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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Barclays Bank v O'Brien [1993] UKHL 6 (21 October 1993) URL: http://www.bailii.org/uk/cases/UKHL/1993/6.html 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.
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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
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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
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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:
The transaction is on its face
not to the financial advantage of
the wife; and
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
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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 -
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.
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.
- 17 -