Constructive notice – Mortgage of jointly owned matrimonial home to secure husband’s unlimited guarantee of loan to company – Wife establishing misrepresentation and coercion on part of husband – Wife receiving inadequate advice from solicitor – Solicitor giving usual confirmation to bank – Bank aware that solicitor playing active role as secretary to company – Whether bank entitled to assume that wife adequately advised – Whether bank had properly left it to solicitor to resolve issue of conflict of interest – Appeal by wife allowed
The defendants (H and W) were husband and wife. In 1983 H formed a publishing company with his business partner (P). W played no part in the company’s operations. At all material times the position of secretary to the company was held by S, a solicitor in private practice who from time to time played an active role in procuring finance for the company.
During 1984 and 1985 the company enjoyed an overdraft facility with the Mincing Lane branch of the claimant bank, such facility having been granted against the personal guarantees of H and P, which were secured by a charge over a house belonging to P. Towards the end of 1985 the bank received a copy of the company’s 1986 publishing programme which declared, inter alia, that S had a long standing relationship with H and P and was to be regarded as one of the mainstays of the company. At that time the manager of the branch (M) obtained unlimited guarantees from H and P and intimated that the bank would require a mortgage over the defendants’ house by way of additional security.
In early 1986 M became increasingly concerned about the company’s failure to adhere to agreed overdraft limits, and by the realisation that performance forecasts previously submitted by H and P were partly based on inaccurate information. On 14 March 1986 the bank wrote to S requesting his confirmation that W fully understood the nature and import of the liability that she would enter into by joining in the desired mortgage. On 17 March 1986 M threatened to withdraw the facility unless the desired mortgage was executed by the end of that week.
On 20 March 1986 the claimants, accompanied by their children (who were restless throughout), attended S’s office where S purported to explain the nature and contents of the mortgage. On 25 March S wrote to the bank, giving the requested confirmation. Following the execution of the mortgage on 1 April 1986, the company’s fortunes went into swift decline and it ceased trading in November 1987. In 1993 the bank brought proceedings for possession.*
W, relying on Barclays Bank plc v O’Brien [1994] 1 AC 180, contended that the mortgage was not binding on her as the bank knew or ought to have known that she had been induced to sign in consequence of threats by H, who had lied to her about the company’s financial situation. The county court judge found that H was guilty of the alleged misconduct, and further found that the advice given to W by S was wholly inadequate in the face of the extreme pressure and fraud that had been exerted. Nevertheless the judge, purporting to apply Royal Bank of Scotland plc v Etridge (No 2) [1988] 4 All ER 705**, held that the bank was entitled to assume that W had been properly advised, it being for the solicitor to decide whether he was disabled from advising for reasons of conflict of interest. W appealed.
Held: The appeal was allowed.
The combination of circumstances took the case out of the ordinary case where, so far as the bank was concerned, it was for the solicitor to resolve whether or not he had a conflict of interest: see the extreme example considered in Bank of Montreal v Stuart [1911] AC 120 and the further examples given in Sir Peter Millett’s article Equity’s Place in the Law of Commerce (1998) 114 LQR 214. Here the bank knew that the company was desperate for cash, that the word of H was not to be relied upon, and that S, as the company’s solicitor, had played a major role in the quest for finance. Because of the strong probability of a real conflict of interest the bank was not entitled to make the assumption that it would otherwise have been entitled to make: Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711, Bank of Scotland v Bennett [1999] 1 FLR 1115 considered.
* Editor’s note: Judgment records that no explanation given for delay.
** Editor’s note: Judgment records that an appeal in Etridge will shortly be heard by House of Lords.
Hashim Reza (instructed by Atkins Wilson & Bell, of Guildford) appeared for the appellant; David Pope (instructed by Denton Wilde Sapte) appeared for the respondent.
Alan Cooklin, barrister
