Hearing eight conjoined appeals, the Court of Appeal set out the consideration given in Barclays Bank plc v O’Brien [1994] AC 180 to whether a bank was entitled to enforce its security against a wife where she had been induced by the undue influence or misrepresentation of her husband to charge the matrimonial home by way of collateral security for her husband’s liability to the bank. The solution proposed was that steps be taken to ensure that the risks she was running were brought home to the wife, and that she should be advised to take independent legal advice. Unfortunately, as the number of cases coming before the courts since O’Brien demonstrated, the protection that ought to be afforded to the wife by provision of independent legal advice proved in many cases to be illusory. The judgment of the court set out the general law affecting transactions between the wrongdoer and the complainant themselves, the particular problems arising where the parties were husband and wife or cohabitees, and where the issue was between the complainant and a third party such as the bank.
1. It was settled law that whether the bank could exercise its legal rights against the wife depended in the first instance on whether the wife had an equity to set aside the transaction and, in the second, whether, at the time it gave value, the bank had notice, actual, imputed or constructive, of the wife’s equity. It was highly undesirable that the validity of such transactions should depend on fine distinctions, particularly on distinctions in the wording of the instructions to the solicitors or the certificates they gave.
2. There was now a consistent line of authority in the Court of Appeal, which established the relevant principles. The leading authorities in order of decision were: Bank of Baroda v Shah [1988] 3 All ER 24; Massey v Midland Bank plc [1995] 1 All ER 929; Banco Exterior Internacional v Mann [1995] 1 All ER 936; Bank of Barodav Rayarel [1995] 2 FLR 376; Midland Bank plc v Serter [1995] 1 FLR 1034; Bank Melli Iran v Samedi-Rad [1995] 2 FLR 367; Halifax Mortgage Services Ltd v Stepsky [1996] Ch 207; Banco Exterior Internacional SA v Thomas [1997] 1 WLR 221; Barclays Bank plc v Thomson [1997] 4 All ER 816; and National Westminster Bank plc v Beaton (1998) 30 HLR 99.
3.The court set out the propositions established by those cases. Royal Bank of Scotland plc v Etridge [1997] 3 All ER 628, a decision given at an interlocutory stage in the proceedings was per incuriam.
4. Where the bank asked a solicitor to explain the transaction to the wife and confirm that she appeared to understand it, the bank was not put on inquiry by the fact that the solicitor had confirmed that he had explained the transaction to her but not that she appeared to understand it. In any case, such confirmation was not an essential requirement.
5. When advising the wife, the solicitor obviously owed her a duty of care. The court wished to guard against the notion that it followed from the fact that he was not also acting for the bank that he owed no corresponding duty of care.
6. If the bank was in possession of material information not available to the solicitor, or the transaction was one which no reasonably competent solicitor could properly advise the wife to enter, the availablilty of legal advice was insufficient to avoid the bank being fixed with constructive notice.
7. Ultimately the issue was whether, at the time when value was given and in the light of all the information in the bank’s possession, including its knowledge of the state of the account, the relationship of the parties, and the availability of legal advice for the wife, there was still a risk that the wife had entered into the transaction as a result of her husband’s misrepresentation or undue influence.
Carolyn Toulmin, Barrister
