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Cite as: [1994] 1 AC 180, [1993] UKHL 6, [1993] 4 All ER 417

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    Parliamentary Archives,
    HL/PO/JU/18/253

    Barclays Bank plc (Appellants)

    v.
    O'Brien and another (A.P.)
    (Respondents)

    JUDGMENT

    Die Jovis 21° Octobris 1993

    Upon Report from the Appellate Committee to whom was
    referred the Cause Barclays Bank plc against O'Brien and another,
    That the Committee had heard Counsel as well on Monday the 26th
    as on Tuesday the 27th, Wednesday the 28th and Thursday the 29th
    days of April last upon the Petition and Appeal of Barclays Bank
    plc of 54 Lombard Street, London EC3P 3AH, praying that the
    matter of the Order set forth in the Schedule thereto, namely
    an Order of Her Majesty's Court of Appeal of the 22nd day of May
    1992, might be reviewed before Her Majesty the Queen in Her Court
    of Parliament and that the said Order might be reversed, varied
    or altered or that the Petitioners might have such other relief
    in the premises as to Her Majesty the Queen in Her Court of
    Parliament might seem meet; as upon the case of Bridget Mary
    O'Brien lodged in answer to the said Appeal; and due
    consideration had this day of what was offered on either side in
    this Cause:

    It is Ordered and Adjudged, by the Lords Spiritual and
    Temporal in the Court of Parliament of Her Majesty the Queen
    assembled, That the said Order of Her Majesty's Court of Appeal
    of the 22nd day of May 1992 complained of in the said Appeal be,
    and the same is hereby, Affirmed and that the said Petition and
    Appeal be, and the same is hereby, dismissed this House: And it
    is further Ordered. That the Appellants do pay or cause to be
    paid to the said Respondents the Costs incurred by them in
    respect of the said Appeal, the amount thereof to be certified
    by the Clerk of the Parliaments if not agreed between the
    parties; and that the costs of the Respondents be taxed in
    accordance with the Legal Aid Act 1988.

    Cler: Parliamentor:

    Judgment: 21 October 1993

    HOUSE OF LORDS


    BARCLAYS BANK PLC

    (APPELLANTS)

    v.

    O 'BRIEN AND ANOTHER (A. P.)
    (RESPONDENTS)


    Lord Templeman
    Lord Lowry
    Lord Browne-Wilkinson
    Lord Slynn of Hadley
    Lord Woolf


    LORD TEMPLEMAN

    My Lords,

    For the reasons to be given by my noble and learned friend Lord
    Browne-Wilkinson I would dismiss the appeal.

    LORD LOWRY

    My Lords.

    I have had the advantage of reading in draft the speech prepared by my
    noble and learned friend Lord Browne-Wilkinson. I agree with it and for the
    reasons he gives I too would dismiss the appeal.


    LORD BROWNE-WILKINSON


    My Lords,


    In this appeal your Lordships for the first time have to consider a
    problem which has given rise to reported decisions of the Court of Appeal on
    no less than 11 occasions in the last eight years and which has led to a
    difference of judicial view. Shortly stated the question is whether a bank is
    entitled to enforce against a wife an obligation to secure a debt owed by her
    husband to the bank where the wife has been induced to stand as surety for

    - 1 -

    her husband's debt by the undue influence or misrepresentation of the
    husband.

    The facts

    The facts of the present case are very fully set out in the judgment of
    Scott L.J. in the Court of Appeal ([1993] Q.B. 109). I will only state them
    in summary form. Mr. and Mrs. O'Brien were husband and wife. The
    matrimonial home. 151, Farnham Lane, Slough, was in their joint names
    subject to a mortgage of approximately £25.000 to a building society. Mr.
    O'Brien was a chartered accountant and had an interest in a company.
    Heathrow Fabrications Ltd. The company's bank account was at the
    Woolwich branch of Barclays Bank. In the first three months of 1987 the
    company frequently exceeded its overdraft facility of £40,000 and a number
    of its cheques were dishonoured on presentation. In discussions in April 1981
    between Mr. O'Brien and the manager of the Woolwich branch. Mr. Tucker.
    Mr. O'Brien told Mr. Tucker that he was remortgaging the matrimonial home:
    Mr. Tucker made a note that Mrs. O'Brien might be a problem. The
    overdraft limit was raised at that stage to £60,000 for one month. Even
    though no additional security was provided, by 15 June 1987. the company's
    overdraft had risen to £98,000 and its cheques were again being dishonoured.

    On 22 June 1987. Mr. O'Brien and Mr. Tucker agreed (1) that the
    company's overdraft limit would be raised to £135,000 reducing to £120,000
    after three weeks (2) that Mr. O'Brien would guarantee the company's
    indebtedness and (3) that Mr. O'Brien's liability would be secured by a second
    charge on the matrimonial home.

    The necessary security documents were prepared by the bank. They
    consisted of an unlimited guarantee by Mr. O'Brien of the company's liability
    and a legal charge by both Mr. and Mrs. O'Brien of the matrimonial home to
    secure any liability of Mr. O'Brien to the bank. Mr. Tucker arranged for the
    documents, together with a side letter, to be sent to the Burnham branch of
    the bank for execution by Mr. and Mrs. O'Brien. In a covering
    memorandum, Mr. Tucker requested the Burnham branch to advise the
    O'Briens as to the current level of the facilities afforded to the bank
    (£107,000) and the projected increase to £135,000. The Burnham branch was
    also asked to ensure that the O'Briens were "fully aware of the nature of the
    documentation to be signed and advised that if they are in any doubt they
    should contact their solicitors before signing".

    Unfortunately the Burnham branch did not follow Mr. Tucker's
    instructions. On 1 July, Mr. O'Brien alone signed the guarantee and legal
    charge at the Burnham branch, the document simply being produced for
    signature and witnessed by a clerk. On the following day Mrs. O'Brien went
    to the branch with her husband. There were produced for signature by Mrs.
    O'Brien, the legal charge on the matrimonial home together with a side letter
    which reads:

    - 2 -

    "We hereby agree acknowledge and confirm as follows: (1) That we
    have each received from you a copy of the guarantee dated 3 July 1987
    (a copy of which is attached hereto) under which Nicholas Edward
    O'Brien guarantees the payment and discharge of all moneys and
    liabilities now or hereafter due owing or incurred by Heathrow
    Fabrications Ltd. to you. (2) That the liability of the said Nicholas
    Edward O'Brien to you pursuant to the said guarantee is and will be
    secured by the legal charge dated 3 July 1987 over the property
    described above made between (1) Nicholas Edward O'Brien (2)
    Nicholas Edward O'Brien and Bridget Mary O'Brien and (3) Barclays
    Bank Plc. (3) That you recommended that we should obtain
    independent legal advice before signing this letter."

    In fact the Burnham branch gave Mrs. O'Brien no explanation of the
    effect of the documents. No one suggested that she should take independent
    legal advice. She did not read the documents or the side letter. She simply
    signed the legal charge and side letter and her signature was witnessed by the
    clerk. She was not given a copy of the guarantee.

    The company did not prosper and by October 1987 its indebtedness to
    the bank was over £154,000. In November 1987 demand was made against
    Mr. O'Brien under his guarantee. When the demand was not met. possession
    proceedings under the legal charge were brought by the bank against Mr. and
    Mrs. O'Brien. Mrs. O'Brien seeks to defend these proceedings by alleging
    that she was induced to execute the legal charge on the matrimonial home by
    the undue influence of Mr. O'Brien and by his misrepresentation. The trial
    judge. Judge Marder Q.C., and the Court of Appeal rejected the claim based
    on undue influence: on the appeal to this House the claim based on undue
    influence is not pursued. However the judge did find that Mr. O'Brien had
    falsely represented to Mrs. O'Brien that the charge was to secure only
    £60,000 and that even this liability would be released in a short time when the
    house was remortgaged. On those findings of fact, the trial judge granted an
    order for possession against Mrs. O'Brien holding that the bank could not be
    held responsible for the misrepresentation made by Mr. O'Brien.

    The decision of the Court of Appeal

    The Court of Appeal (Purchas, Butler-Sloss and Scott L.JJ.) reversed
    his decision. The leading judgment in the Court of Appeal was given by Scott
    L.J. who found that there were two lines of authority. One line would afford
    no special protection to married women: the rights of the creditor bank could
    only be adversely affected by the wrongful acts of the principal debtor, the
    husband, in procuring the surety's liability if the principal debtor was acting
    as the agent of the creditor in procuring the surety to join or the creditor had
    knowledge of the relevant facts. I will call this theory "the agency theory".
    The other line of authority detected by Scott L.J. (which I will call "the
    special equity theory") considers that equity affords special protection to a
    protected class of surety viz. those where the relationship between the debtor

    - 3 -

    and the surety is such that influence by the debtor over the surety and reliance
    by the surety on the debtor are natural features of the relationship. In cases
    where a surety is one of this protected class, the surety obligation is
    unenforceable by the creditor bank if (1) the relationship between the debtor
    and the surety was known to the creditor (2) the surety's consent was obtained
    by undue influence or by misrepresentation or without "an adequate
    understanding of the nature and effect of the transaction" and (3) the creditor
    had failed to take reasonable steps to ensure that the surety had given a true
    and informed consent to the transaction. The Court of Appeal preferred the
    special equity principle. They held that the legal charge on the O'Brien's
    matrimonial home was not enforceable by the bank against Mrs. O'Brien save
    to the extent of the £60,000 which she had thought she was agreeing to
    secure.

    Policy considerations

    The large number of cases of this type coming before the courts in
    recent years reflects the rapid changes in social attitudes and the distribution
    of wealth which have recently occurred. Wealth is now more widely spread.
    Moreover a high proportion of privately owned wealth is invested in the
    matrimonial home. Because of the recognition by society of the equality of
    the sexes, the majority of matrimonial homes are now in the joint names of
    both spouses. Therefore in order to raise finance for the business enterprises
    of one or other of the spouses, the jointly owned home has become a main
    source of security. The provision of such security requires the consent of
    both spouses.

    In parallel with these financial developments, society's recognition of
    the equality of the sexes has led to a rejection of the concept that the wife is
    subservient to the husband in the management of the family's finances. A
    number of the authorities reflect an unwillingness in the court to perpetuate
    law based on this outmoded concept. Yet, as Scott L.J. in the Court of
    Appeal rightly points out, although the concept of the ignorant wife leaving
    all financial decisions to the husband is outmoded, the practice does not yet
    coincide with the ideal [1993] Q.B. 109, 139. In a substantial proportion of
    marriages it is still the husband who has the business experience and the wife
    is willing to follow his advice without bringing a truly independent mind and
    will to bear on financial decisions. The number of recent cases in this field
    shows that in practice many wives are still subjected to, and yield to, undue
    influence by their husbands. Such wives can reasonably look to the law for
    some protection when their husbands have abused the trust and confidence
    reposed in them.

    On the other hand, it is important to keep a sense of balance in
    approaching these cases. It is easy to allow sympathy for the wife who is
    threatened with the loss of her home at the suit of a rich bank to obscure an
    important public interest viz. the need to ensure that the wealth currently tied
    up in the matrimonial home does not become economically sterile. If the

    - 4 -

    rights secured to wives by the law renders vulnerable loans granted on the
    security of matrimonial homes, institutions will be unwilling to accept such
    security, thereby reducing the flow of loan capital to business enterprises. It
    is therefore essential that a law designed to protect the vulnerable does not
    render the matrimonial home unacceptable as security to financial institutions.

    With these policy considerations in mind I turn to consider the existing
    state of the law. The whole of modern law is derived from the decision of the
    Privy Council in Turnbull & Co. v. Duval [1902] A.C. 429 which, as I will
    seek to demonstrate, provides an uncertain foundation. Before considering
    that case however. I must consider the law of undue influence which (though
    not directly applicable in the present case) underlies both Duval's case and
    most of the later authorities.

    Undue influence

    A person who has been induced to enter into a transaction by the undue
    influence of another ("the wrongdoer") is entitled to set that transaction aside
    as against the wrongdoer. Such undue influence is either actual or presumed.
    In Bank of Credit and Commerce International S.A. v. Aboody [1990] 1 Q.B.
    923. 953 the Court of Appeal helpfully adopted the following classification.

    Class 1 Actual undue influence.

    In these cases it is necessary for the claimant to prove affirmatively
    that the wrongdoer exerted undue influence on the complainant to enter into
    the particular transaction which is impugned.

    Class 2 Presumed undue influence.

    In these cases the complainant only has to show, in the first instance,
    that there was a relationship of trust and confidence between the complainant
    and the wrongdoer of such a nature that it is fair to presume that the
    wrongdoer abused that relationship in procuring the complainant to enter into
    the impugned transaction. In Class 2 cases therefore there is no need to
    produce evidence that actual undue influence was exerted in relation to the
    particular transaction impugned: once a confidential relationship has been
    proved, the burden then shifts to the wrongdoer to prove that the complainant
    entered into the impugned transaction freely, for example by showing that the
    complainant had independent advice. Such a confidential relationship can be
    established in two ways, viz.

    Class 2(A)

    Certain relationships (for example solicitor and client, medical advisor
    and patient) as a matter of law raise the presumption that undue influence has
    been exercised.

    - 5 -

    Class 2(B)

    Even if there is no relationship falling within Class 2(A), if the
    complainant proves the de facto existence of a relationship under which the
    complainant generally reposed trust and confidence in the wrongdoer, the
    existence of such relationship raises the presumption of undue influence. 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.

    As to dispositions by a wife in favour of her husband, the law for long
    remained in an unsettled state. In the 19th century some judges took the view
    that the relationship was such that it fell into Class 2(A) i.e. as a matter of
    law undue influence by the husband over the wife was presumed. It was not
    until the decisions in Howes v. Bishop [19091 2 K.B. 390 and Bank of
    Montreal
    v. Stuart [1911] A.C. 120 that it was finally determined that the
    relationship of husband and wife did not as a matter of law raise a
    presumption of undue influence within Class 2(A). It is to be noted therefore
    that when the Duval case was decided in 1902 the question whether there was
    a Class 2(A) presumption of undue influence as between husband and wife
    was still unresolved.

    An invalidating tendency?

    Although there is no Class 2(A) presumption of undue influence as
    between husband and wife, it should be emphasised that in any particular case
    a wife may well be able to demonstrate that de facto she did leave decisions
    on financial affairs to her husband thereby bringing herself within Class 2(B)
    i.e. that the relationship between husband and wife in the particular case was
    such that the wife reposed confidence and trust in her husband in relation to
    their financial affairs and therefore undue influence is to be presumed. Thus,
    in those cases which still occur where the wife relies in all financial matters
    on her husband and simply does what he suggests, a presumption of undue
    influence within Class 2(B) can be established solely from the proof of such
    trust and confidence without proof of actual undue influence

    In the appeal in C.I.B.C. Mortgages Plc. v. Pitt (judgment in which
    is to be given immediately after that in the present appeal) Mr. Price for the
    wife argued that in the case of transactions between husband and wife, there
    was an "invalidating tendency" i.e. although there was no Class 2(A)
    presumption of undue influence, the courts were more ready to find that a
    husband had exercised undue influence over his wife than in other cases.
    Scott L.J. in the present case also referred to the law treating married women
    "more tenderly" than others. This approach is based on dicta in early
    authorities. In Grigby v. Cox (1750) 1 Ves. Sen. 517 Lord Hardwicke, whilst

    - 6 -

    rejecting any presumption of undue influence, said that a court of equity "will
    have more jealousy" over dispositions by a wife to a husband. In Yerkey v.
    Jones
    (1939) 63 C.L.R. 649 Dixon J. (at p. 675 et seq.) refers to this
    "invalidating tendency". He also refers to the court recognising "the
    opportunities which a wife's confidence in her husband gives him of unfairly
    or improperly procuring her to become surety": see at p. 677.

    In my judgment this special tenderness of treatment afforded to wives
    by the courts is properly attributable to two factors. First, many cases may
    well fall into the Class 2(B) category of undue influence because the wife
    demonstrates that she placed trust and confidence in her husband in relation
    to her financial affairs and therefore raises a presumption of undue influence.
    Second, the sexual and emotional ties between the parties provide a ready
    weapon for undue influence: a wife's true wishes can easily be overborne
    because of her fear of destroying or damaging the wider relationship between
    her and her husband if she opposes his wishes.

    For myself. I accept that the risk of undue influence affecting a
    voluntary disposition by a wife in favour of a husband is greater than in the
    ordinary run of cases where no sexual or emotional ties affect the free
    exercise of the individual's will.

    Undue influence, misrepresentation and third parties

    Up to this point I have been considering the right of a claimant wife
    to set aside a transaction as against the wrongdoing husband when the
    transaction has been procured by his undue influence. But in surety cases the
    decisive question is whether the claimant wife can set aside the transaction,
    not against the wrongdoing husband, but against the creditor bank. Of course,
    if the wrongdoing husband is acting as agent for the creditor bank in obtaining
    the surety from the wife, the creditor will be fixed with the wrongdoing of its
    own agent and the surety contract can be set aside as against the creditor.
    Apart from this, if the creditor bank has notice, actual or constructive, of the
    undue influence exercised by the husband (and consequentially of the wife's
    equity to set aside the transaction) the creditor will take subject to that equity
    and the wife can set aside the transaction against the creditor (albeit a
    purchaser for value) as well as against the husband: see Bainbrigge v. Browne
    (1881) 18 Ch.D. 188; Aboody (supra) at p. 973. Similarly, in cases such as
    the present where the wife has been induced to enter into the transaction by
    the husband's misrepresentation, her equity to set aside the transaction will be
    enforceable against the creditor if either the husband was acting as the
    creditor's agent or the creditor had actual or constructive notice.

    Turnbull & Co. v. Duval

    This case provides the foundation of the modern law: the basis on
    which it was decided is, to say the least, obscure. Mr. Duval owed three
    separate sums to a firm, Turnbull & Co., including £1,000 owed to the

    - 7 -

    Jamaican branch for beer. Turnbulls' manager and agent in Jamaica was a
    Mr. Campbell. Mr. Campbell was also an executor and trustee of a will
    under which Mrs. Duval had a beneficial interest. Mr. Campbell threatened
    to stop supplying beer to Mr. Duval unless security was given for the debts
    owed and, with Mr. Campbell's knowledge, a document was prepared under
    which Mrs. Duval charged her beneficial interest under the will to secure the
    payment of all debts owed by Mr. Duval to Turnbull i.e. not only the money
    owed for beer but all the debts. Mr. Duval put pressure on Mrs. Duval to
    sign the document. She was under the impression that the document was to
    secure the beer debt only.

    The trial judge in the Court of Appeal in Jamaica held that the security
    document should be set aside as against Turnbulls on the sole ground that Mr.
    Campbell, as executor of the will, was in a fiduciary capacity vis-à-vis his
    beneficiary, Mrs. Duval, and his employers could not uphold the security
    document unless they could show that Mrs. Duval was fully aware of what she
    was doing when she entered into it and did it freely. The Privy Council
    dismissed Turnbulls' appeal. Lord Lindley expressing the ratio in these terms,
    at pp. 434-435:

    "In the face of such evidence, their Lordships are of opinion that it is
    quite impossible to uphold the security given by Mrs. Duval. It is
    open to the double objection of having been obtained by a trustee from
    his cestui que trust by pressure through her husband and without
    independent advice, and of having been obtained by a husband from
    his wife by pressure and concealment of material facts. Whether the
    security could be upheld if the only ground for impeaching it was that
    Mrs. Duval had no independent advice has not really to be determined.
    Their Lordships are not prepared to say it could not. But there is an
    additional and even stronger ground for impeaching it. It is, in their
    Lordships' opinion, quite clear that Mrs. Duval was pressed by her
    husband to sign, and did sign, the document, which was very different
    from what she supposed it to be, and a document of the true nature of
    which she had no conception. It is impossible to hold that Campbell
    or Turnbull & Co. are unaffected by such pressure and ignorance.
    They left everything to Duval, and must abide the consequences."

    The first ground mentioned by Lord Lindley (i.e. Campbell's breach
    of fiduciary duties) raises no problems. It is the second ground which has
    spawned the whole line of cases with which your Lordships are concerned.
    It raises two problems. The passage appears to suggest that Mr. Duval had
    acted in some way wrongfully vis-à-vis his wife, and that Turnbulls who "had
    left everything to Duval" were held liable for Duval's wrong. What was the
    wrongful act of Duval vis-à-vis his wife? Second, why did the fact that
    Turnbulls "left everything to Duval" render them unable to enforce their
    security?

    - 8 -

    Duval's case: was the husband in breach of duty to his wife?

    Thanks to the industry of counsel, we have seen the case lodged on the
    appeal to the Privy Council. The pleadings contain no allegation of undue
    influence or misrepresentation by Mr. Duval. Mrs. Duval did not in evidence
    allege actual or presumptive undue influence. The sole ground of decision in
    the courts below was Campbell's fiduciary position. There is no finding of
    undue influence against Mr. Duval. No one appeared for Mrs. Duval before
    the Privy Council. Therefore the second ground of decision sprung wholly
    from the Board and Lord Lindley's speech gives little insight into their
    reasoning.

    For myself I can only assume that, if the Board considered that Mr.
    Duval had committed a wrongful act vis-à-vis his wife, it proceeded on a
    mistaken basis. It will be remembered that in 1902 it had not been finally
    established that a presumption of undue influence within Class 2(A) did not
    apply as between husband and wife. The Board may therefore have been
    proceeding on the basis that the presumption of undue influence applied as
    between Mr. and Mrs. Duval. This was certainly one contemporary
    understanding of the ratio decidendi: see Bishoff's Trustees v. Frank (1903)
    89 L.T. 188. Alternatively, the Board may have been mistakenly applying the
    heresy propounded by Lord Romilly to the effect that when a person has made
    a large voluntary disposition the burden is thrown on the party benefitting to
    show that the disposition was made fairly and honestly and in full
    understanding of the nature and consequences of the transaction: see Hoghton
    v. Hoghton
    ([1852) 15 Beav. 278. Although this heresy has never been
    formally overruled, it has rightly been regarded as bad law for a very long
    time: see the account given by Dixon J. in Yerkey v. Jones, 63 C.L.R. 649,
    678 et seq. It is impossible to find a sound basis for holding that Mrs. Duval
    was entitled to set aside the transaction as against her husband. How then
    could she set it aside as against Turnbulls?

    Duval's case: Was the creditor under a direct duty to the wife?

    It is the lack of any sound basis for holding that Mr. Duval was guilty
    of a legal wrong for which Turnbulls were indirectly held liable which has led
    to the theory that the creditor, Turnbulls, were themselves in breach of some
    duty owed by them as creditors directly to the surety, Mrs. Duval. No one
    has ever suggested that in the ordinary case of principal and surety the
    creditor owes any duty of care to the surety: in the normal case it is for the
    surety to satisfy himself as to the nature and extent of the obligations he is
    assuming. Therefore, it is said, there must be some special feature of the case
    where a wife stands surety for her husband's debt which gives rise to some
    special duty. This is the explanation of the decision of Duval's case given by
    Dixon J. in Yerkey v. Jones (supra) which, in turn, is the basis on which the
    Court of Appeal in the present case adopted the view that the law imposed on
    the creditor itself a duty to take steps to ensure not only that the husband had
    not used undue influence or made a misrepresentation but also that the wife

    - 9 -

    had "an adequate understanding of the nature and effect" of what she was
    doing. If this interpretation of Duval's case is correct, the law not only
    imposes on the creditor a duty vis-à-vis a particular class of surety (where
    ordinarily there would be none) but the extent of that duty is greater than that
    which, under the ordinary law, a husband would owe to his wife: a
    transaction between husband and wife cannot, in the absence of undue
    influence or misrepresentation, be set aside simply on the ground that the wife
    did not fully understand the transaction.

    Duval's case: "They left everything to Duval
    and must abide the consequences".

    These words provide the only guidance as to the circumstances which
    led the Board to set aside the surety agreement as against Turnbulls. In later
    cases the words have often been treated as indicating that Mr. Duval (but not
    Turnbulls themselves) acted in breach of duty to Mrs. Duval, that Mr. Duval
    was Turnbulls' agent and that Turnbulls could not be in a better position than
    its agent. Quite apart from the difficulty of identifying what was the breach
    of duty committed by Mr. Duval, the concept of Mr. Duval having acted as
    agent for Turnbulls to procure his wife to become surety for the debt was
    artificial in Duval's case itself and in some of the later cases becomes even
    more artificial. As the Court of Appeal in this case point out, in the majority
    of cases the reality of the relationship is that, the creditor having required of
    the principal debtor that there must be a surety, the principal debtor on his
    own account in order to raise the necessary finance seeks to procure the
    support of the surety. In so doing he is acting for himself not for the creditor.

    The subsequent authorities

    The authorities in which the principle derived from the Duval case has
    been applied are fully analysed in the judgment of Scott L.J. and it is
    unnecessary to review them fully again.

    Scott L.J. analyses the cases as indicating that down to 1985 there was
    no decision which indicated that the agency theory, rather than the special
    equity theory, was the basis of the decision in Duval. I agree. But that is
    attributable more to the application of the Duval principle than ro any analysis
    of its jurisprudential basis. The only attempts to analyse the basis of the
    decision in Duval's case were the Australian decisions in Bank of Victoria Ltd.
    v. Mueller
    [1925] V.L.R. 642 and the judgment of Dixon J. in Yerkey v.
    Jones
    (supra). The former decision was reached by applying the Romilly
    heresy which, as I have already said, is bad law. The judgment of Dixon J.
    undoubtedly supports the special equity theory.

    From 1985 down to the decision of the Court of Appeal in the present
    case the decisions have all been based on the agency theory i.e. that the
    principal debtor has acted in breach of duty to his wife, the surety, and that.

    - 10 -

    if the principal debtor was acting as the creditor's agent but not otherwise, the
    creditor cannot be in any better position than its agent, the husband. In all the
    cases since 1985 the principal debtor has procured the agreement of the surety
    by a legal wrong (undue influence or misrepresentation). In all the cases
    emphasis was placed on the question whether the creditor was infected by the
    debtor's wrongdoing because the debtor was acting as the agent of the creditor
    in procuring the wife's agreement to stand as surety. I am unable to agree
    with Scott L.J. that the decision in Kings North Trust Ltd. v. Bell [1986] 1
    W.L.R. 119 was not based on the agency theory: Dillon L.J. at p. 123F-G
    expressly makes it a necessary condition that the creditor has entrusted to the
    husband the task of obtaining his wife's signature.

    However, in four of the cases since 1985 attention has been drawn to
    the fact that, even in the absence of agency, if the debtor has been guilty of
    undue influence or misrepresentation the creditor may not be able to enforce
    the surety contract if the creditor had notice, actual or constructive, of the
    debtor's conduct: see Avon Finance Co. Ltd. v. Bridger [1985] 2 All E.R.
    281. per Brandon L.J., at p. 287E; Coldunell Ltd. v. Gallon [1986] Q.B.
    1184. 1201; Midland Bank Plc. v. Shephard [1988] 3 All E.R. 17, 23; Bank
    of Credit and Commerce International S.A. v. Aboody
    [1990] 1 Q.B. 923,
    973. As will appear, in my view it is the proper application of the doctrine
    of notice which provides the key to finding a principled basis for the law.

    Accordingly, the present law is built on the unsure foundations of the
    Duval case. Like most law founded on obscure and possibly mistaken
    foundations it has developed in an artificial way, giving rise to artificial
    distinctions and conflicting decisions. In my judgment your Lordships should
    seek to restate the law in a form which is principled, reflects the current
    requirements of society and provides as much certainty as possible.

    Conclusions
    (a) Wives

    My starting point is to clarify the basis of the law. Should wives (and
    perhaps others) be accorded special rights in relation to surety transactions by
    the recognition of a special equity applicable only to such persons engaged in
    such transactions? Or should they enjoy only the same protection as they
    would enjoy in relation to their other dealings? In my judgment, the special
    equity theory should be rejected. First, I can find no basis in principle for
    affording special protection to a limited class in relation to one type of
    transaction only. Second, to require the creditor to prove knowledge and
    understanding by the wife in all cases is to reintroduce by the back door either
    a presumption of undue influence of Class 2(A) (which has been decisively
    rejected) or the Romilly heresy (which has long been treated as bad law).
    Third, although Scott L.J. found that there were two lines of cases one of
    which supported the special equity theory, on analysis although many
    decisions are not inconsistent with that theory the only two cases which

    - 11 -

    support it are Yerkey v. Jones, 63 C.L.R. 649, and the decision of the Court
    of Appeal in the present case. Finally, it is not necessary to have recourse to
    a special equity theory for the proper protection of the legitimate interests of
    wives as I will seek to show.

    In my judgment, if the doctrine of notice is properly applied, there is
    no need for the introduction of a special equity in these types of cases. A
    wife who has been induced to stand as a surety for her husband's debts by his
    undue influence, misrepresentation or some other legal wrong has an equity
    as against him to set aside that transaction. Under the ordinary principles of
    equity, her right to set aside that transaction will be enforceable against third
    parties (e.g. against a creditor) if either the husband was acting as the third
    party's agent or the third party had actual or constructive notice of the facts
    giving rise to her equity. Although there may be cases where, without
    artificiality, it can properly be held that the husband was acting as the agent
    of the creditor in procuring the wife to stand as surety, such cases will be of
    very rare occurrence. The key to the problem is to identify the circumstances
    in which the creditor will be taken to have had notice of the wife's equity to
    set aside the transaction.

    The doctrine of notice lies at the heart of equity. Given that there are
    two innocent parties, each enjoying rights, the earlier right prevails against the
    later right if the acquirer of the later right knows of the earlier right (actual
    notice) or would have discovered it had he taken proper steps (constructive
    notice). In particular, if the party asserting that he takes free of the earlier
    rights of another knows of certain facts which put him on inquiry as to the
    possible existence of the rights of that other and he fails to make such inquiry
    or take such other steps as are reasonable to verify whether such earlier right
    does or does not exist, he will have constructive notice of the earlier right and
    take subject to it. Therefore where a wife has agreed to stand surety for her
    husband's debts as a result of undue influence or misrepresentation, the
    creditor will take subject to the wife's equity to set aside the transaction if the
    circumstances are such as to put the creditor on inquiry as to the
    circumstances in which she agreed to stand surety.

    It is at this stage that, in my view, the "invalidating tendency" or the
    law's "tender treatment" of married women, becomes relevant. As I have
    said above in dealing with undue influence, this tenderness of the law towards
    married women is due to the fact that, even today, many wives repose
    confidence and trust in their husbands in relation to their financial affairs.
    This tenderness of the law is reflected by the fact that voluntary dispositions
    by the wife in favour of her husband are more likely to be set aside than other
    dispositions by her: a wife is more likely to establish presumed undue
    influence of Class 2(B) by her husband than by others because, in practice,
    many wives do repose in their husbands trust and confidence in relation to
    their financial affairs. Moreover the informality of business dealings between
    spouses raises a substantial risk that the husband has not accurately stated to

    - 12 -

    the wife the nature of the liability she is undertaking i.e. he has
    misrepresented the position, albeit negligently.

    Therefore in my judgment a creditor is put on inquiry when a wife
    offers to stand surety for her husband's debts by the combination of two
    factors:

    1. The transaction is on its face not to the financial advantage of
      the wife; and

    2. 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.

    It follow that unless the creditor who is put on inquiry takes reasonable
    steps to satisfy himself that the wife's agreement to stand surety has been
    properly obtained, the creditor will have constructive notice of the wife's
    rights.

    What, then are the reasonable steps which the creditor should take to
    ensure that it does not have constructive notice of the wife's rights, if any?
    Normally the reasonable steps necessary to avoid being fixed with constructive
    notice consist of making inquiry of the person who may have the earlier right
    (i.e. the wife) to see if whether such right is asserted. It is plainly impossible
    to require of banks and other financial institutions that they should inquire of
    one spouse whether he or she has been unduly influenced or misled by the
    other. 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. However
    for the future in my judgment a creditor will have satisfied these requirements
    if it insists that the wife attend a private meeting (in the absence of the
    husband) with a representative of the creditor at which she is told of the extent
    of her liability as surety, warned of the risk she is running and urged to take
    independent legal advice. If these steps are taken in my judgment the creditor
    will have taken such reasonable steps as are necessary to preclude a
    subsequent claim that it had constructive notice of the wife's rights. I should
    make it clear that I have been considering the ordinary case where the creditor
    knows only that the wife is to stand surety for her husband's debts. I would
    not exclude exceptional cases where a creditor has knowledge of further facts
    which render the presence of undue influence not only possible but probable.
    In such cases, the creditor to be safe will have to insist that the wife is
    separately advised.

    I am conscious that in treating the creditor as having constructive
    notice because of the risk of Class 2(B) undue influence or misrepresentation

    - 13 -

    by the husband I may be extending the law as stated by Fry J. in Bainbrigge
    v. Browne
    (supra) at p. 197 and the Court of Appeal in the Aboody case
    (supra) at p. 973. Those cases suggest that for a third party to be affected by
    constructive notice of presumed undue influence the third party must actually
    know of the circumstances which give rise to a presumption of undue
    influence. In contrast, my view is that the risk of Class 2(B) undue influence
    or misrepresentation is sufficient to put the creditor on inquiry. But my
    statement accords with the principles of notice: if the known facts are such
    as to indicate the possibility of an adverse claim that is sufficient to put a third
    party on inquiry.

    If the law is established as I have suggested, it will hold the balance
    fairly between on the one hand the vulnerability of the wife who relies
    implicitly on her husband and, on the other hand, the practical problems of
    financial institutions asked to accept a secured or unsecured surety obligation
    from the wife for her husband's debts. In the context of suretyship, the wife
    will not have any right to disown her obligations just because subsequently she
    proves that she did not fully understand the transaction: she will, as in all
    other areas of her affairs, be bound by her obligations unless her husband has.
    by misrepresentation, undue influence or other wrong, committed an
    actionable wrong against her. In the normal case, a financial institution will
    be able to lend with confidence in reliance on the wife's surety obligation
    provided that it warns her (in the absence of the husband) of the amount of
    her potential liability and of the risk of standing surety and advises her to take
    independent advice.

    Mr. Jarvis, for the bank, urged that this is to impose too heavy a
    burden on financial institutions. I am not impressed by this submission. The
    Report by Professor Jack's Review Committee on Banking Services: Law and
    Practice (1989), (Cmnd. 622), recommended that prospective guarantors
    should be adequately warned of the legal effects and possible consequences of
    their guarantee and of the importance of receiving independent advice.
    Pursuant to this recommendation, the Code of Banking Practice (adopted by
    banks and building societies in March 1992) provides in paragraph 12.1 as
    follows:

    "Banks and building societies will advise private individuals proposing
    to give them a guarantee or other security for another person's
    liabilities that:

    (i) by giving the guarantee or third party security he or she might
    become liable instead of or as well as that other person;

    (ii) he or she should seek independent legal advice before entering
    into the guarantee or third party security.

    Guarantees and other third party security forms will contain a clear
    and prominent notice to the above effect."

    - 14 -

    Thus good banking practice (which applies to all guarantees not only those
    given by a wife) largely accords with what I consider the law should require
    when a wife is offered as surety. The only further substantial step required
    by law beyond that good practice is that the position should be explained by
    the bank to the wife in a personal interview. I regard this as being essential
    because a number of the decided cases show that written warnings are often
    not read and are sometimes intercepted by the husband. It does not seem to
    me that the requirement of a personal interview imposes such an additional
    administrative burden as to render the bank's position unworkable.

    (b) Other persons

    I have hitherto dealt only with the position where a wife stands surety
    for her husband's debts. But in my judgment the same principles are
    applicable to all other cases where there is an emotional relationship between
    cohabitees. The "tenderness" shown by the law to married women is not
    based on the marriage ceremony but reflects the underlying risk of one
    cohabitee exploiting the emotional involvement and trust of the other. Now
    that unmarried cohabitation, whether heterosexual or homosexual, is
    widespread in our society, the law should recognise this. Legal wives are not
    the only group which are now exposed to the emotional pressure of
    cohabitation. Therefore if, but only if, the creditor is aware that the surety
    is cohabiting with the principal debtor, in my judgment the same principles
    should apply to them as apply to husband and wife.

    In addition to the cases of cohabitees, the decision of the Court of
    Appeal in Avon Finance Co. Ltd. v. Bridger (supra) shows (rightly in my
    view) that other relationships can give rise to a similar result. In that case a
    son, by means of misrepresentation, persuaded his elderly parents to stand
    surety for his debts. The surety obligation was held to be unenforceable by
    the creditor inter alia because to the bank's knowledge the parents trusted the
    son in their financial dealings. In my judgment that case was rightly decided:
    in a case where the creditor is aware that the surety reposes trust and
    confidence in the principal debtor in relation to his financial affairs, the
    creditor is put on inquiry in just the same way as it is in relation to husband
    and wife.

    Summary

    I can therefore summarise my views as follows. Where one cohabitee
    has entered into an obligation to stand as surety for the debts of the other
    cohabitee and the creditor is aware that they are cohabitees:

    1. the surety obligation will be valid and enforceable by the
    creditor unless the suretyship was procured by the undue
    influence, misrepresentation or other legal wrong of the
    principal debtor;

    - 15 -

    1. if there has been undue influence, misrepresentation or other
      legal wrong by the principal debtor, unless the creditor has
      taken reasonable steps to satisfy himself that the surety entered
      into the obligation freely and in knowledge of the true facts,
      the creditor will be unable to enforce the surety obligation
      because he will be fixed with constructive notice of the surety's
      right to set aside the transaction.

    2. 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.

    I should make it clear that in referring to the husband's debts I include
    the debts of a company in which the husband (but not the wife) has a direct
    financial interest.

    The decision of this case.

    Applying those principles to this case, to the knowledge of the bank
    Mr. and Mrs. O'Brien were man and wife. The bank took a surety obligation
    from Mrs. O'Brien, secured on the matrimonial home, to secure the debts of
    a company in which Mr. O'Brien was interested but in which Mrs. O'Brien
    had no direct pecuniary interest. The bank should therefore have been put on
    inquiry as to the circumstances in which Mrs. O'Brien had agreed to stand as
    surety for the debt of her husband. If the Burnham branch had properly
    carried out the instructions from Mr. Tucker of the Woolwich branch, Mrs.
    O'Brien would have been informed that she and the matrimonial home were
    potentially liable for the debts of a company which had an existing liability of
    £107,000 and which was to be afforded an overdraft facility of £135,000. If
    she had been told this, it would have counteracted Mr. O'Brien's
    misrepresentation that the liability was limited to £60,000 and would last for
    only three weeks. In addition according to the side letter she would have been
    recommended to take independent legal advice.

    Unfortunately Mr. Tucker's instructions were not followed and to the
    knowledge of the bank (through the clerk at the Burnham branch) Mrs.
    O'Brien signed the documents without any warning of the risks or any
    recommendation to take legal advice. In the circumstances the bank (having
    failed to take reasonable steps) is fixed with constructive notice of the
    wrongful misrepresentation made by Mr. O'Brien to Mrs. O'Brien. Mrs.
    O'Brien is therefore entitled as against the bank to set aside the legal charge
    on the matrimonial home securing her husband's liability to the bank.

    For these reasons I would dismiss the appeal with costs.

    - 16 -

    LORD SLYNN OF HADLEY

    My Lords,

    I have had the advantage of reading in draft the speech prepared by my noble
    and learned friend Lord Browne-Wilkinson. For the reasons he gives, I
    agree that this appeal should be dismissed.

    LORD WOOLF

    My Lords.

    I have had the advantage of reading in draft the speech prepared by my
    noble and learned friend Lord Browne-Wilkinson. I agree with it and for the
    reasons he gives I too would dismiss the appeal.














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