Judgments - Royal Bank of Scotland v. Etridge (AP)

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    95. One course is for the lender himself to warn the surety of the risk and to recommend the taking of legal advice. But there may well be good reasons, particularly for banks, to feel it inappropriate or even unwise for them to be giving any detailed form of warning or explanation, and to take the view that it is preferable for that matter to be managed by a solicitor acting for the wife. It is certainly possible to suggest courses of action which should be sufficient to absolve the creditor from constructive notice of any potential undue influence. Thus in the summary at the end of his speech Lord Browne-Wilkinson said, at p 199:

    "unless there are special exceptional circumstances, a creditor will have taken such reasonable steps to avoid being fixed with constructive notice if the creditor warns the surety (at a meeting not attended by the principal debtor) of the amount of her potential liability and of the risks involved and advises the surety to take independent legal advice."

But matters of banking practice are principally matters for the banks themselves in light of the rights and liabilities which the law may impose upon them. I would not wish to prescribe what those practices should be. One can only suggest some courses of action which should meet the requirements of the law. These are not matters of ritual, the blind performance of which will secure the avoidance of doom, but sensible steps which seek to secure that the personal and commercial interests of the parties involved are secured with certainty and fairness. Necessarily the precise course to be adopted will depend upon the circumstances. In the Scottish case of Forsyth v Royal Bank of Scotland Plc 2000 SLT 1295 it appeared to the creditor that the wife had already had the benefit of professional legal advice. In such a case, it may well be that no further steps need be taken by the creditor to safeguard his rights. Of course if the creditor knows or ought to know from the information available to him that the wife has not in fact received the appropriate advice then the transaction may be open to challenge.

    96. Thirdly, I agree that it is not fatal that the solicitor is also the solicitor who acts for the party for whose benefit the guarantee or the charge is being effected, that is to say the husband in cases where the wife is granting the deed in question. If there is any question of any conflict of interest arising, or if the solicitor feels that he cannot properly act for the wife in the matter of giving the advice, then he will be perfectly able to identify the difficulty and withdraw. Again it should be stressed that the wife's consultation with her solicitor is a serious step which is not to be brushed off as a mere formality or a charade. It is in the interests of all the parties involved that the wife should appreciate the significance of what she has been asked to sign so that the transaction may not only appear to be fair but also in fact to be freely and voluntarily undertaken.

    97. I agree that the appeals in the cases of Mrs Wallace, Mrs Bennett, Mrs Moore and Desmond Banks & Co be allowed. I have had some hesitation about the case of Mrs Harris but following in particular the view expressed by Lord Scott of Foscote I consider that the appeal in her case should also be allowed. I consider that the other appeals should be dismissed.

LORD HOBHOUSE OF WOODBOROUGH

My Lords,

    Introduction:

    98. These appeals have come before your Lordships in order to enable the workings of the judgments of your Lordships' House in Barclays Bank Plc v O'Brien [1994] 1 AC 180 and CIBC Mortgages Plc v Pitt [1994] 1 AC 200 to be considered. The leading speech in both of those cases was, with the agreement of the House, that of Lord Browne-Wilkinson. His speeches are in my respectful opinion a masterly exposition of principles designed to give structure to this difficult corner of the law and to provide practical solutions to the problems to which it gives rise whilst recognising the conflict between the interests of the commercial community and the need to protect vulnerable members of society from oppression or exploitation. These problems and conflicts are real and should not be ignored. The value of the transactions takes them outside the scope of the existing statutory protection and the solution therefore has to be found in the application of equitable principles formulated by judges. Experience in litigation since 1993 has not been encouraging. Disputes have continued to come before the courts; the determination of those disputes has not always carried conviction. Before your Lordships no party has sought to challenge the authority of Lord Browne-Wilkinson's speeches, subject to the criticism of one point of categorisation derived from BCCI v Aboody [1990] 1 QB 923, criticism which I, like the rest of your Lordships, consider to be justified; the point of categorisation has been the source of much of the confusion which has ensued.

    99. I therefore propose to take the speech of Lord Browne-Wilkinson in O'Brien as my starting point. Some of what he said was novel. Some has been criticised as departing from fully conventional equitable principle. It is true that other approaches had been adopted in other cases, including in the Court of Appeal in that case. But the purpose of such judgments of this House is to settle the law and enable certainty to be re-established. That should again be the objective of your Lordships on these appeals. Doubt should not be cast upon the authority of O'Brien. There is a need for some clarification and for the problem areas to be resolved as far as possible. But the essential structure of O'Brien is in my view sound and Lord Browne-Wilkinson fully took into account the practical implications.

    100. To the end that lenders, those advising parties and, indeed, judges should have clear statements of the law on which to base themselves, I will state at the outset that in this speech I shall agree with my noble and learned friend Lord Nicholls and, specifically, the guidance which he gives concerning the role of the burden of proof, the duties of solicitors towards their clients (paragraphs 64-68, and paragraph 74), and the steps which a lender which has been put on enquiry should take paragraph 79). I would stress that this guidance should not be treated as optional, to be watered down when it proves inconvenient (as may be thought to have been the fate of Lord Browne-Wilkinson's equally carefully crafted scheme). Nor should it be regarded as something which will only apply to future transactions; it has represented, and continues to represent, the reasonable response to being put on enquiry. The purpose of guidance is to provide certainty for those who rely upon and conform to the requirements of that guidance: it is not a licence to excuse unreasonable conduct on the ground that no judge had previously told them in express terms what was not an adequate response. If the relevant solicitor was not in fact acting for the wife and had not been held out by the wife as doing so, the conduct of that solicitor will not avail the lender. Once a lender has been put on enquiry, mere assumptions on the part of the lender will not assist him. I will, in the course of this speech and without qualifying the scope of my agreement with Lord Nicholls, mention certain points in the hope that it will add to the clarity and accuracy of the analysis. I must also express my gratitude to my noble and learned friend Lord Scott of Foscote, whose speech I have read in draft, for his summary of the facts of the eight individual cases before the House.

O'Brien:

    101. The speech of Lord Browne-Wilkinson followed a four part scheme. First, he characterised the law of the enforceability of suretyship contracts and security as between lenders to a husband or his company and a wife as being an application of the equitable principle of undue influence. Secondly, he sought to categorise the undue influence into classes drawn from Allcard v Skinner (1887) 36 Ch D 145, Turnbull & Co v Duval [1902] AC 429 and BCCI v Aboody (v.s.) giving rise to presumptions. Thirdly, he provided a formulation to answer the question whether the lender had been put on enquiry as to the risk of undue influence:

    "a creditor is put on inquiry when a wife offers to stand surety for her husband's debts by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction." (p.196)

Fourthly, he laid down steps which if taken would enable the lender to say that he had taken reasonable steps to satisfy himself that the "surety entered into the obligation freely and in knowledge of the true fact". (p.198) His speech thus provides a structured scheme for the decision of cases raising the issue of enforceability as between a lender and a wife. It can be expressed by answering 3 questions:

       (1)  Has the wife proved what is necessary for the court to be satisfied that the transaction was affected by the undue influence of the husband?

       (2)  Was the lender put on enquiry?

(3) If so, did the lender take reasonable steps to satisfy itself that there was no undue influence?

    It will be appreciated that unless the first question is answered in favour of the wife neither of the later questions arise. The wife has no defence and is liable. It will likewise be appreciated that the second and third questions arise from the fact that the wife is seeking to use the undue influence of her husband as a defence against the lender and therefore has to show that the lender should be affected by the equity - that it is unconscionable that the lender should enforce the secured contractual right against her.

    102. Difficulties have arisen in relation to each of these three questions. I will take the questions in turn. The most important difficulties relate to the first and third questions.

(1) Presumed Undue Influence:

    103. The division between presumed and actual undue influence derives from the judgments in Allcard v Skinner. Actual undue influence presents no relevant problem. It is an equitable wrong committed by the dominant party against the other which makes it unconscionable for the dominant party to enforce his legal rights against the other. It is typically some express conduct overbearing the other party's will. It is capable of including conduct which might give a defence at law, for example, duress and misrepresentation. Indeed many of the cases relating to wives who have given guarantees and charges for their husband's debts involve allegations of misrepresentation. (O'Brien was such a case.) Actual undue influence does not depend upon some preexisting relationship between the two parties though it is most commonly associated with and derives from such a relationship. He who alleges actual undue influence must prove it

    104. Presumed undue influence is different in that it necessarily involves some legally recognised relationship between the two parties. As a result of that relationship one party is treated as owing a special duty to deal fairly with the other. It is not necessary for present purposes to define the limits of the relationships which give rise to this duty. Typically they are fiduciary or closely analogous relationships. A solicitor owes a legal duty to deal fairly with his client and he must, if challenged, be prepared to show that he has done so. In Pitt at p.209, Lord Browne-Wilkinson referred to

    "the long standing principle laid down in the abuse of confidence cases viz the law requires those in a fiduciary position who enter into transactions with those to whom they owe fiduciary duties to establish affirmatively that the transaction was a fair one."

Such legal relationships can be described as relationships where one party is legally presumed to repose trust and confidence in the other - the other side of the coin to the duty not to abuse that confidence. But there is no presumption properly so called that the confidence has been abused. It is a matter of evidence. If all that has happened is that, say, a client has left a small bequest to his family solicitor or that a solicitor has made a reasonable charge for professional services rendered to the client, no inference of abuse or unfair dealing will arise. But if a solicitor has bought property from his client and it is properly put in issue that the purchase was at an under-value or that the client's consent may have been improperly obtained, the solicitor will have to show that the price was fair and that the client's consent to the transaction was freely given in knowledge of the true facts. The solicitor has to justify what he has done. He has a burden of proof to discharge and if he fails to discharge it he will not have succeeded in justifying his conduct. Thus, at the trial the judge will decide on the evidence whether he is in fact satisfied that there was no abuse of confidence. It will be appreciated that the relevance of the concept of "manifest disadvantage" is evidential. It is relevant to the question whether there is any issue of abuse which can properly be raised. It is relevant to the determination whether in fact abuse did or did not occur. It is a fallacy to argue from the terminology normally used, "presumed undue influence", to the position, not of presuming that one party reposed trust and confidence in the other, but of presuming that an abuse of that relationship has occurred; factual inference, yes, once the issue has been properly raised, but not a presumption.

    105. The Court of Appeal in Aboody and Lord Browne-Wilkinson classified cases where there was a legal relationship between the parties which the law presumed to be one of trust and confidence as "presumed undue influence: class 2(A)". They then made the logical extrapolation that there should be a class 2(B) to cover those cases where it was proved by evidence that one party had in fact reposed trust and confidence in the other. It was then said that the same consequences flowed from this factual relationship as from the legal class 2(A) relationship. Lord Browne-Wilkinson said at pp.189-190

    "In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned."

There are difficulties in the literal application of this statement. It describes the other party as a "wrongdoer" without saying why when it is expressly postulated that no wrongdoing may have occurred. He treats trust and confidence as indivisible. His actual words are: "a relationship under which the complainant generally reposed trust and confidence in the wrongdoer" (emphasis supplied). But a wife may be happy to trust her husband to make the right decision in relation to some matters but not others; she may leave a particular decision to him but not other decisions. Nor is it clear why the mere "existence of such relationship raises the presumption of undue influence". Where the relevant question is one of fact and degree and of the evaluation of evidence, the language of presumption is likely to confuse rather than assist and this is borne out by experience.

    106. That there is room for an analogous approach to cases concerning a wife's guarantee of her husband's debts is clear and no doubt led to Lord Browne-Wilkinson saying what he did. The guarantee is given by the wife at the request of the husband. The guarantee is not on its face advantageous to the wife, doubly so where her liability is secured upon her home. The wife may well have trusted the husband to take for her the decision whether she should give the guarantee. If he takes the decision in these circumstances, he owes her a duty to have regard to her interests before deciding. He is under a duty to deal fairly with her. He should make sure that she is entering into the obligation freely and in knowledge of the true facts. His duty may thus be analogous to that of a class 2(A) fiduciary so that it would be appropriate to require him to justify the decision. If no adequate justification is then provided, the conclusion would be that there had been an abuse of confidence. But any conclusion will only be reached after having received evidence. This evidence will inevitably cover as well whether there has in fact been an abuse of confidence or any other undue influence. The judge may have to draw inferences. He may have to decide whether he accepts the evidence of the wife and, if so, what it really amounts to, particularly if it is uncontradicted. Since there is no legal relationship of trust and confidence, the general burden of proving some form of wrongdoing remains with the wife, but the evidence which she has adduced may suffice to raise an inference of wrongdoing which the opposite party may find itself having to adduce evidence to rebut. If at the end of the trial the wife succeeds on the issue of undue influence, it will be because that is the right conclusion of fact on the state of the evidence at the end of the trial, not because of some artificial legal presumption that there must have been undue influence.

    107. In agreement with what I understand to be the view of your Lordships, I consider that the so-called class 2(B) presumption should not be adopted. It is not a useful forensic tool. The wife or other person alleging that the relevant agreement or charge is not enforceable must prove her case. She can do this by proving that she was the victim of an equitable wrong. This wrong may be an overt wrong, such as oppression; or it may be the failure to perform an equitable duty, such as a failure by one in whom trust and confidence is reposed not to abuse that trust by failing to deal fairly with her and have proper regard to her interests. Although the general burden of proof is, and remains, upon her, she can discharge that burden of proof by establishing a sufficient prima facie case to justify a decision in her favour on the balance of probabilities, the court drawing appropriate inferences from the primary facts proved. Evidentially the opposite party will then be faced with the necessity to adduce evidence sufficient to displace that conclusion. Provided it is remembered that the burden is an evidential one, the comparison with the operation of the doctrine res ipsa loquitur is useful.

(2) Put on Enquiry:

    108. However described, this is an essential step in the reasoning of Lord Browne-Wilkinson. The wife becomes involved at the request of her husband. It is he who, in these types of case, is the source of the undue influence and commits the equitable wrong against her. But the party with whom the wife contracts and to whom the wife accepts obligations is the lender. It is the lender who is seeking to enforce those obligations. Therefore there has to be some additional factor before the lender's conscience is affected and he is to be restrained from enforcing his legal rights. The solution adopted by Lord Browne-Wilkinson was to formulate a principle of constructive notice. He did so in terms which were not as restrictive as the established principles of constructive knowledge. However, there is a structural difficulty in his approach. Notice of the risk of undue influence is not an all or nothing question. Situations will differ across a spectrum from a very small risk to a serious risk verging on a probability. There has to be a proportionality between the degree of risk and the requisite response to it. Lord Browne-Wilkinson expressed it in terms of a "substantial risk" (p.196). But, then, in describing the requisite response he stated (p.197) that he had been considering "the ordinary case where the creditor knows only that the wife is to stand surety for her husband's debts". This is, as my noble and learned friend Lord Nicholls has said, a low threshold. There are arguments which would favour a higher threshold. It would enable a more positive approach to be taken to the response. It would avoid calling for a response when the level of risk did not really justify it. But the advantage of this low threshold is that it assists banks to put in place procedures which do not require an exercise of judgment by their officials and I accept Lord Nicholls's affirmation of the low threshold. This, however, is not to say that banks are at liberty to close their eyes to evidence of higher levels of risk or fail to respond appropriately to higher risks of which they have notice.

    109. Needless to say the question whether the bank has been put on enquiry has to be answered upon the basis of the facts available to the bank. Does the bank know that the wife is standing surety for her husband's debts? This should be an easy question for the bank to answer. The bank should know who the principal debtor is and what is the purpose of the facility. Likewise the bank should know of any factors which are likely to aggravate the risk of undue influence. Paradoxically the best place at which to start to assess the risk of undue influence is to consider the true nature of the transaction and examine the financial position of the principal debtor and the proposal which he is making to the bank. These are the facts which the bank has most readily to hand and, if it finds that it lacks relevant information, it is in a position to get it and has the expertise to assess it. A loan application backed by a viable business plan or to acquire a worthwhile asset is very different from a loan to postpone the collapse of an already failing business or to refinance with additional security loans which have fallen into arrear. The former would not aggravate the risk; the latter most certainly would do so. The bank is as well placed as anyone to assess the underlying rationality of the debtor's proposal. It will be the bank that will have formed the view that it is not satisfied with the debtor's covenant and the security he can provide and it will be the bank that has called for additional security. The bank will also probably be aware what has been the previous involvement, if any, of the wife in the husband's business affairs.

    110. The position therefore is that in relation to any guarantee by a wife of her husband's debts (or those of his company) the bank is put on enquiry and accordingly will have to respond unless it is to run the risk of finding that the guarantee and other security provided by the wife are unenforceable. If it becomes aware of any aggravation of the risk of undue influence, its response must take that into account. More will be required to satisfy it that the wife's agreement has been properly obtained.

The Practical Situation:

    111. Before turning to discuss what are the reasonable steps to be taken by a lender who had been put on enquiry, I will pause to look at some of the practical aspects. Lord Browne-Wilkinson clearly regarded these as important (pp.197-8). He drew attention to the Report of the Review Committee on Banking Services under the chairmanship of Professor Jack which reported in 1989 (Cm.622) which noted that "there are cases of guarantors losing their houses because of open ended commitments that they entered into, without understanding or advice" (?13.22) and recommended that banks should adopt a standard of best practice which would require them to "ensure that prospective guarantors, whether or not they are customers, are adequately warned about the legal effects and possible consequences of guarantees, and about the importance of receiving independent advice" (recommendation 13.5). The Committee was concerned with the lack of the understanding on the part of guarantors of the onerous contractual obligations arising from the signature of the forms used by banks for guarantees or charges. The printed documentation used by banks is of such length, complexity and obscurity that it is unlikely to be read let alone understood by private guarantors who lack legal training or appropriate business experience. They are treated by banks as contracts of adhesion discouraging any attempt to modify any of their terms. They are often unduly favourable to the bank and excessively onerous to the surety. The surety will probably be made a principal debtor and liable without limit for very onerous rates of interest and charges. The liability may be an "all moneys" guarantee covering without limit any future advances not merely the advances intended to be guaranteed. Thus, quite apart from the question of undue influence, the signature of such documents may not represent any reality of informed consent. The need to guard against lack of comprehension is important and applies in any event to a non-business surety. But it is not the same as guarding against undue influence. It may be a first step but it is a fallacy to confuse the two. Comprehension is essential for any legal documents of this complexity and obscurity. But for the purpose of negativing undue influence it is necessary to be satisfied that the agreement was, also, given freely in knowledge of the true facts. It must be remembered that the equitable doctrine of undue influence has been created for the protection of those who are sui juris and competent to undertake legal obligations but are nevertheless vulnerable and liable to have their will unduly influenced. It is their weakness which is being protected not their inability to comprehend. I regret that I must specifically disagree with my noble and learned friend Lord Scott when (in his summary) he treats a belief on the part of a lender that the wife has understood the nature and effect of the transaction as sufficient to exonerate the lender from enquiry or as treating this as the effect of the scheme laid out by Lord Nicholls in the paragraphs to which I have referred earlier.

    112. A further point of relevance which has been commented on in the past and should be commented upon again has been the use by banks of forms under which the surety gives an unlimited guarantee or charge. This was what banks ordinarily asked for. Indeed, the guarantees obtained in the cases from which these appeals arise, are unlimited. Banks have acknowledged that such guarantees are likely to be unnecessary and unjustifiable where private sureties are sought. They should be subject to a stated monetary limit on the surety's liability and any legal adviser should so advise a private client. Where a bank has nevertheless obtained an unlimited guarantee from a wife, it should ask itself how that can be if the wife has in truth been independently advised. Would anyone who had a proper regard to the wife's interests ask her to sign an unlimited guarantee or charge?

    113. Lord Browne-Wilkinson stressed the need for the wife to be seen and communicated with separately from her husband. This was clearly appropriate since, if the purpose is to satisfy oneself that the wife is acting freely in knowledge of the true facts, an interview in the presence of the husband is unlikely to achieve this objective if she has been improperly influenced by him. Lord Browne-Wilkinson concluded that the requirement of a personal interview did not impose such an additional administrative burden as to make the bank's position unworkable (p.198). What the banks appear to find difficult is entrusting the conduct of such an interview to one of their own officers as opposed to entrusting it to an outside agent. This is sad but probably derives from a wish to avoid getting directly involved in imparting information and maybe opinions to an individual whose interests are likely to conflict with their own and with whom they may subsequently be in dispute. Lord Browne-Wilkinson contemplated that the banks might use a representative to do what he considered necessary and this would imply that they would be responsible for their representative. The banks have not done this. They have used solicitors. They have denied any responsibility even for a complete failure of the solicitor whom they have instructed to carry out their instructions and have nevertheless sought to hold the wife to her signature so obtained. I doubt that this is what Lord Browne-Wilkinson had in mind.

 
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