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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  EWCA Civ 1543,  HLR 335
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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE SOUTHEND COUNTY
(HIS HONOUR JUDGE YELTON)
Monday, 14th October 2002
B e f o r e :
LORD JUSTICE MANCE
|LLOYDS TSB BANK||Claimants/Respondents|
|JOY DOROTHY ANNE HOLDGATE||Defendant/Appellant|
Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
(Official Shorthand Writers to the Court)
MR DAVID WOLFSON (instructed by Wragge & Co, 55 Colmore Row, Birmingham, B5 2AS) appeared on behalf of the Respondents
Crown Copyright ©
Monday, 14th October 2002
"1. Warrant is stayed for 7 days and if notice of appeal or a separate application for permission to appeal from the possession order is made in that time it shall remain stayed until that appeal or application is disposed of unless otherwise ordered in the meantime.
2. Any application relating to the warrant made in the county court `shall be reserved to His Honour Judge Yelton and may be heard wherever he may be sitting'."
A notice applying for permission to appeal the original order of 21st September 2000 was apparently then issued in the Basildon County Court and the matter came a second time before His Honour Judge Yelton on 27th March 2002. He identified its procedural complexity, but, putting that on one side, he looked at the merits of the application. He considered that the House of Lords' decision in Etridge No.2 still gave the appellant no prospect of any success and made an order which, as drawn, was that the appellant's application to stay or suspend the warrant be dismissed. It would seem that his order should have been expressed as an order allowing an appeal from District Judge Gypps, but that is of no consequence.
"44 In O'Brien the House considered the circumstances in which a bank, or other creditor, is `put on inquiry'. Strictly this is a misnomer. As already noted, a bank is not required to make inquiries. But it will be convenient to use the terminology which has now become accepted in this context. The House set a low level for the threshold which must be crossed before a bank is put on inquiry. For practical reasons the level is set much lower than is required to satisfy a court that, failing contrary evidence, the court may infer that the transaction was procured by undue influence. Lord Browne-Wilkinson said  1 AC 180, 196:
`Therefore in my judgement a credit 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.'
In my view, this passage, read in context, is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts.
45 The Court of Appeal, comprising Stuart-Smith, Millett and Morritt LJJ, interpreted this passage more restrictively. The threshold, the court said, is somewhat higher. Where condition (a) is satisfied, the bank is put on inquiry if, but only if, the bank is aware that the parties are cohabiting or that the particular surety places implicit trust and confidence in the principal debtor in relation to her financial affairs: see Royal Bank of Scotland plc v Etridge (No 2)  4 All ER 705, 719.
46 I respectfully disagree. I do not read (a) and (b) as factual conditions which must be proved in each case before a bank is put on inquiry. I do not understand Lord Browne-Wilkinson to have been saying that in husband and wife cases, whether the bank is put on inquiry depends on its state of knowledge of the parties' marriage, or of the degree of trust and confidence the particular wife places in her husband in relation to her financial affairs. That would leave banks in a state of considerable uncertainty in a situation where it is important they should know clearly where they stand. The test should be simple and clear and easy to apply in a wide range of circumstances. I read (a) and (b) as Lord Browne-Wilkinson's broad explanation of the reason why a creditor is put on inquiry when a wife offers to stand surety for her husband's debts. These are the two factors which, taken together, constitute the underlying rationale.
47 The position is likewise if the husband stands surety for his wife's debts. Similarly, in the case of unmarried couples, whether heterosexual or homosexual, where the bank is aware of the relationship: see Lord Browne-Wilkinson in O'Brien's case, at p 198. Cohabitation is not essential. The Court of Appeal rightly so decided in Massey v Midland Bank plc  1 All ER 929: see Steyn LJ, at p 933.
48 As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband's debts is, in this context, a straightforward case. The bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband's purposes, as distinct from their joint purposes. That was decided in CIBC Mortgages plc v Pitt  1 AC 200.
49 Less clear cut is the case where the wife becomes surety for the debts of a company whose shares are held by her and her husband. Her shareholding may be nominal, or she may have a minority shareholding or an equal shareholding with her husband. In my view the bank is put on inquiry in such cases, even when the wife is a director or secretary of the company. Such cases cannot be equated with joint loans. The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the persons who actually have the conduct of the company's business."
The present case is within the "straightforward" category identified by Lord Nicholls at the beginning of paragraph 48, where he says:
"As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband's debts is, in this context, a straightforward case. The bank is put on inquiry."
He then contrasts the other side of the line:
"On the other side of the line is the case where money is being advanced, or has been advanced, by the husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband's purposes, as distinct from their joint purposes."
"79 I now return to the steps a bank should take when it has been put on inquiry and for its protection is looking to the fact that the wife has been advised independently by a solicitor.
(1) One of the unsatisfactory features in some of the cases is the late stage at which the wife first became involved in the transaction. In practice she had no opportunity to express a view on the identity of the solicitor who advised her. She did not even know that the purpose for which the solicitor was giving her advice was to enable him to send, on her behalf, the protective confirmation sought by the bank. Usually the solicitor acted for both husband and wife.
Since the bank is looking for its protection to legal advice given to the wife by a solicitor who, in this respect, is acting solely for her, I consider the bank should take steps to check directly with the wife the name of the solicitor she wishes to act for her. To this end, in future the bank should communicate directly with the wife, informing her that for its own protection it will require written confirmation from a solicitor, acting for her, to the effect that the solicitor has fully explained to her the nature of the documents and the practical implications they will have for her. She should be told that the purpose of this requirement is that thereafter she should not be able to dispute she is legally bound by the documents once she has signed them. She should be asked to nominate a solicitor whom she is willing to instruct to advise her, separately from her husband, and act for her in giving the necessary confirmation to the bank. She should be told that, if she wishes, the solicitor may be the same solicitor as is acting for her husband in the transaction. If a solicitor is already acting for the husband and the wife, she should be asked whether she would prefer that a different solicitor should act for her regarding the bank's requirement for confirmation from a solicitor.
The bank should not proceed with the transaction until it has received an appropriate response directly from the wife.
(2) Representatives of the bank are likely to have a much better picture of the husband's financial affairs than the solicitor. If the bank is not willing to undertake the task of explanation itself, the bank must provide the solicitor with the financial information he needs for this purpose. Accordingly it should become routine practice for banks, if relying on confirmation from a solicitor for their protection, to send to the solicitor the necessary financial information. What is required must depend on the facts of the case. Ordinarily this will include information on the purpose for which the proposed new facility has been requested, the current amount of the husband's indebtedness, the amount of his current overdraft facility, and the amount and terms of any new facility. If the bank's request for security arose from a written application by the husband for a facility, a copy of the application should be sent to the solicitor. The bank will, of course, need first to obtain the consent of its customer to this circulation of confidential information. If this consent is not forthcoming the transaction will not be able to proceed.
(3) Exceptionally there may be a case where the bank believes or suspects that the wife has been misled by her husband or is not entering into the transaction of her own free will. If such a case occurs the bank must inform the wife's solicitors of the facts giving rise to its belief or suspicion.
(4) The bank should in every case obtain from the wife's solicitor a written confirmation to the effect mentioned above.
80 These steps will be applicable to future transactions. In respect of past transactions, the bank will ordinarily be regarded as having discharged its obligations if a solicitor who was acting for the wife in the transaction gave the bank confirmation to the effect that he had brought home to the wife the risks she was running by standing as surety." [per Lord Nicholls]
"167 In a number of cases a firm of solicitors has been acting for the husband in the transaction with the bank and has acted also for the wife in connection with the grant of the security to the bank. In many cases, the same solicitor acting for the husband and the wife has been asked by the bank to act for it in connection with the completion of the security. A number of questions arise - for instance:
(1) Does the fact that, to the knowledge of the bank, a solicitor is acting for the wife in the security transaction entitle the bank reasonably to believe that the solicitor will have given her an adequate explanation of the nature and effect of the security document she is to sign?
(2)If so, are there, in the ordinary case, i.e. where there is no special reason for the bank to suspect undue influence or other impropriety, any other steps that the bank ought reasonably to take?
(3) If the answer to question (1) is `Yes' and to question (2) is `No', does the fact that the solicitor is also the husband's solicitor and is acting for the bank in arranging for completion of the security bar the bank from relying on the solicitor's role in acting for the wife?
(4) In many cases the solicitor in whose offices the wife has signed the security document has confirmed, sometimes on the document itself and sometimes in a covering letter to the bank, that the nature and effect of the document has first been explained to the wife and that she has appeared to understand it and to be entering freely into the transaction, or to that effect.
If in these cases the solicitor has in fact given no, or no adequate, explanation of the document to the wife, in what circumstances can the solicitor's knowledge of his failure be attributed to the bank?
168 As to question (1), the duty of a solicitor towards his client is, in every case, dependent on the instructions, express or implied, that he has received from his client. A solicitor acting for a client in connection with a proposed transaction under which the client is to become surety or give security for the debts of another will not necessarily have instructions to advise the client about the nature and effect of the transaction. In most cases such instructions, if not express, would, I think, be implied; but it is at least possible that the circumstances of the solicitor's retainer would not require him to give such advice. So, in my opinion, knowledge by a bank that a solicitor is acting for a surety wife does not, without more, justify the bank in assuming that the solicitor's instructions extend to advising her about the nature and effect of the transaction.
169 Normally, however, a solicitor, instructed to act for a surety wife in connection with a suretyship transaction would owe a duty to the wife to explain to her the nature and effect of the document or documents she was to sign. Exactly what the explanation should consist of would obviously depend in each case on the facts of that case and on any particular concerns that the wife might have communicated to the solicitor. In general, however, the solicitor should, in my opinion: (i) explain to the wife, on a worst case footing, the steps the bank might take to enforce its security; (ii) make sure the wife understands the extent of the liabilities that may come to be secured under the security; (iii) explain the likely duration of the security; (iv) ascertain whether the wife is aware of any existing indebtedness that will, if she grants the security, be secured under it; (v) explain to the wife that he may need to give the bank a written confirmation that he has advised her about the nature and effect of the proposed transaction and obtain her consent to his doing so.
170 I think the solicitor should, probably, begin by trying to discover from the wife her understanding of the proposed transaction. He, the solicitor, may then be in a position to remedy any misapprehensions and cure any misrepresentations.
171 A bank, proposing to take a security from a surety wife for whom a solicitor is acting, requires, first, confirmation that the solicitor's instructions do extend to advising her about the nature and effect of the transaction. Subject to that confirmation, however, the bank is, in my opinion, entitled reasonably to believe that the solicitor will have advised her on the matters to which I have referred and, accordingly, that she has had an adequate explanation and has an adequate understanding of the transaction" [per Lord Scott]
"In respect of past transactions, the bank will ordinarily be regarded as having discharged its obligations if a solicitor ... was acting for the wife in the transaction."
The only additional idea which his formulation introduces was that it was here a family solicitor. Even if that was known to the present bank, which is not clear, it seems to me that it could not make all the difference.
" ... the information that Mr and Mrs Moore had solicitors acting for them reduced the risk. It is not to the point that Mrs Moore had never instructed Quiney & Harris. UCB were not to know that that was so. They had been misled by the contents of the mortgage application form that Mrs Moore had signed in blank. It would be possible to argue that Mrs Moore, by signing in blank, had given an implied authority to her husband, or to his agent Mr Zerfahs, to complete the form on her behalf. It is enough, however, to conclude that UCB were entitled to take the mortgage application at its face value."
So, in the view of those two members of the House of Lords, quite clearly the Moore case was not decided on the basis that Mrs Moore never instructed the solicitors, or that the bank never had reason to believe that she had instructed solicitors. The basis of their decision appears in paragraph 307 of Lord Scott's speech, which I read:
"But the problem is that UCB did not know what Quiney & Harris's instructions were and had no reason to assume that their instructions extended to giving Mrs Moore advice about the nature and effect of the legal charge. The instructions may have been no more than to agree the form of security documents and make arrangements for them to be executed. Quiney & Harris gave UCB no indication that they had given Mrs Moore any such advice and in fact they had not done so. In my opinion, therefore, on the evidence as it now stands UCB failed to take reasonable steps to satisfy itself that Mrs Moore understood the nature and effect of the legal charge."
"As a result, on the face of the form sent to the lender there was a single solicitor who was to act on behalf of both applicants. The wife says that the husband had not obtained her authority to fill in the form in this way; it is agreed that the husband undoubtedly filled in other parts of the form fraudulently. Having received instructions from Mr Zerfahs, the solicitors, without obtaining confirmation from the wife, referred to her and her husband in correspondence as `our clients'. The lender did not obtain any assurance that the wife had received independent advice before signing. It is the wife's case that she received no advice at all. This is a disturbing case. It may turn out (if there is a trial) that the wife is an unreliable witness and that her case cannot be accepted. But, for present purposes, the lender's case has to depend wholly upon an estoppel arising from her having signed the application form in blank and, it is argued, an inference that she had been separately advised as an independent client by the solicitor. I do not believe that this is a sound basis for disposing of this case without a trial. The true facts need to be known. She was the victim of misrepresentation; the solicitors purported to act on her behalf without any authority to do so; the only document which the lender saw did not suggest anything other than a joint retainer; the lender never checked the position with the wife or sought any confirmation that she was being separately advised. Discovery of documents and a morning in the county court would have sorted the matter out more expeditiously and cheaply."
Lord Hobhouse's speech on this point was expressly agreed to by Lord Nicholls, and Lord Clyde generally agreed with Hobhouse LJ's reasoning and the result. The result was that the wife's appeal in Moore succeeded.
"I should, perhaps, begin this section of the judgment by saying that in my judgment Mr Barker's concession (to the effect that UCB cannot avoid being fixed with constructive notice of Mrs Williams' equity by relying merely on an honest belief that Mrs Williams was represented in the transaction by a solicitor) was rightly made.
As Lord Scott, in particular, makes clear in Etridge, an honest belief to that effect is not enough, since it cannot be assumed that the solicitor's retainer extends to explaining to his client the nature and effect of the transaction."
Jonathan Parker LJ then cited paragraph 168 of the judgment in Etridge, which was to that effect, in particular the last sentence, which reads as follows:
"So, in my opinion, knowledge by a bank that a solicitor is acting for a surety wife does not, without more, justify the bank in assuming that the solicitor's instructions extend to advising her about the nature and effect of the transaction."
He also cited paragraph 115 in the speech of Lord Hobhouse which, as I have said, draws a clear distinction between a solicitor's potential role, sometimes of a relatively low order involving no more than the execution of an agreed transaction, sometimes of a higher order involving a lesser or greater degree of advice.
"But in my judgment the creditor, in order to avoid being fixed with constructive notice, can reasonably be expected to take steps to bring home to the wife the risk she is running by standing as surety and to advise her to take independent advice. As to past transactions, it will depend on the facts of each case whether the steps taken by the creditor satisfy this test."
He then went on to state what the bank should do for the future if it wished to avoid being fixed with constructive notice.
Order: Appeal allowed with costs. In respect of the costs of the hearing in 2000, they will be the defendant's costs in cause -- that is to say Mrs Holdgate's costs in cause not the banks. Application for permission to appeal refused.