enquiry — Steps to be taken by bank to ensure wife properly informed – Extent of duty owed to wife by her advising solicitor
Eight appeals were heard together by the House of Lords, each concerning an allegation by W*, that a purported charge over her joint interest in her home was unenforceable because the bank (or other lender), was, or should have been aware, that her signature would not have been obtained but for undue influence, or a material misrepresentation† on the part of the principal debtor (H). Guidance was given on a number of issues that had arisen since the leading case of Barclays Bank plc v O’Brien [1994] AC 180.‡
Held:
1. Has H taken unfair advantage of W?
That W may have habitually left important financial decisions to H, does not create a relationship or a situation calling for special legal classification. The legal burden of proving undue influence (without which, no claim can be made against the bank) lies on W throughout. However, res ipsa loquitur, the degree of trust enjoyed by H is one of the main factors determining at what stage, if any, a purely evidential burden should pass to the bank.
While the burden would shift to demonstrating that the transaction was to the “manifest disadvantage” of W, the mere entry by W, into a commitment carrying serious risks, does not of itself afford prima facie evidence of undue influence.
Proof that W had received independent advice does not necessarily demonstrate that she was free from the undue influence at the material time.
2. Was the bank “put on inquiry”?
The expressions “constructive notice” and “put on inquiry” serve merely to identify the circumstances in which the bank cannot prudently obtain W’s signature without first ascertaining whether W, is, or has been, made fully aware of the nature of the transaction. For that purpose, and despite judicial pronouncements to the contrary, W does not have to show that the transaction was particularly disadvantageous to her; nor does W have to categorise her relationship with H, whether married or otherwise. The only practical way forward is to regard the bank as being “put on inquiry” in each case where the relationship between the surety and the debtor is non-commercial.
3. What steps should the bank take when put on inquiry?
It is neither desirable nor practicable that the bank should be required: (a) to discover for itself whether W’s consent was procured by exercise of undue influence; and (b) to insist upon confirmation from a solicitor that no such influence has been exercised. The bank needs only to take reasonable steps to satisfy itself that the practical implications of the proposed transaction have been explained to W in a meaningful way. For that purpose the bank should insist either: (a) that W attend a meeting in private with a member of its staff, who should inform her of the extent of her liability, warn her of the risks and urge her to take independent legal advice; or (b) (as is likely to remain the common practice) that W seeks advice from an outside solicitor.
In the latter course of action, unless the case has a special feature, the bank’s knowledge or reasonable belief that a solicitor (whether or not also retained by H), is acting for W, and has advised her about the nature and effect of the transaction will afford sufficient reason to believe that she understands the aforementioned implications. Insistence upon advice from a fully independent solicitor would only be expected where facts, increasing the risk of undue influence, are known to the bank. However, the bank must take steps to check directly with the wife the name of the solicitor that she wishes to instruct, inter alia that it will require written confirmation from the solicitor that a full explanation has been given.§
4. What duty is owed to W by her advising solicitor?¶
Subject to special instructions or circumstances the solicitor’s duty is to try to make sure that W understands the nature and effect of the transaction. Contrary to what was stated by Stuart-Smith LJ in Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705 at p715, the solicitor, unless armed with special facts, is not bound to satisfy himself of the absence of undue influence, nor is he required to ascertain whether the transaction was one into which W could sensibly be advised to enter into if free from such influence. Independent and competent advice does not mean independent and competent approval: see per Fletcher Moulton LJ in In re Coomber [1911] 1 Ch 723 at p730.
5. Policy considerations
Per Lord Nicholls: “most home owners… 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…The law should not restrict them in the use they make of it… Finance raised by second mortgages on the principal’s home is a significant source of capital for the start-up of small businesses.”
Editor’s Notes:
* The references to W and H are to parties standing in a close non-commercial relationship where H would be seen as the bank’s customer. H would seldom be concerned to dispute W’s allegations.
† Unless otherwise indicated “undue influence” includes misrepresentation.
‡ This affirmed, inter alia, that a lender could be fixed with “constructive notice” of the risk of undue influence.
§ For detailed guidance, see para 79 of the transcript.
¶ The issue presupposes that W was unable to resist the bank’s claim: see last of the appeals considered ( Kenyon Brown v Desmond Banks & Co).
Richard Mawrey QC and Simon Wheatley (instructed by Collins Solicitors, of Watford) appeared for Mrs Etridge.
Michael Briggs QC and Amanda Harrington (instructed by Fladgate Fielder) appeared for the Royal Bank of Scotland plc.
Jules Sher QC and Stephen Whitaker (instructed by Evans Derry Binnion) appeared for Mrs Harris.
John Jarvis QC and David Wolfson (instructed by Salans Hertzfeld & Heilbronn HRK) appeared for Barclays Bank plc.
Jules Sher QC and Bernard Devlin (instructed by Richard Wilson & Co, of Reading) appeared for Mrs Moore.
Michael Briggs QC and Christopher Coney (instructed by Copley Clark & Bennett, of Sutton) appeared for UCB Home Loans Corp.
Jules Sher QC and Mark Lyne (instructed by Keppe Shaw & Partners, of Twickenham) appeared for Mrs Wallace.
Michael Briggs QC and Clive Jones (instructed by Tarlo Lyons) appeared for Midland Bank plc.
Jules Sher QC and Teresa Rosen Peacocke (instructed by Baxter & Co, of Bournemouth) appeared for Mrs Gill.
Michael Lerego QC and Nicholas Briggs (instructed by Osborne Clarke, of Bristol) appeared for National Westminster Bank plc.
Nicholas Yell (instructed by Trevor Jenkin) appeared for Mrs Bennett.
John Jarvis QC (instructed by Underwood & Co) appeared for Royal Bank of Scotland.
Jonathan Sumption QC and Ben Hubble (instructed by Henmans, Oxford and Pinsent Curtis Biddle) appeared for Desmond Banks & Co.
Julia Smith (instructed by Neilson & Co) appeared for Kenyon Brown.
Jules Sher QC and Helene Pines Richman (instructed by Waller & Co) appeared for Mrs Coleman.
John Jarvis QC and David Wolfson (instructed by Nicholson Graham Jones) appeared for Barclays Bank plc.
Alan Cooklin, barrister
