[2001] 4 All ER 449
House of Lords
This 'case' actually dealt with seven cases. In each case the submissions on behalf of the wife were based upon the principles expressed by Lord Browne-Wilkinson in Barclays Bank plc v O'Brien [1993] and, to a lesser extent, in CIBC Mortgages plc v Pitt [1993].
This case analyses and explains the principles formulated by Lord Browne-Wilkinson in O'Brien's case. The case also examines and explores the case law since the O'Brien's case.
Lord Scott of Foscote
Introduction
[132] My Lords, eight appeals have been heard together. In seven of these appeals, the appellant is a wife who agreed to subject her property, usually her interest in the matrimonial home, to a charge in favour of a bank in order to provide security for the payment of her husband's debts, or the debts of a company by means of which her husband carried on business. In each of these cases the bank has commenced proceedings for possession of the mortgaged property with a view to its sale and the wife has defended the claim by alleging, first, that her agreement to grant the charge to the bank was brought about by undue influence or misrepresentation, or both, on the part of her husband, and, secondly, that, in the circumstances, the chargee bank ought not to be allowed to enforce the charge against her. In each of these cases the question has been raised whether the bank should be treated as having had notice of the impropriety, or alleged impropriety, of the husband. In each of these cases the bank has had some reason to believe that a solicitor had acted for the wife in the transaction in question. So the question has arisen as to the extent to which the solicitor's participation, or believed participation, has absolved the bank of the need to make any further inquiries about the circumstances in which the wife was persuaded to agree to grant the charge, or to take any further steps to satisfy itself that her consent to do so was a true and informed consent.
[134] In each of these seven cases, the submissions on behalf of the wife have been based upon the principles expressed by Lord Browne-Wilkinson in Barclays Bank plc v O'Brien [1993] 4 All ER 417, [1994] 1 AC 180 and, to a lesser extent, in CIBC Mortgages plc v Pitt [1993] 4 All ER 433, [1994] 1 AC 200.
[138] In deciding these appeals it is necessary in my opinion, first, to analyse and explain the principles formulated by Lord Browne-Wilkinson in O'Brien's case. The case law since O'Brien's case has, in my view, disclosed some misconceptions about these principles.
The O'Brien principles
[139] It is convenient to start with a look at the problems that had to be addressed in O'Brien's case and at Lord Browne-Wilkinson's solution to them.
[140] There had been an increasing number of cases in which wives had sought to avoid the charges they had given to banks or finance houses in support of their husbands' debts. In many, probably in most, of the cases that had come to court, the wives had not read, or, if they had, had not understood the document they had signed. Many of the wives protested that they had signed because excessive pressure to do so had been brought to bear on them by their husbands; others said that their husbands had misrepresented the amount of the secured debts, the time during which the charge would remain in force or some other material matter. In most cases the wife emphasised, in explaining her willingness to sign the charge, the trust and confidence she had had in her husband. This trust and confidence, it was said, had led her to succumb to his pressure to sign and to be the more easily misled by his misrepresentations...
[142] One of the difficulties is that the protection the wife needs in these cases is a remedy against the bank, or other lender, to whom she is offering the suretyship security. It is not protection against her husband, who has allegedly procured her to do so by some wrongdoing, that is the problem. The law has no difficulty in providing an oppressed or deceived wife with a remedy against the wrongdoing husband. But, in most of the cases with which the House is now concerned, the husband is supporting his wife in her attempt to prevent the bank from enforcing its security. They stand together in attempting to save the family home. In these circumstances, Lord Browne-Wilkinson held that the requisite protection for wives against the banks should be provided by the application of the doctrine of constructive notice. He had in mind that in certain circumstances constructive notice of the husband's impropriety towards his wife could be imputed to the bank.
[143] The doctrine of notice is a doctrine that relates primarily and traditionally to the priority of competing property rights. Lord Browne-Wilkinson described the operation of the doctrine in this way:
'. . . 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.' (See [1993] 4 All ER 417 at 429, [1994] 1 AC 180 at 195-196.)
This is a classic statement of the operation of the doctrine of notice in order to determine the priority of property rights.
[144] Banks and other lenders who take charges from surety wives are certainly purchasers of property rights. But they acquire their rights by grant from the surety wives themselves. The issue between the banks and the surety wives is not one of priority of competing interests. The issue is whether or not the surety wife is to be bound by her apparent consent to the grant of the security to the bank. If contractual consent has been procured by undue influence or misrepresentation for which a party to the contract is responsible, the other party, the victim, is entitled, subject to the usual defences of change of position, affirmation, delay etc, to avoid the contract. But the case is much more difficult if the undue influence has been exerted or the misrepresentation has been made not by the party with whom the victim has contracted, but by a third party. It is, in general, the objective manifestation of contractual consent that is critical. Deficiencies in the quality of consent to a contract by a contracting party, brought about by undue influence or misrepresentation by a third party, do not, in general allow the victim to avoid the contract. But if the other contracting party had had actual knowledge of the undue influence or misrepresentation the victim would not, in my opinion, be held to the contract (see Commission for the New Towns v Cooper (GB) Ltd [1995] 2 All ER 929 at 943-946, [1995] Ch 259 at 277-280 and Banco Exterior Internacional SA v Thomas [1997] 1 All ER 46 at 54, [1997] 1 WLR 221 at 229). But what if there had been no actual knowledge of the third party's undue influence or misrepresentation but merely knowledge of facts or circumstances that, if investigated, might have led to actual knowledge? In what circumstances does the law expect a contracting party to inquire into the reasons why the other party is entering into the contract or to go behind the other party's apparent agreement, objectively ascertained, to enter into the contract? These are the questions that Lord Browne-Wilkinson had to answer in O'Brien's case. They are contractual questions, not questions relating to competing property interests.
[145] Care must, in my opinion, be taken in applying principles evolved in cases in which the issue has been whether a purchaser was bound by some pre-existing equitable interest in the purchased property to cases in which the issue is whether a contracting party can safely rely on the other contracting party's apparent consent. Among other things, the onus is different. If a purchaser acquires property over which there is an existing equitable interest, for example, an equitable charge, it is up to the purchaser to show that he is a purchaser without notice and so is not bound by the equitable interest. He must show that his conscience is clear. But if a contracting party, A, acquires an interest under a contract with another contracting party, B, and B wishes to escape from the contract on the ground that his consent to it was procured by the undue influence or a misrepresentation of a third party, A can rely on B's apparent consent to the contract and it is for B to show that A had actual or constructive notice of the undue influence or misrepresentation. It is, in my opinion, important to recognise that constructive notice, in cases such as those now before the House, is serving a different function from that served by constructive notice in its traditional role and is not necessarily subject to the same rules.
[146] In particular, it must be recognised that in the bank v surety wife cases the constructive notice that is sought to be attributed to the bank is not constructive notice of any pre-existing prior right or prior equity of the wife. The husband's impropriety, whether undue influence or misrepresentation, in procuring his wife to enter into a suretyship transaction with the bank would not entitle her to set it aside unless the bank had had notice of the impropriety. It is notice of the husband's impropriety that the bank must have, not notice of any prior rights of the wife. It is the notice that the bank has of the impropriety that creates the wife's right to set aside the transaction. The wife does not have any prior right or prior equity.
[147] In a case where the financial arrangements with the bank had been negotiated by the husband, no part in the negotiations having been played by the wife, and where the arrangements required the wife to become surety for her husband's debts, the bank would, or should, have been aware of the vulnerability of the wife and of the risk that her agreement might be procured by undue influence or misrepresentation by the husband. In these circumstances the bank would be 'put on inquiry', as Lord Browne-Wilkinson put it. But 'on inquiry' about what? Not about the existence of undue influence, for how could any inquiry reasonably to be expected of a bank satisfy the bank that there was no undue influence? 'On inquiry', in my opinion, as to whether the wife understood the nature and effect of the transaction she was entering into. This is not an 'inquiry' in the traditional constructive notice sense. The bank would not have to carry out any investigation or to ask any questions about the reasons why the wife was agreeing to the transaction or about her relationship with her husband. The bank would not, unless it had notice of additional facts pointing to undue influence or misrepresentation, be on notice that undue influence or misrepresentation was to be presumed. It would simply be on notice of a risk of some such impropriety. What Lord Browne-Wilkinson had in mind was that the bank should be expected to take reasonable steps to satisfy itself that she understood the transaction she was entering into. If the bank did so, no longer could constructive notice of any impropriety by the husband in procuring his wife's consent be imputed to it. The original constructive notice would have been shed. If, on the other hand, a bank with notice of the risk of some such impropriety, failed to take the requisite reasonable steps, then, if it transpired that the wife's consent had been procured by the husband's undue influence or misrepresentation, constructive knowledge that that was so would be imputed to the bank and the wife would have the same remedies as she would have had if the bank had had actual knowledge of the impropriety.
[148] Under Lord Browne-Wilkinson's scheme for the protection of vulnerable wives it is the bank's perception of the risk that the wife's consent may have been procured by the husband's misrepresentation or undue influence that is central. The risk must be viewed through the eyes of the bank. Some degree of risk can, usually, never be wholly eliminated. But it can be reduced to a point at which it becomes reasonable for the bank to rely on the apparent consent of the wife to enter into the transaction and to take no further steps to satisfy itself that she understood the transaction she was entering into. Lord Browne-Wilkinson thought that, in order to reach this point, the bank should itself give the wife an explanation of the nature and effect of the proposed transaction and should advise her to take independent legal advice. The function of these steps would be to try and ensure that the wife understood what she was doing in entering into the proposed transaction and that her consent to do so was an informed consent. But whether these steps would always be necessary, or would always be sufficient, would depend on the facts of the particular case. Lord Browne-Wilkinson was not legislating; he was suggesting steps that, if taken, would in the normal case entitle a bank to rely on the wife's apparent consent, evidenced by her signature to the document or documents in question.
[149] In each of the wife v bank appeals now before your Lordships, the transactions pre-dated O'Brien's case and the bank did not have the advantage of the guidance provided by Lord Browne-Wilkinson. The question to be asked in each of these cases, therefore, is whether at the time the security was granted to the bank, the bank's perception of the risk that the grant might have been procured by the husband's impropriety was such as to have required the bank to take some additional steps to satisfy itself that she understood the nature and effect of the transaction.
[150] Since Lord Browne-Wilkinson's constructive notice route for providing protection to vulnerable wives who agree to become sureties for their husband's debts was substantially based on the risk that the wife might have been subjected to undue influence by her husband, it is necessary to review the principles of undue influence on which he built that protection.
Undue influence
[151] Undue influence cases have, traditionally, been regarded as falling into two classes, cases where undue influence must be affirmatively proved (class 1) and cases where undue influence will be presumed (class 2). The nature of the two classes was described by Slade LJ in Bank of Credit and Commerce International SA v Aboody [1992] 4 All ER 955 at 964, [1990] 1 QB 923 at 953:
'Ever since the judgments of this court in Allcard v Skinner (1887) 36 Ch D 145, [1886-90] All ER Rep 90 a clear distinction has been drawn between (1) those cases in which the court will uphold a plea of undue influence only if it is satisfied that such influence has been affirmatively proved on the evidence (commonly referred to as cases of "actual undue influence" . . . "class 1" cases); (2) those cases (commonly referred to as cases of "presumed undue influence" . . . "class 2" cases) in which the relationship between the parties will lead the court to presume that undue influence has been exerted unless evidence is adduced proving the contrary, eg by showing that the complaining party has had independent advice.'
[152] This passage provides, if I may respectfully say so, an accurate summary description of the two classes. But, like most summaries, it requires some qualification.
[153] First, the class 2 presumption is an evidential rebuttable presumption. It shifts the onus from the party who is alleging undue influence to the party who is denying it. Second, the weight of the presumption will vary from case to case and will depend both on the particular nature of the relationship and on the particular nature of the impugned transaction. Third, the type and weight of evidence needed to rebut the presumption will obviously depend upon the weight of the presumption itself. In Allcard v Skinner the presumption was a very heavy one. Correspondingly strong evidence would have been needed to rebut it. Even independent legal advice would not necessarily have sufficed. Lindley LJ ((1887) 36 Ch D 145 at 184, [1886-90] All ER Rep 90 at 100) made clear his view that without legal independent advice the presumption could not have been rebutted but went on to doubt whether independent legal advice would have sufficed 'unless there was also proof that she was free to act on the advice which might be given to her'. And in Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 at 135, [1928] All ER Rep 189 at 193 Lord Hailsham LC said: '. . . their Lordships are not prepared to accept the view that independent legal advice is the only way in which the presumption can be rebutted . . .'
[154] The onus will, of course, lie on the person alleging the undue influence to prove in the first instance sufficient facts to give rise to the presumption. The relationship relied on in support of the presumption will have to be proved.
[155] In National Westminster Bank plc v Morgan [1985] 1 All ER 821 at 827, [1985] AC 686 at 704 Lord Scarman, referring to the character of the impugned transaction in a class 2 case, said:
'. . . it must constitute a disadvantage sufficiently serious to require evidence to rebut the presumption that in the circumstances of the relationship between the parties it was procured by the exercise of undue influence.'
Lord Scarman went on:
'In my judgment, therefore, the Court of Appeal erred in law in holding that the presumption of undue influence can arise from the evidence of the relationship of the parties without also evidence that the transaction itself was wrongful in that it constituted an advantage taken of the person subjected to the influence which, failing proof to the contrary, was explicable only on the basis that undue influence had been exercised to procure it.'
With respect to Lord Scarman, the reasoning seems to me to be circular. The transaction will not be 'wrongful' unless it was procured by undue influence. Its 'wrongful' character is a conclusion, not a tool by which to detect the presence of undue influence. On the other hand, the nature of the transaction, its inexplicability by reference to the normal motives by which people act, may, and usually will, constitute important evidential material.
[156] Lord Browne-Wilkinson in CIBC Mortgages plc v Pitt [1993] 4 All ER 433, [1994] 1 AC 200 pointed out, plainly correctly, that if undue influence is proved, the victim's right to have the transaction set aside will not depend upon the disadvantageous quality of the transaction. Where, however, a class 2 presumption of undue influence is said to arise, the nature of the impugned transaction will always be material, no matter what the relationship between the parties. Some transactions will be obviously innocuous and innocent. A moderate gift as a Christmas or birthday present would be an example. A solicitor who is appointed by a client as his executor and given a legacy of a moderate amount if he consents to act, is not put to proof of the absence of undue influence before he can take the legacy. If the nun/postulant/novice in Allcard v Skinner had given moderate Christmas presents to the mother superior, or to the sisterhood, no inference that the gifts had been procured by undue influence could be drawn and no presumption of undue influence would have arisen. It is, in my opinion, the combination of relationship and the nature of the transaction that gives rise to the presumption and, if the transaction is challenged, shifts the onus to the transferee.
[157] In Aboody's case Slade LJ split the class 2 cases into two sub-divisions. He categorised ([1992] 4 All ER 955 at 964, [1990] 1 QB 923 at 953) the 'well-established categories of relationship, such as a religious superior and inferior and doctor and patient where the relationship as such will give rise to the presumption' as class 2A cases, and confirmed that neither a husband/wife relationship nor a banker/customer relationship would normally give rise to the presumption. (See also Morgan's case [1985] 1 All ER 821 at 826, [1985] AC 686 at 703 and O'Brien's case [1993] 4 All ER 417 at 424, [1994] 1 AC 180 at 190.) He continued:
'Nevertheless, on particular facts (frequently referred to in argument as "class 2b" cases) relationships not falling within the "class 2a" category may be shown to have become such as to justify the court in applying the same presumption . . .'
In O'Brien's case Lord Browne-Wilkinson adopted Slade LJ's class 2B category for the purpose of the surety wife cases that he was considering. He said:
'Even if there is no relationship falling within class 2A, 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 2B 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.' (See [1993] 4 All ER 417 at 423, [1994] 1 AC 180 at 189-190.)
[158] In my respectful opinion, this passage, at least in its application to the surety wife cases, has set the law on a wrong track. First, it seems to me to lose sight of the evidential and rebuttable character of the class 2 presumption. The presumption arises where the combination of the relationship and the nature of the transaction justify, in the absence of any other evidence, a conclusion that the transaction was procured by the undue influence of the dominant party. Such a conclusion, reached on a balance of probabilities, is based upon inferences to be drawn from that combination. There are some relationships, generally of a fiduciary character, where, as a matter of policy, the law requires the dominant party to justify the righteousness of the transaction. These relationships do not include the husband/wife relationship. In the surety wife cases, the complainant does have to prove undue influence: the presumption, if it arises on the facts of a particular case, is a tool to assist him or her in doing so. It shifts, for the moment, the onus of proof to the other side.
[159] Second, the passage cited appears to regard a relationship of trust and confidence between a wife and husband as something special rather than as the norm. For my part, I would assume in every case in which a wife and husband are living together that there is a reciprocal trust and confidence between them. In the fairly common circumstance that the financial and business decisions of the family are primarily taken by the husband, I would assume that the wife would have trust and confidence in his ability to do so and would support his decisions. I would not expect evidence to be necessary to establish the existence of that trust and confidence. I would expect evidence to be necessary to demonstrate its absence. In cases where experience, probably bitter, had led a wife to doubt the wisdom of her husband's financial or business decisions, I still would not regard her willingness to support those decisions with her own assets as an indication that he had exerted undue influence over her to persuade her to do so. Rather I would regard her support as a natural and admirable consequence of the relationship of a mutually loyal married couple. The proposition that if a wife, who generally reposes trust and confidence in her husband, agrees to become surety to support his debts or his business enterprises a presumption of undue influence arises is one that I am unable to accept. To regard the husband in such a case as a presumed 'wrongdoer' does not seem to me consistent with the relationship of trust and confidence that is a part of every healthy marriage.
[160] There are, of course, cases where a husband does abuse that trust and confidence. He may do so by expressions of quite unjustified over-optimistic enthusiasm about the prospects of success of his business enterprises. He may do so by positive misrepresentation of his business intentions, or of the nature of the security he is asking his wife to grant his creditors, or of some other material matter. He may do so by subjecting her to excessive pressure, emotional blackmail or bullying in order to persuade her to sign. But none of these things should, in my opinion, be presumed merely from the fact of the relationship of general trust and confidence. More is needed before the stage is reached at which, in the absence of any other evidence, an inference of undue influence can properly be drawn or a presumption of the existence of undue influence can be said to arise.
[161] For my part, I doubt the utility of the class 2B classification. Class 2A is useful in identifying particular relationships where the presumption arises. The presumption in class 2B cases, however, is doing no more than recognising that evidence of the relationship between the dominant and subservient parties, coupled with whatever other evidence is for the time being available, may be sufficient to justify a finding of undue influence on the balance of probabilities. The onus shifts to the defendant. Unless the defendant introduces evidence to counteract the inference of undue influence that the complainant's evidence justifies, the complainant will succeed. In my opinion, the presumption of undue influence in Class 2B cases has the same function in undue influence cases as res ipsa loquitur has in negligence cases. It recognises an evidential state of affairs in which the onus has shifted.
[162] In the surety wife cases it should, in my opinion, be recognised that undue influence, though a possible explanation for the wife's agreement to become surety, is a relatively unlikely one. O'Brien's case itself was a misrepresentation case. Undue influence had been alleged but the undoubted pressure which the husband had brought to bear to persuade his reluctant wife to sign was not regarded by the judge or the Court of Appeal as constituting undue influence. The wife's will had not been overborne by her husband. Nor was O'Brien's case a case in which, in my opinion, there would have been at any stage in the case a presumption of undue influence.
Summary
[191] My Lords I think, given the regrettable length of this opinion, I should try and summarise my views about the principles that apply and the practice that should be followed in surety wife cases. (1) The issue as between the surety wife and the lender bank is whether the bank may rely on the apparent consent of the wife to the suretyship transaction. (2) If the bank knows that the surety wife's consent to the transaction has been procured by undue influence or misrepresentation, or if it has shut its eyes to the likelihood that that was so, it may not rely on her apparent consent. (3) If the wife's consent has in fact been procured by undue influence or misrepresentation, the bank may not rely on her apparent consent unless it has good reason to believe that she understands the nature and effect of the transaction. (4) Unless the case has some special feature, the bank's knowledge that a solicitor is acting for the wife and has advised her about the nature and effect of the transaction will provide a good reason for the purposes of (3) above. That will also be so if the bank has a reasonable belief that a solicitor is acting for her and has so advised her. Written confirmation by a solicitor acting for the wife that he has so advised her will entitle the bank to hold that reasonable belief. (5) So, too, a sufficient explanation of the nature and effect of the transaction given by a senior bank official would constitute good reason for the purposes of (3) above. (6) If there are any facts known to the bank which increase the inherent risk that the wife's consent to the transaction may have been procured by the husband's undue influence or misrepresentation, it may be necessary for the bank to be satisfied that the wife has received advice about the transaction from a solicitor independent of the husband before the bank can reasonably rely on the wife's apparent consent. (7) If the bank has not taken reasonable steps to satisfy itself that the wife understands the nature and effect of the transaction, the wife will, subject to such matters as delay, acquiescence, change of position etc, be able to set aside the transaction if her consent was in fact procured by undue influence or misrepresentation. (8) Subject to special instructions or special circumstances, the duty of a solicitor instructed to act for a wife proposing to stand as surety, or to give security, for her husband's debts is to try and make sure that she understands the nature and effect of the transaction. (9) In all surety wife cases the bank should disclose to the surety wife, or to the solicitor acting for her, the amount of the existing indebtedness of the principal debtor to the bank and the amount of the proposed new loan or drawing facility. (10) Subject to (9) above, a creditor has no greater duty of disclosure to a surety wife than to any other intending surety.
[192] I am in full agreement with the analysis of the applicable principles of law and with the conclusions expressed in the opinion of my noble and learned friend Lord Nicholls of Birkenhead. I believe the analysis I have sought to give in this opinion and my conclusions are consistent with them.