Husband and wife executing mortgage supporting husband’s guarantee of liabilities of company – Mortgage in bank’s standard form – Husband subsequently executing further guarantees without wife’s consent – Bank seeking sums due under guarantees – Bank obtaining charging order over husband’s interest in property and seeking order for sale – Whether wife prohibited by terms of mortgage from claiming right of subrogation
The defendants were husband and wife. In February 1989 the husband entered into an agreement with the claimant bank guaranteeing the liability of a company for up to £150,000. On the same day, the defendants executed a mortgage limited to £150,000 over their home (the property) to support the husband’s guarantee. The charge was in the bank’s standard form. By clause 16, the bank was empowered to make further advances to the husband without the consent of the wife. By clause 21, the wife agreed that, pending payment in full of her husband’s liabilities to the bank, she would not enforce any claim against her husband in competition with the bank. Later, the husband executed further guarantees in relation to the company, increasing his liability under the guarantees to £290,000. The wife was not informed.
Subsequently, the company defaulted and the bank issued proceedings against the husband for sums due under the guarantees. In May 1992 the bank obtained judgment against the husband for £238,894. The bank then commenced proceedings against the defendants to enforce the mortgage. A suspended possession order was made by consent in December 1992. In April 1993 the bank sought to enforce its judgement against the husband and for that purpose obtained a charging order over the husband’s interest in the property.
Subsequently, £150,000 was paid to discharge the mortgage. However, the bank applied for an order for the sale of the property on the basis of the remaining unpaid debts. The wife claimed that the money used to discharge the mortgage had been exclusively her money which provided her with a claim for restitution against her husband. She contended that by virtue of section 5 of the Mercantile Law Amendment Act 1856, her claim against her husband took priority over the bank’s charging order. It was submitted that, accordingly, no sale should be ordered, as there was nothing against which the bank could enforce its charging order.
The district judge enforced the charging order and ordered the sale of the property. The defendants appealed. The judge, allowing the appeal, held that the bank was prevented from relying upon clause 21 of the mortgage because it had failed to disclose to the wife the increases in her husband’s liabilities under the guarantees and, accordingly, the wife was entitled to exercise her right of subrogation. The bank appealed.
Held: The appeal was dismissed.
Clause 16 only allowed the bank to vary the underlying transaction without the wife’s consent in situations where the guarantor would otherwise have been released. It did not cover the bank’s actions in this case, since the underlying transaction had been to increase the liability of the husband for the debts of the company. Although clause 21 allowed the bank to prevent the wife from exercising the rights that equity otherwise gave her, there was nothing in the clause that allowed the bank to put the wife in a position which she would not reasonably have contemplated so far as her rights against her husband were concerned. The wife would have reasonably contemplated that her husband’s liability under the guarantee would be limited to £150,000, being the debts and liabilities of the company, and that the bank would rely upon clause 21 on that basis. If the bank had obtained the wife’s consent to the prejudice caused to her position by entering into further guarantees, then it would be able to enforce clause 21 against her. However, it had not done so, and accordingly it was precluded from relying upon clause 21. The case highlighted the requirement for the bank to obtain the wife’s consent to increase the guarantees, or to secure a provision to cover what it was seeking to do without her consent. Egbert v National Crown Bank [1918] AC 903 and Far Eastern Shipping Company Public Ltd v Scales Trading Ltd [2001] Lloyd’s Rep Bank 29 considered.
Christopher Pymont QC and Ian Wilson (instructed by Stephens & Scown, of Exeter) appeared for the bank; Peter Knox (instructed by Freemans) appeared for the defendants.
Thomas Elliott, barrister
