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Under the Influence: Banks & the Family Home

John Wilson of 1 Hare Court looks at the circumstances in which a spouse can challenge a mortgage secured over the matrimonial home in favour of a bank and/or resist claims for possession on the basis that the other spouse exercised undue influence.

John Wilson, 1 Hare Court

The circumstances in which a wife can challenge a mortgage secured over the matrimonial home in favour of a bank and/or resist claims for possession on the basis that her husband exercised undue influence over her have been a source of difficulty for family lawyers. This article addresses the issues that this all too common scenario raises. It will examine, in particular, the recent House of Lords decision in Royal Bank of Scotland plc v Etridge (No 2) (2001) 2 FLR 1364 (Etridge No 2).

"Undue influence" is one of the grounds of relief developed by the courts of equity as a court of conscience. The law will investigate the manner in which an intention to enter into a transaction was secured, and if the intention was secured or produced by an unacceptable or improper means, the law will not permit the transaction to stand. The means used is regarded as the exercise of improper or "undue" influence. Equity recognises two forms of undue influence:

(1) Overt acts of improper pressure or coercion such as threats (there is an overlap here with the principles of duress) (this is actual undue influence);
(2) Undue influence arising out of a relationship between two parties where one has acquired over the other a measure of influence or ascendancy of which the ascendant person takes advantage (Lord Nicholls referred to these as "relationship cases").

Relationship cases
In these cases the nature of the relationship provides scope for misuse without any specific overt acts of persuasion so that the less dominant person is, without more, disposed to agree the course of action proposed by the dominant person. Typically this will occur when one places trust and confidence in another to look after his/her affairs and interests and that other betrays that trust. The types of relationship in respect of which the court may intervene are infinitely various and the question to be answered is not, primarily, as to whether a relationship is of a particular type (e.g. husband and wife or father and son) but:

Has one party reposed sufficient trust and confidence in the other to allow that other to take unfair advantage?

Even this test is not comprehensive. The law will not only protect those whose trust and confidence have been abused but will also intervene in those cases where a vulnerable person has been exploited. Although there is no requirement of disadvantage in financial or other ways to the weaker person, issues as to undue influence are unlikely to arise where the transaction in question is innocuous.

Presumed undue influence and the burden of proof
In the past (and possibly still) practitioners have got into a mess by forgetting that the essential question remains:

Has one party reposed sufficient trust and confidence in the other to allow that other to take unfair advantage?

There are two types of "presumed undue influence" which deal with the burden of proof in relation to the evidential question set out above:

(1) Those cases where the circumstances are such as to raise a rebuttable evidential presumption of undue influence (these cases were formerly known as Class 2(A)[1] cases but the House of Lords felt that this nomenclature did more harm than good)
(2) Those cases where there is an irrebuttable presumption that one party had influence over the other such that it is not necessary for the "weaker" party actually to prove that he/she actually reposed trust and confidence in the other – examples of these are the relationships of parent and child; guardian and ward; trustee and beneficiary; solicitor and client and medical adviser and patient (these were formerly known as Class 2(B) cases)

It has been long established that the relationship of husband and wife is not one of the relationships in respect of which this irrebuttable presumption arises[2].

In every case it will be a question of fact as to whether or not there was undue influence. Whether the cases falls on its facts into the category of actual or presumed undue influence really determines where the burden of proof lies and who has to shift that evidential burden. The Court must still, however, be satisfied on the balance of probabilities that there was in fact undue influence.

When lawyers talk about presumed undue influence they are talking about a set of circumstances where the burden of proof shifts to the Defendant on the proof of certain facts. Therefore, proof that:

(1) the complainant placed trust and confidence in the other party in relation to the management of the complainant's financial affairs; and
(2) the complainant entered into a transaction that calls for an explanation

will normally suffice, failing satisfactory evidence to the contrary, for the complainant to shift the evidential burden of proof onto the Defendant. It will then be for the Defendant to counter the inference that would otherwise be drawn. There is a rebuttal evidential presumption of undue influence.

The weight of the evidential presumption will vary from case to case and will depend upon the particular nature of the relationship and the particular nature of the impugned transaction. The type and weight of the evidence needed to rebut the presumption will depend upon the weight of the presumption itself[3].

In those cases where there is an irebuttable presumption that one party had influence over the other (i.e. it is effectively accepted that the complainant placed trust and confidence in the Defendant) the evidential issue is:

Did the transaction in question call for an explanation?
If the transaction in question calls for an explanation then, again, the burden of proof switches to the Defendant.

In Etridge No 2 the House of Lords did away with the classification of Class 2(A) and Class 2(B) presumed undue influence because it set the law on the wrong track. It made one lose sight of the fact that in these cases we are dealing with evidential presumptions and the burden of proof.

How does a Defendant discharge the burden of proof?
This can be done by showing:

(1) that the complainant took independent legal advice on the transaction;
(2) the transaction was not to the complainant's "manifest disadvantage" (although that latter expression has also caused more harm than good and should be avoided when one is carrying out a legal analysis of the relevant facts).

Independent legal advice
Proof that a complainant received advice from a third party before entering into the impugned transaction is one of the matters that a court will take into account when weighing all the evidence. The weight or importance to be attached to such advice will depend upon all the circumstances of the case. Normally advice from a solicitor or other outside adviser can be expected to bring home to a complainant a proper understanding of what he or she is about to do. However, a person may understand fully the implications of a transaction and still be acting under the undue influence of another. So proof of outside advice does not of itself show that the subsequent completion of the transaction was free from undue influence. Whether it will be proper to infer that the outside advice had an emancipating effect so that the transaction was not brought about by the exercise of undue influence is a question of fact to be decided having regard to all the circumstances of the case.

"Manifest disadvantage"
The second evidential question in "rebuttable presumption" cases and the only evidential question in "irrebuttable presumption" cases is:

Does the transaction in question call for an explanation?
or, put another way:
Is the transaction readily explicable by the relationship of the parties?
The House of Lords in Etridge No 2 decided that the expression "manifest disadvantage" was unhelpful and should be treated with caution. They fell back on the words of Lindley LJ in Allcard v Skinner (1887) 36 Ch D 145:

"if the gift is so large as not to be reasonably accounted for on the ground of friendship, relationship, charity or other ordinary motives on which ordinary men act, the burden is upon the donee to support the gift…"[4]

Where clear "disadvantage" is shown to the complainant the greater that disadvantage the more cogent must be the explanation for the presumption of undue influence to be displaced[5]. Lord Scarman in Natwest v Morgan attached the words "manifest disadvantage" to the second evidential question. This has caused very significant problems to lawyers wrestling with cases involving undue influence. The "baffling" question to quote Lord Nicholls in Etridge No 2 is:

Does a wife's guarantee of her husband's bank overdraft together with a charge on her share in the former matrimonial home constitute a transaction manifestly to her disadvantage?

On a narrow analysis it is plainly or manifestly to her disadvantage in that she undertakes a serious financial obligation and, in return, she personally receives nothing.

On a broad analysis there are inherent reasons why such a transaction may be for the wife's benefit. A married couple's affairs are, ordinarily, bound up together and if the husband's business is the source of the family income and wealth the wife will have a lively interest in doing what she can to support that business. A wife's affection and self-interest may run hand in hand in inclining her to join her husband in charging the marital home.

In Etridge No 2 the House of Lords charted a course between the narrow and broad approaches. They discarded the expression "manifest disadvantage" and returned to the formulation of Lindley LJ set out above as adopted by Lord Scarman in Natwest v Morgan:

"whatever the legal character of the transaction it must constitute a disadvantage sufficiently serious to require evidence to rebut the presumption that in the circumstances of the parties' relationship it was procured by the exercise of undue influence."

Lord Nicholls in Etridge No 2 considered that a transaction whereby a wife guarantees her husband's bank overdraft and secures it with a charge over a share in the house is not explicable, in the ordinary course, only on the basis that it was procured by undue influence.

Emphasis is on "the ordinary course". There will remain cases where a wife's signature on a guarantee or charge does call for an explanation. In considering the way in which a husband describes the prospects for his business a distinction must be drawn between:

(1) the fact that he may express a degree of hyperbole about his prospects which is only human and natural; and
(2) the situation where he provides an inaccurate explanation of a proposed transaction and/or prefers his own interests to those of a wife who reposes trust and confidence in him and makes a choice for both of them on the basis of his own interests. In such circumstances he has failed to discharge his fiduciary obligations to his wife.

Suretyship transactions involving, typically, banks in the affairs of husband and wife
A suretyship transaction is a tripartite transaction involving a creditor (usually a bank), a debtor (usually a husband) and a surety (usually a wife). The surety will assume the obligations of a guarantor at the request of the debtor. On the face of it the guarantor receives nothing in return. The creditor bank will know this. When should a bank be put on inquiry?

In Barclays Bank v O'Brien (1994) 1 FLR 1 Lord Browne-Wilkinson identified the tension between, on the one hand, allowing home owners to make economic use of the equity in their homes and – on the other – allowing a bank to have confidence that a wife's signature of the necessary guarantee and charge over her interest in the home will be as binding upon her as the signature of anyone else on documents he/she may sign. If the wife's signature has in fact been tainted by the undue influence of the husband the bank does not want to be tainted by that fact.

In O'Brien the House of Lords set out the steps that it felt a bank should take to avoid being tainted by a husband's undue influence. Lord Browne-Wilkinson used the doctrine of "constructive notice" in a way that attracted criticism from property law purists. In other words a party to a contract may lose the benefit of his contract, entered into in good faith, if he ought to have known that the other party's concurrence had been procured by the misconduct of a third party. Therefore the bank had to take certain steps to ensure that there had been no improper conduct so as to ensure that the transaction was not tainted.

The House of Lords in Etridge No 2 acknowledged that this use of "constructive notice" represented an extension of existing principle but rejected academic criticism of it:

"The law had to find a way of giving wives a reasonable measure of protection without adding unreasonably to the expense involved in entering into guarantee transactions of the type under consideration. The protection had to extend to any misrepresentations made by a husband to his wife. In a situation where there is substantial risk the husband may exercise his influence improperly regarding the provision of security for his business debts there is an increased risk that the explanations of the transaction given to him by his wife may be misleadingly incomplete or even inaccurate…"

The threshold: When is the bank put on enquiry?
In O'Brien a bank was put on inquiry in these circumstances by a combination of two factors: (a) the transaction was not on its face to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that in procuring the wife to act as surety the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction (per Lord Browne-Wilkinson).

In Etridge No 2 the Lords went further. Lord Nicholls said:

"In my view, this passage, read in context is to be taken to mean, quite simply, that a bank is put on inquiry whenever a wife offers to stand surety for her husband's debts."

In his view the position was likewise:

If a husband stands surety for his wife's debts
If one or other of an unmarried couple stands surety for the other's debts
Whether the relationship is heterosexual or homosexual
Where the wife becomes surety for the debts of a company whose shares are held by her and her husband
In every case where the relationship between surety and debtor is non-commercial.

However, the bank is NOT put on inquiry where money is being advanced to the husband and wife jointly unless the bank is aware that the loan is being made for the husband's purposes[6].

The steps that the bank should take
In O'Brien Lord Browne-Wilkinson stated that one test would apply to past transactions and that in cases post-O'Brien the bank would have to go further. For past transactions a bank could reasonably be expected to take steps to bring home to the wife the risk she was running by standing surety and to advise her to take independent advice. For post-O'Brien cases a bank would have to insist that the wife attend a private meeting with a representative of the bank at which she would be told of the extent of her liability as surety, warned of the risk she was running and urged to take independent legal advice. In exceptional cases, the bank, to be safe, had to insist that the wife was separately advised.

Again, Etridge No 2 took the law further. Lord Nicholls said:

"The furthest a bank can be expected to go is to take reasonable steps to satisfy itself that the wife has had brought home to her, in a meaningful way, the practical implications of the proposed transaction. This does not wholly eliminate the risk of undue influence or misrepresentation. But it does mean that the wife enters into a transaction with her eyes open so far as the basic elements of the transaction are concerned."

In Lord Nicholls' view it was not necessary for the bank to have a personal meeting with the wife and the reasons why banks tend not to do so are perfectly understandable. It is not unreasonable for the bank to prefer explanations to be given by an independent legal adviser.

Duties of the independent legal adviser
The House of Lords has resolved the tension between allowing home owners to use their equity and banks to be secure in the transactions they undertake by putting the poor independent legal adviser in the middle. The House of Lords anticipated that the obligations of the independent legal adviser would be onerous and comprehensive. It is not clear whether all solicitors giving such independent advice are aware of how much the House of Lords expects of them. Certainly, to do the job properly would not necessarily be cheap in terms of legal time.

The following points arise:

- It is not the duty of the legal adviser to satisfy himself that his client is free from improper influence and as part of that investigation to ask himself whether or not the transaction is one into which a wife could be sensibly be advised to enter. Neither is it his/her duty if he/she is not so satisfied to advise the wife not to enter the transaction and then to refuse to act for her if she persists:

"all that is necessary is that some independent person, free from any taint of the relationship, or of the consideration of interest which would affect the act, should put clearly before the person what are the nature and consequences of the act, and I do not think that independent and competent advice means independent and competent approval. It simply means that the advice shall be removed entirely from the suspected atmosphere; and that from the clear language of an independent mind, they should know precisely what they are doing."[7]

- It is accordingly not the solicitor's duty to veto the transaction
- If he/she considers it is not to be in the wife's best interests he/she will give her reasoned advice to that effect – however, the final decision is hers
There may be exceptions to the general rule and in exceptional circumstances where it is glaringly obvious that a wife is being grievously wronged the solicitor may intervene.

Responsibilities of the independent legal adviser
These will depend upon the terms of the solicitor's retainer. Normally this will be to allay the bank's concern that the solicitor has brought home to the wife the risks in the transaction.

The advice given by the solicitor must be given during a face to face meeting with the wife in the absence of the husband. Therefore:

(1) The solicitor must first explain to the wife the purpose for which he has become involved. He should explain that, should it ever become necessary, the bank will rely upon his/her involvement to counter any argument that the wife was overborne by the husband or that she did not properly understand the implications of the transaction.

(2) The solicitor should seek the wife's confirmation that she wishes him/her to act for her in the matter and to advise her on the legal and practical implications of the proposed transaction.

(3) If the wife instructs him/her to continue the content of the advice given by the solicitor will depend upon the circumstances of the case. Typically, however, it should cover the following:

(i) the nature of the documents and the practical consequences these will have for the wife if she signs them – she could lose her home if her husband's business does not prosper; she could be made bankrupt;

(ii) the seriousness of the risks involved. She should be told the purpose of the new facility, the amount and the principal terms of the new facility and that the bank may change the terms of the facility or change its terms or grant a new facility without reference to her. She should be told the amount of her liability under the guarantee. The solicitor should discuss with the wife her financial means, including her understanding of the value of the property being charged. The solicitor should discuss with her whether or not her husband has other assets out of which repayment could be made if the business fails. All these matters are relevant to the seriousness of the risk;

(iii) the availability to the wife of a choice . The decision is hers and hers alone. This explanation will call for some discussion of the present financial position including the amount of the husband's indebtedness and the amount of his current overdraft facility;

(iv) checking whether the wife wishes to proceed in the light of the advice given. She should be asked whether she is content that the solicitor should write to the bank confirming that he/she has explained to her the nature of the documents and the practical implications that they may have for her or whether for instance she would prefer him/her to negotiate with the bank on the terms of the transaction. Matters for negotiation could include the sequence in which the various securities will be called upon or a specific or lower limit to her liabilities. No confirmation should be given to the bank without the wife's authority.

Some miscellaneous points
There is no rule that the solicitor cannot act for the husband as well as advising the wife. However, per Lord Nicholls, he/she must consider carefully whether there is any conflict of interest or duty and, more widely, whether it would be in the wife's best interests for the solicitor to accept instructions from her. If at any stage a real risk of conflict arises the solicitor must cease to act.

The solicitor is not ordinarily the agent of the bank[8]. This was a relatively common argument in the earlier development of the law.

What steps should the bank be taking?
The bank should take steps to check directly with the wife the name of the solicitor she wishes to act for her. It should inform her that for its own protection it will require written confirmation from the solicitor to the effect that he/she has fully explained the nature of the documents and the practical implications that they will have for her. She should be told that the purpose of this requirement is that thereafter she should not be able to dispute that she is legally bound by the documents once she has signed them. The House of Lords foresaw detailed enquiry as to the identity of the independent legal adviser. It held that a bank should not proceed until it has received an appropriate response from the wife.

As the bank is likely to have a much better picture of the husband's finances than the solicitor, the bank must provide the solicitor with the financial information that he/she needs for the purpose of providing independent legal advice. The House of Lords envisaged it becoming routine practice for banks, if relying on confirmation from a solicitor for their protection, to send the solicitor the necessary financial information (depending upon the circumstances of the case). This will require the husband's consent and if this is not forthcoming the transaction should not proceed. Typically the information will include:

If the bank believes or suspects that the wife has been misled by the husband or is not entering the transaction of her own free will, the bank must inform the wife's solicitor of the facts giving rise to its belief or suspicion.

Post-Etridge No 2 cases
Etridge No 2 brought considerably more certainty into the law although arguably this is at the expense of the independent legal adviser whose duties are considerably more onerous. Although this article is long it should be borne in mind that Etridge No 2 ran to 374 paragraphs over 95 pages. There have been further important cases since although none of them undermine the jurisprudence of Etridge No 2.

In Natwest v Amin (2002) 1 FLR 735 a husband and wife guaranteeing their son's debts spoke no English though there son was an educated English speaker. The bank wrote to local solicitors with the documentation and asked them to attend to the formalities on their behalf. The solicitor convened a meeting between husband, wife and son. The meeting was conducted in English. The bank tried to strike out the wife's defence of undue influence (her husband having died) when it brought possession proceedings. There was a serious issue to be tried as to whether on the facts the solicitor was the bank's agent. It had been alleged that the bank knew that husband and wife spoke no English and were therefore open to exploitation. That too was a serious issue to be tried.

In UCB Corporate Services v Williams (2003) 1 P & CR 12 the judge found that even though the wife would have signed the charge had she known all the relevant facts and exercised her own free will she was still entitled to have the charge set aside as against her husband who had used undue influence and misrepresentation. Further the lender had failed to take reasonable steps to satisfy itself that the solicitor who witnessed the signature on the charge had given the wife of the borrower advice about the nature and effect of the transaction. Charge set aside.[9]

In Mortgage Agency Services Number Two Ltd v Chater (2003) 15 E.G. 138 a son persuaded his mother to transfer her house into joint names and take a loan subject to a mortgage. The money was for his business. However, the purpose of the loan on the application form was stated as being a "purchase". The charge was executed in the presence of a solicitor retained jointly by mother and son. It was held that there was undue influence by the son however the lender was not affected by it. The application was a joint loan and there was nothing to put the lender on enquiry as to the problem. There was nothing on the documents to suggest the true purpose of the loan and the fact that the two borrowers were mother and son was insufficient to put the lender on enquiry.

In Yorkshire Bank v Tinsley (2004) 2 FLR 1079 a 1988 charge and a 1991 charge in favour of the Yorkshire Bank were voidable for undue influence. In 1992 the Tinsleys' marriage began to fail and in 1994 as part of the ancillary settlement it was arranged that the marital home be sold and a flat be purchased for the wife. It was originally intended that the husband would redeem the mortgages on the home and the wife would take the flat mortgage free. However, the Yorkshire Bank insisted on having security over the flat. The wife signed a new all monies charge in the bank's favour over the flat (the 1994 charge) ostensibly following advice from an independent solicitor. In October 1997 the bank took possession proceedings against the flat. One of the main issues was whether if the 1988 and 1991 charges were voidable for undue influence that could taint the otherwise unimpeachable 1994 charge. The Court of Appeal, reversing the trial judge held that the 1994 charge could be so tainted. The situation would have been different if a different lender had provided the 1994 mortgage.

In First National Bank plc v Achampong (2003) the court held, applying Etridge No 2 that the bank had failed to take sufficient steps to avoid notice of the undue influence. However, the Court of Appeal held that the legal charge, although ineffective as against the wife, did create an equitable charge against the husband's beneficial interest and, if necessary, severed any joint beneficial tenancy. Therefore the bank was entitled to an order for sale under section 14 of the Trusts of Land and Appointment of Trustees Act 1996, one of the factors to which regard should be had being the "interests of any secured creditor of any beneficiary". So Mrs Achampong lost her home even though she was looking after children, one of whom (an adult) was disabled and three of whom were minors.

Other recent cases include Jennings & Lewis v Cairns (2003) EWCA 1935: Court of Appeal upheld findings of undue influence (not involving a bank), Daniel v Drew (2005) EWCA Civ 507 : Court of Appeal restated the Etridge No 2 position and the dicta of Lindley LJ in Allcard v Skinner; and Abbey National v Stringer (2006) EWCA Civ 338: Court of Appeal upheld a finding that a 56 year old illiterate Italian woman (70 at the date of trial) had been subject to undue influence by her son and the bank had constructive notice of that undue influence.

When representing, typically, a wife who is facing legal action from a bank the first step must be to see whether or not there was in fact undue influence and/or misrepresentation as between husband and wife. Frequently, by this stage the husband's finances will be in a parlous state. The first part of this article addressed what is needed to establish undue influence on a bi-partite basis. For there to be protection from the bank, however, one must go considerably further. One must see whether this is a pre or post-O'Brien charge and look to the tests set out by Lord Browne-Wilkinson in that case. If the case is post-Etridge No 2 one must look to whether the bank has carried out that which it is required to do and the independent legal adviser has followed through the fairly onerous steps expected of him or her. Provided the bank has done what it should do under Etridge No 2 it will be difficult to challenge its claims. There may, however, be claims against a solicitor who has failed in his/her duties of providing independent legal advice. Further, as Achampong shows, the bank may still be able to secure a sale of the property based upon its unimpeachable claim against the husband's share. In addition, if the monies are provided by way of joint loan to husband and wife and the bank has no knowledge or notice of the fact that the monies in reality were being used only by the husband it is also probably safe.


[1] Per the House of Lords in Barclays Bank plc v O'Brien (1994) 1 FLR 1 adopting the analysis of the Court of Appeal in BCCI v Aboody (1990) 1 FLR 354

[2] Yerkey v Jones (1939) CLR 648 at 675 per Dixon J

[3] See e.g. Allcard v Skinner (1887) 36 Ch D 145 where the presumption was a heavy one

[4] See also Lord MacNaghten in Bank of Montreal v Stuart (1911) AC 120 at 127 describing a gift as "immoderate and irrational"

[5] See Lord Scarman in National Westminster Bank plc v Morgan (1985) AC 686 at 703 - 707

[6] See HL in CICB v Pitt (1994) 1 FLR 17

[7] Per Fletcher-Moulton LJ in Re Coomber (1911) 1 Ch 723 approved by Lord Nicholls in Etridge No 2

[8] But see Lord Scott at paras 176 – 179 in Etridge No 2 and Natwest v Amin (2002) 1 FLR 235 for an example of a case where the solicitor was found to be the agent of the bank

[9] See also Lloyds TSB v Holgate (2002) 43 E.G. 203; (2003) HLR 25 on whether or not bank had taken the necessary steps.