Undue influence: Lord Nicholls’ judgment in Etridge

In Royal Bank of Scotland v Etridge (No 2) ([2002] 2 AC 773, HL) the House of Lords looked at the law of undue influence in the context of a wife acting as surety for the indebtedness of her husband or her husband’s business (though as will be seen, the principles enunciated in the judgments are not limited so as to apply only in this context). The House of Lords had to consider the circumstances in which the rights of the bank as against the wife might be affected should it transpire that the wife entered into the arrangement as a result of some misrepresentation or undue pressure by the husband. This post seeks to give an account of the judgment of Lord Nicholls (with whom all of the others agreed). The House of Lords was considering a set of appeals. In each case, the bank was seeking an order for possession as against the wife. In each case, the wife claimed that the bank was on notice that the transaction arose from the husband’s undue influence ([5]).

In such cases, it is for the wife to prove that she entered into the transaction as a result of her husband’s undue influence. Where the relationship is one of trust and confidence and the transaction calls for an explanation then the burden of proof passes to the husband to show that the wife’s consent to the transaction was not improperly procured. The relationship between a husband and a wife is not necessarily one of trust and confidence, but the wife may be able to show in any particular case that she reposed the necessary trust and confidence in her husband. In the last analysis, the court has to decide whether or not the transaction was the fruit of the wife’s informed and free consent. This is independent of the subordinate question as to whether or not the burden of proof passed to the husband in the way just described. There may have been undue influence even though the burden of proof never passed to the husband. The burden of proof may pass to the husband but he may be able to show that there was no undue influence.

The special focus of Etridge is whether the bank’s rights are affected if it should transpire that there was undue influence. The bank’s rights are only affected if it was put in inquiry as to the undue influence. This will occur in the same circumstances in which the burden of proof passes to the husband (but with the threshold being set lower than is necessary for the wife to show that there was undue influence ([44])). So the question is again whether the relationship was one of trust and confidence and whether the transaction was one that called for an explanation.

Where the bank is on inquiry, it can protect its rights under the guarantee ‘if it insists that the wife attend a private meeting with a representative of the bank 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.’ ([50]). If the bank prefers not to give this advice through its own representatives then it may achieve the same protection by obtaining the confirmation of a solicitor acting for the wife that he has explained the nature of the documents to the wife as well as the practical implications they may have for her ([65]).

There then follows a detailed ‘code’ concerning the steps to be taken and the level of detail of the transaction and its financial context that are to be disclosed to the wife ([58] – [80]).

Lord Nicholls said that the bank is on inquiry whenever the relationship between the surety and the debtor is non-commercial ([87]). The principles set out in his judgment, and the steps to be taken, do not only apply in husband and wife cases.

Michael Lower

Advertisements

Tags: , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: